The 200-Share Problem: Intermarket Sweeps and a Rejected ISO

Treat this as a trade-through until the facts show otherwise.

• Exchange C's 24.99 offer for 200 shares was an automated quotation that was the best price at that trading center and was disseminated, so it was a protected quotation. It was better than 25.00.
• Executing at 25.00 while a protected 24.99 offer is displayed is a trade-through unless an exception applies. The one that matters here is the intermarket sweep exception: the order routed to B must be marked as an ISO and must represent that, simultaneously, the desk routed orders to every other protected quotation at a price better than the 25.00 accessed - i.e., to C for at least 200 shares at 24.99.
• Good-faith routing is not enough. The sweep must actually be executed for the exception to hold. Because C's ISO was rejected at the gateway, the sweep was not effective and the desk's 25.00 prints are exposed. The desk should escalate, preserve the gateway logs, and not assume the 200 shares traded.

It can change the Rule 611 conclusion, but only if the status is verified rather than assumed.

• A protected quotation must be automated - one the trading center is willing to execute against immediately and automatically. A genuinely manual quote that cannot be auto-executed is not protected, so executing at 25.00 would not be a trade-through.
• Verify the designation with Exchange C and the exchange's own quotation rules; do not rely on a trader's impression that the market maker 'wasn't really there.' Exchanges frequently designate quotes as automated even when a human is behind them.
• Separate from Rule 611, best execution still applies. The desk should document why the 24.99 was not reasonably accessible - no automatic execution, no immediate response, no size available within the time the customer's fill required. A manual quote the desk could have called and traded through in 20 seconds is a different matter than one it could not reach at all. The documentation is what protects the firm if the execution is later examined.

The fills stand, and the desk should be careful not to manufacture a different outcome.

• The order was a market order with a 25.10 limit; every execution fell within the limit, so the customer is bound and has no right to cancel after execution because the market moved. Only the unfilled 4,000 shares can be cancelled at the customer's direction.
• Do not bust, reprice, or make an 'as-of' adjustment to accommodate the customer. Transferring the customer's market risk to the firm is a giveaway of firm assets, raises books-and-records problems, and is exactly the practice supervision is designed to catch.
• If the desk believes its own systems caused a genuinely erroneous execution, use the firm's error policy and, for exchange executions, the applicable clearly-erroneous process within its short time window. That is a remedy for a malfunction, not a remedy for adverse price movement. Distinguish the two explicitly in the file.