October 31, 2014
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Limit Order Protection Pilot Approved by SEC

On February 8, 2001, the SEC approved the Limit Order Protection Pilot for the OTC Bulletin Board (OTCBB). The rule change will, for a 12 month pilot period, prohibit Market Makers from "trading ahead" of customer limit orders that a member accepts in securities quoted on the OTCBB. Members handling customer limit orders are prohibited from trading at prices equal or superior to that of the customer limit order without executing the limit order.

Highlights:

  • Price Improvement - Members cannot avoid this obligation through price improvement unless such price improvement is for a minimum of $0.05 or one-half the inside spread, which ever is less.
  • Contemporaneous Execution - A member that trades through a customer limit order must execute that order contemporaneously - as soon as possible but in no case later than 5 minutes after the member has traded at a price more favorable than the customer's price.
  • Order Size - The limit order protection will extend up to the size of the limit order as long as it does not exceed the size of the proprietary trade.
  • Pilot Securities - 325 OTCBB securities will be subject to this rule during the pilot study. A complete list of these securities will be posted on OTCBB.com as soon as it is available. During the pilot study, all subject securities will be identified with a "##" following the security name on the Nasdaq Workstation II. The securities selected for the pilot will be chosen so that the OTCBB can test the effects of Limit Order Protection on a wide range of securities. 200 of the most actively traded securities will be included. An additional 100 securities will be selected from a cross section of all remaining securities. The remaining 25 securities will be selected on a case-by-case basis after the pilot begins, likely from securities delisted from Nasdaq or an exchange.
  • Implementation - Within 30 days of SEC approval, the NASD will issue a Notice To Members describing the new rule. The new rule will become effective 30 days after the publication of the Notice To Members.

Further information on the Limit Order Protection Pilot will be available on the OTCBB.com website as it becomes available. Click the link below to view the complete SEC approval order.

SEC Approval Order


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