Q&A: How does priority, parity and yielding work in the market?

By: Ray Pellecchia

File Under: NYSE, NYSE

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A reader writes:

Hi,
Looking at the priority parity yielding example in the hybrid booklet:

Price/20.07; Offer/100; DOT/50; eQt/30; sQt/20

So first mkt order to buy 5,000 at 20.07 - 3,000 assigned to single DOT order with priority. Remaining 2,000 split between DOT and eQuotes since they are on parity (and sQuote yields) giving

Price/20.07; Offer/50; DOT/10; eQt/20; sQt/20

Next mkt order for 5,000 at 20.07, in the example this is assigned as 1,000 to DOT, and 2,000 each to eQuote and sQuote.

My question is how does this work? Based on the example of the first mkt order I would figure that the first 2,000 is split between DOT and eQuote. Then once the DOT orders are filled there is the remaining 3,000 to assign.

However why is this not split 1,500 each? So why do we not see 1,000 to DOT, 2,500 to eQuote and 1,500 to sQuote ?

Apologies if i'm being a bit dim.

rgds
--Brian Lather

Brian -- No apology necessary; it's actually a good question. A colleague helps me with the answer:

Priority interest is maintained in addition to the parity interest of the same type (in the example, DOT) and is always allocated first for one trade. Another way to think of the example is to split out the priority interest, as follows:

Price/20.07; Offer/100; Priority DOT/30; DOT/20; eQt/30; sQt/20

The first MKT order of 5,000 shares to buy is first allocated to the 3,000-share priority DOT order. The remaining 2,000 shares is split between the other DOT orders and the e-Quote (1,000 shares each) with the s-Quote yielding. After the first trade there is no more priority (floor is "cleared") resulting in the following market:

Price/20.07; Offer/50; DOT/10; eQt/20; sQt/20

The second MKT order will be allocated to the remaining interest as outlined in the example. The reason you don't see an allocation as you suggested (1,000 DOT; 2,500 e-Quote; 1,500 s-Quote) is because there is only 2,000 shares of the e-Quote remaining.

Hope that clarifies it, Brian. Thanks for writing!

BTW, we are not alone in having a PPY acronym. TheFreeDictionary.com lists:
-- Pancreatic Polypeptide (an amino acid secreted by the pancreas)
-- Petite Princess Yucie (Japanese anime)
-- Polypyrrole (a chemical compound)
-- Pronatura Peninsula de Yucatan, A.C. a (Mexican non-profit organization that focuses on the conservation of ecosystems)
-- Puchi Puri Yucie (Japanese anime)

And you didn't think you were going to learn anything new today.

BTW2, that's Petite Princess Yucie pictured above. The series "centers around Yucie, a 17 year old who is trapped in a 10 year old's body. The story follows her and her friends, all of who are designated as a Platinum Princess candidates. A Platinum Princess receives the Eternal Tiara which grants any wish, but only to the one it judges worthy and only one wish."

I'm not platinum, but I wish you a great Thursday. OK, enough nonsense for one morning; back to work.

Tags: New York Stock Exchange, Hybrid Market, NYSE, NYSE Euronext, NYX, trading, stock market