Networks, Nodes, and Priority Rules

In the United States, the same stock can be traded at different locations. In the case of listed stocks, each location is a node in national network called the Intermarket Trading System (ITS). Unlisted stocks also trade at different nodes on the National Association of Securities Dealers Automated Quotation (NASDAQ) network. Each node of these two networks may have rules for breaking queuing ties among competing orders. Orders may be routed on the networks according to official rules (as with ITS) or order preferencing arrangements (both networks). This chapter examines the impact of priority rules on individual markets and networks. The development of the ITS and NASDAQ networks as well as the relevant literature is discussed. I conclude that network priority rules improve market quality if they result in consolidated markets.