Locked, Crossed and Barrel

The piece explains locked (equal best bid and offer) and crossed (bid above offer) markets, quantifying that S&P 500 names are locked on average about 2.5 seconds per day and crossed only ~4.2 milliseconds, with individual lock events averaging ~5.5 ms and crosses ~0.8 ms. It highlights that tick‑constrained and low‑priced stocks are disproportionately prone to locks, that the SEC’s proposed half‑cent tick for constrained names should reduce such occurrences, and that geographic/SIP latency accounts for much of the observed locks—reconstructed NBBOs show locked spreads fall roughly 80% after latency adjustment, making many locks effectively non‑exploitable. These findings feed directly into Regulation NMS debates: while current rules and fast arb activity largely restore the NBBO almost instantly, removing the Order Protection Rule could increase locking, change fee/queue incentives and raise questions about the relevance of midpoint orders, price improvement and 605 metrics.

Analysis

The article defines locked markets (equal best bid and offer) and crossed markets (bid above offer) and notes that Rule 611 (Order Protection Rule) and Rule 610 are intended to prevent trade-throughs and displayed locks/crosses, although the NBBO can still appear locked or crossed in practice. Empirical data for S&P 500 names shows an average locked duration of roughly 2.5 seconds per stock per day and crossed duration of about 4.2 milliseconds per stock per day, while individual events average 5.5 milliseconds for locks and 0.8 milliseconds for crosses.

Geographic/SIP latency is material: messages take ~0.2 milliseconds to travel between venues, and Holsten, Pierson and Wu (2023) find that latency-adjusted reconstructions reduce matched locked spreads by roughly 80%, implying most observed locks are extinguished before typical order-routing can exploit them. The piece also documents that tick-constrained and lower-priced stocks are disproportionately prone to locks because tight spreads make locking easier, while higher-priced stocks typically have multi-tick spreads that reduce lock probability.

Regulatory implications are central: the SEC’s proposed minimum tick-size change (half-cent ticks for tick-constrained names) is expected to reduce locks in affected stocks, but removing the Order Protection Rule could increase locking, alter fee/queue incentives and call into question the continued relevance of midpoint orders, price improvement and 605 metrics—outcomes that would materially change execution economics and routing behavior.

Key Decisions for Investors

• Reduce passive resting exposures in tick-constrained and low-priced names and re-test execution algorithms for lock-handling and realized slippage
• Pay for direct market data feeds and enhance smart-routing logic to mitigate SIP-latency mispricing and avoid trades based on stale NBBO prints
• Monitor SEC rulemaking closely—if half-cent ticks are adopted, expect fewer locks among affected names and adjust implementation cost assumptions accordingly
• Prepare for a potential removal or relaxation of the Order Protection Rule by stress-testing routing strategies against increased locking and altered fee/rebate dynamics
• For high-frequency or market-making strategies, de-emphasize expectations of exploitable locked/crossed arbitrage given sub-6ms average durations and the ~80% latency-adjusted reduction in locked spreads