The Securities and Exchange Commission released a notice on February 20, 2026, detailing a proposed rule change filed by the Texas Stock Exchange LLC on February 17, 2026. This filing, designated as non-controversial under Section 19(b)(3)(A)(iii) of the Securities Exchange Act of 1934 and Rule 19b-4(f)(6), introduces an Offset Peg Order to the exchange's offerings. The new order type builds on existing pegged orders by incorporating a user-defined offset to the national best bid or offer, or NBBO. This development aims to enhance trading flexibility for market participants, potentially increasing competition among exchanges. With immediate effectiveness, the proposal reflects TXSE's effort to align its functionalities with those of established competitors, while the SEC invites public comments to assess its impact.
Background on TXSE and Pegged Orders
The Texas Stock Exchange, a self-regulatory organization, currently provides three types of pegged orders: Primary Peg, Midpoint Peg, and Market Peg. These are non-displayed orders that automatically adjust based on NBBO changes. A Primary Peg order ties to the national best bid for buys or national best offer for sells. A Midpoint Peg targets the NBBO midpoint, and a Market Peg aligns with the opposite side of the NBBO. According to TXSE Rule 11.006(h), pegged orders are managed by the exchange's system to respond dynamically to market shifts.
This proposal emerges from informal member feedback, as noted in the filing, indicating a demand for more precise pricing within the NBBO. TXSE seeks to amend Rule 11.006(h) and related provisions to include the Offset Peg as a fourth option. The exchange emphasizes that this addition would not disrupt existing operations but would offer voluntary tools for users. Key players include TXSE as the filer and the SEC as the regulator overseeing the process under the Exchange Act.
Details of the Proposed Offset Peg Order
The Offset Peg Order is defined in proposed Rule 11.006(h)(4) as a non-displayed pegged order that pegs to the less aggressive of the primary quote adjusted by a user-specified offset or the order's limit price. For buy orders, it adjusts to the national best bid plus the offset, up to the limit. For sell orders, it adjusts to the national best offer minus the offset, down to the limit. Users must include a limit price, and if no offset is specified, it defaults to zero.
The filing specifies handling for sub-penny increments: if the offset results in a price smaller than allowed under Rule 11.006(g), buy orders round down and sell orders round up to the nearest permissible increment. This ensures compliance with Regulation NMS Rule 612, which prohibits sub-penny quoting but permits certain sub-penny executions, as referenced in the 2005 NMS Adopting Release.
Additional rules apply similarly to other pegged orders. Under amended Rule 11.007(c), Offset Peg Orders can use time-in-force instructions like Day, SYS, IOC, RHO, or GTT. They may be odd lots, round lots, or mixed lots, execute in pre-market, market, or post-market sessions, and include Book Only or Post Only instructions. The proposal also addresses locking and crossing quotations, rejecting or canceling orders when the NBBO is unavailable, consistent with existing pegged order behaviors.
Comparison to Other Exchanges and Legal Precedents
The Offset Peg Order mirrors functionalities on other exchanges, supporting TXSE's claim of consistency with market standards. Nasdaq Rule 4703(d) offers primary pegging with offsets, while NYSE Arca Rule 7.31-E(h)(1) includes market pegged orders with offsets. Cboe BZX Exchange Rule 11.9(c)(8)(A) allows primary pegged orders with designated offsets. The filing also cites a prior Investors Exchange notice (SEC Release No. 90197, October 15, 2020) that added a similar order type.
These precedents underline the proposal's non-novel nature. TXSE argues in its statutory basis statement that the change promotes just and equitable trade principles under Section 6(b)(5) of the Exchange Act by fostering competition and protecting investors. By enabling offsets, the exchange provides efficiency over manual broker adjustments, ensuring fair access. Rounding mechanisms align with SEC guidance on sub-penny pricing, as in FAQs from the Division of Market Regulation.
Perspectives vary. Proponents, including TXSE, view it as a competitive enhancement that could attract liquidity without imposing burdens. Critics might question whether added complexity fragments markets, though the filing asserts no significant intermarket or intramarket competition issues, as all members access it equally. The non-controversial designation suggests broad acceptance, but public comments could reveal differing views.
Potential Implications
In the short term, the Offset Peg Order could increase TXSE's appeal to traders seeking nuanced pricing strategies, potentially boosting order flow. Long-term effects include heightened competition with established exchanges, as users gain tools for precise NBBO trading without constant manual intervention. This might reduce order cancellations and improve efficiency, per TXSE's feedback-based rationale.
Implications extend to regulatory oversight. The immediate effectiveness allows quick implementation, but the 60-day window for SEC suspension ensures review. If approved without changes, it could set a model for other emerging exchanges. However, any comments highlighting risks, such as unintended market impacts, might prompt modifications.
Different stakeholders offer balanced views. Market makers may appreciate the flexibility for risk management, while retail investors benefit indirectly through potentially tighter spreads. Regulators focus on maintaining fair markets, ensuring the order type does not enable manipulative practices.
The proposal includes minor amendments for consistency, such as updating pegged order definitions and adding references in rules on priority, halts, auctions, and openings. These cleanup changes, like clarifying Primary Peg treatment in openings, reinforce rulebook coherence.
Key takeaways from this development highlight TXSE's push for innovation within established frameworks. The exchange positions the Offset Peg as a voluntary feature that enhances functionality without novel risks. Potential next steps include the SEC reviewing comments submitted by March 18, 2026, and possibly instituting proceedings if concerns arise. Ongoing debates may center on balancing innovation with market stability, especially as new exchanges like TXSE challenge incumbents. Future challenges could involve adapting to evolving NBBO dynamics or addressing any unforeseen execution issues in volatile conditions.
