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IEX Launches the Next Generation of Investor and Member Protection
Traders Magazine Online News, April 10, 2017
IEX, the Investors Exchange, announced that it had completed the rollout of two breakthrough enhancements, more than doubling the predictive power of the IEX Signal and extending its protective capability to the exchange’s Primary Peg order type.
The Signal, first integrated into IEX’s Discretionary PegTM (D-Peg) order type, is a centerpiece of IEX’s evolving market design, which sets a new standard for investor and Member protection not available on other U.S. stock exchanges.
Due to heavy market fragmentation and the varying speeds at which market participants – including U.S. stock exchanges – receive data, the NBBO (National Best Bid and Offer) is not a uniform indication of stock prices. Instead, multiple “best prices” can exist at any given moment, each one representing a different participant’s point of view. This discrepancy between diverging views of the market creates windows of time in which predatory trading strategies can exploit investors’ and other participants’ reliance on older views of the best price.
While the IEX Speed Bump is designed to address this problem after changes to the NBBO occur, but before they are widely disseminated, algorithmic prediction models enable another form of predatory, speed-based trading. This type of strategy is based on the ability to recognize early indications of price movement and predict price shifts tiny fractions of a second before the NBBO changes. This predictive ability gives predatory traders another way to trade at soon-to-be stale prices at the expense of less informed participants.
To protect participants from this form of arbitrage, IEX developed the IEX Signal. The Signal uses a proprietary model to predict declines in the National Best Bid (NBB) or increases in the National Best Offer (NBO) before those changes occur and are communicated to market participants. When the Signal is on, D-Peg orders behave less aggressively to prevent them from trading in adverse conditions.
On March 28, IEX deployed a new, upgraded version of the Signal, more than doubling its ability to predict those price changes in the market. Initial results show that the new IEX Signal correctly predicts approximately 26% of the total price changes in the trading day, up from 9% with the previous version. On a volume-weighted basis, the Signal now predicts the direction and timing of more than 44% of price changes.
The IEX Signal has been integrated into the IEX D-Peg order type since November 2014.
“Since its inception, IEX’s aim has been to produce a fair marketplace, and a huge part of this has been by minimizing the ‘relativity effects’ in a disparate geographical marketplace,” said William Lishman, Head of Trading, Americas at Schroders, a global asset management company with $490.7 billion in assets under management globally as of December 31, 2016. “D-Peg has played a significant role in reducing negative selection over the infinitesimally small timeframes that some market participants live in, and has helped create a positive environment for seeking block liquidity.”
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