Group Co.
The $1.3 Million Dollar Question
Traders Magazine Online News, July 27, 2017
In our prior blog post, we discussed IEX’s rank on broker routing tables and provided evidence that IEX’s displayed quote is being “skipped” far too often, given our unique combination of low cost and price improvement. This post evaluates the most opportune times to access IEX’s quote and dives into the price improvement opportunity uniquely available on IEX, which dwarfs what is currently being realized by investors, brokers and other market participants.
In general, we believe routers should consistently prioritize IEX due to the potential price improvement available. However, there are some market-wide signals that point to the most opportune times to do so.
One Easy Beacon for Price Improvement
One such signal is whenever BX, BYX, or EDGA (three “cheap to take” exchanges) are displaying a quote that’s part of the NBBO.
When this is the case, there is a 34% chance that for S&P 500 symbols, IEX has non-displayed liquidity at a price better than the prevailing NBBO. In other words, in those moments you have a 34% chance of receiving price improvement if you route to IEX[1]. To that end, we have received positive feedback from firms pinging IEX’s midpoint prior to accessing displayed quotes.
Even more compelling than the likelihood of price improvement is the amountavailable on IEX. When IEX did have liquidity at a better price, this hidden interest was more than ten times greater than the collective quote size on BX, BYX, and EDGA[2].
As it turns out, too often firms pass up the opportunity to interact with it.
Quantifying the Opportunity Cost
We can actually quantify how much price improvement is foregone by not routing to IEX (or at least checking IEX’s midpoint).
We identified transactions at the NBBO, and looked at the IEX order book at the time of these transactions to see whether IEX had non-displayed liquidity at a better price.
For example, if the NBBO is $100.00 by $100.04, and we see a trade of 300 shares at $100.04 on another venue, we looked to see whether IEX had a seller at $100.02. If the sell order on IEX was for 200 shares, we capped the would-be price improved shares at 200.
Here is how much volume was executed across each exchange in June 2017 that could have executed at a better price on IEX.
For more information on related topics, visit the following channels:
Comments (0)