Since its introduction in November, buyside brokerage and aspiring exchange IEX announced that adoption for its Discretionary Peg Order Type (D-Peg) comprised 11 percent of IEXs December volume, or 13 percent of midpoint volume.
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IEX designed D-Peg in response to an industry-wide issue: crumbling quotes, or slower, predictable changes in the National Best Bid and Offer (NBBO) of a stock, according to a company press statement. It added, Due to the nature of a highly fragmented market, quote changes can take several milliseconds to occur and/or propagate over market data, creating an actionable signal for certain strategies.
Price changes expose traditional investors because faster traders are able to predict the fair price of a stock before they can, said Brad Katsuyama, IEX CEO and co-founder. D-Peg is designed to help orders resting at IEX avoid being picked off while the quote is changing. This is an incremental and complementary layer of protection on top of our 350 microsecond speed bump – which protects orders after a quote change in the market. One problem occurs over milliseconds while the other over microseconds, and though the difference may seem subtle, innovating for both is important in order for IEX to consistently deliver the fairest possible price for any stock.
Jefferies, a global investment bank and IEX Subscriber, observed an improvement in execution quality after adopting Discretionary Peg. ICF (Information Content Factor) is a proprietary benchmark weve developed to measure toxicity, said Jatin Suryawanshi, head of global quantitative strategy for Jefferies. Since fully migrating over to Discretionary Peg, the liquidity at IEX has demonstrated close to a zero ICF, which implies that on average there is almost no market movement following an IEX execution. This ranks IEX among the top dark pools and exchanges that we trade with.
According to IEX, D-Peg orders peg to the primary side of the bid-ask spread, but can trade up to the midpoint at a level set by the contra-partys limit – thereby maximizing both trading opportunities and price improvement. However, in crumbling quote situations, D-Peg orders stay pegged to the primary, which helps the order avoid adverse selection, defined as trading at soon-to-be stale prices.
According to Ronan Ryan, IEX CSO and co-founder, We have found that there are times when a price change can be predicted milliseconds before it occurs due to technology inefficiencies in the market. A human is unable to leverage this prediction, but a machine can. In these instances, D-Peg helps our Subscribers and their clients – who shouldnt have to invest in expensive, complex trading technology – avoid situations where the deck is stacked against them.
