In April 2023, we introduced a new version of The Signal for D-Peg, P-Peg, and C-Peg, our non-displayed Signal-enabled pegged order types. After roughly 6 months of usage and evaluating the data, the results are in: this new version – Signal V6 – delivers a new level of performance and protection against adverse selection.1
We are now ready to bring the power of Signal V6 to displayed trading on IEX Exchange. Moving forward, Signal V6 will apply to all D-Limit orders as a default – both displayed and non-displayed.
The State of Displayed Trading on IEX Exchange
Even though IEX began as an ATS and was originally known for our performance in dark trading, over the last several years as a stock exchange we’ve been focused on growing our lit quote. Below are just some of the things we’ve done to improve the displayed trading experience for our Members:
• Launched D-Limit, the only displayed order type designed to minimize adverse selection;
• Removed our outbound Speed Bump, allowing market participants to receive IEX’s market data updates more quickly;
• Introduced an optional Cancel/Reprice functionality, designed to allow market participants to better manage their D-Limit orders and ensure that they spend most of their time resting at the NBBO;
• Incentivized displayed adding with a deterministic 4 mil rebate - a major change for IEX and one that’s demonstrated positive results in both lit quote presence and performance to date.
Bringing the latest and greatest version of The Signal to D-Limit, our flagship lit order type, is the newest update in this vein as we continuously work to improve our displayed trading environment.
Quantifying the Performance Upgrade from Signal V5 to Signal V6
After 6 months of Signal V6 being available as an option for clients’ D-Peg and P-Peg orders, we’ve already seen significant adoption to the point where, today, more than half of our D-Peg volume is now leveraging Signal V6 (versus Signal V5, the previous version and default selection). The results have been strong as expected, where D-Peg and P-Peg users leveraging Signal V6 have seen marginal improvements in markouts while maintaining their hit and fill rates.
The robust production data we’ve collected via this V6-enabled D-Peg and P-Peg volume over the past six months also provides an opportunity to retroactively evaluate how recent D-Limit volumes would have performed if they had also been leveraging Signal V6 instead of Signal V5. In other words, what incremental performance benefit can D-Limit users expect to get from Signal V6?
Currently, the vast majority of displayed volume on IEX Exchange utilizes our D-Limit order type. However, some institutional brokers and market-makers continue to use standard Limit orders for certain strategies.
To better understand the incremental benefit of D-Limit using Signal V6, it helps to analyze the volume of standard Limit orders on IEX Exchange by various Signal conditions. There is lot of overlap between the protection offered by Signals V5 and V6, but Signal V6 is not a strict superset of Signal V5. Therefore, there will be scenarios where both Signal V5 and V6 are on, as well as situations where one is on but the other is off.
Not surprisingly, there is of course significant overlap between trading volume where Signal V5 and Signal V6 are on. However, there is an incremental 11% of volume where Signal V6 is on and Signal V5 is off, compared to just 3% of volume where the opposite is true. This suggests that the additional protection provided by Signal V6 is multiples of the would-be protection potentially lost by moving from Signal V5.
Just how valuable is this incremental protection? We can help answer that question by looking at the markouts of trades taking place while Signal V6 is on but Signal V5 is off.
This production data shows that display orders that executed while Signal V5 was off but Signal V6 was on (i.e., meaning if it had been a D-Limit order with V6, it would not have executed), had strongly negative markouts. Clearly, this data suggests that these executions likely experienced adverse selection. Therefore, Signal V6 effectively identifies additional situations when the market is unstable and likely to change, providing additional protection for displayed resting orders. The result? A better D-Limit experience!
To bring it all together, the markout curves below illustrate the incremental benefits of D-Limit compared to standard Limit orders by showing the improved markouts offered by Signal V5, and the further improvement provided by Signal V6.
An Ongoing Commitment to Performance
D-Limit continues to rely on a deterministic, transparent logic outlined in the IEX Rule Book, available for all market participants to see exactly how it works and what market conditions impact its executions. The cutover from Signal V5 to Signal V6 will occur for all D-Limit users and all symbols on November 10, 2023. We are enthusiastic about the possibility of what Signal V6, our most performant Signal yet, can mean for D-Limit and the quality of displayed trading on IEX Exchange.
Please note that this update only applies to D-Limit and requires no action by the Member to benefit from Signal V6 performance. If you are still using Signal V5 with your D-Peg, P-Peg, and C-Peg orders and are ready to move to Signal V6, clients may elect through a port request form to use the new Signal formula for all of their D-Peg, P-Peg, and C-Peg orders or can designate via a FIX tag to opt-in on a per-order basis (see Trading Alert #2023-008). If you have any other questions about what this means for your trading volumes, please reach out to your contact at IEX.
1While IEX Exchange endeavors to utilize data and calculations that it believes to be reliable, IEX Exchange cannot ensure the timeliness, accuracy, reliability, or completeness of any data or calculations, including our measure of when we determine the quote to be crumbling.