Aug 27, 2020

August 27, 2020

IEX receives SEC's OK on new order designed to improve displayed liquidity

SEC on building

IEX receives SEC's OK on new order designed to improve displayed liquidity

IEX Group Inc. plans to launch a new order type that it says will provide traders with a way to avoid adverse selection on its exchange.

The stock exchange operator, known for the role its founding executives played as the protagonists in Michael Lewis' "Flash Boys," received the U.S. Securities and Exchange Commission's approval for its proposed Discretionary Limit, or D-Limit, order type Aug. 26.

Using predictive technology known as the IEX Signal, D-Limit will provide traders and investors with the ability to submit a limit order that IEX says will then adjust its pricing if the Signal detects that the stock price is about to adversely change. IEX estimates that the Signal is only active for 0.02% of the trading day; however, the exchange says that 24% of displayed order volume on its venue trade during that brief period of time.

The D-Limit order, IEX hopes, will help level the information playing field between slower market participants and Wall Street's speediest players who are easily able today to detect a price change on their own.

"IEX is pleased that the SEC has approved our new order type, D-Limit, which is an innovative, yet simple, solution designed to enhance on-exchange liquidity," IEX Group President Ronan Ryan said in a statement. "D-Limit has gained the support of a broad coalition of asset managers, pension funds, brokers and market makers, and represents a continuation of our efforts to partner with the broker-dealer community to provide new solutions for best execution designed to help all market participants achieve better performance in displayed trading."

Among the supporter of IEX's D-Limit proposal were Virtu Financial Inc., Goldman Sachs Group Inc. and California Public Employees' Retirement System.

It did have its detractors. Citadel Securities LLC, the trading and market making shop, most recently wrote to the SEC in mid-August to say that the IEX D-Limit proposal will "discriminate against all types of liquidity takers" because the Signal can be triggered by ordinary trading activity and could therefore force brokers to reevaluate their routing strategies.

"This proposal represents a significant departure from the current market structure, unfairly favoring IEX liquidity providers without any corresponding obligation, compelling market participants to preference IEX over other exchanges, and adversely impacting tens of millions of orders submitted by retail investors annually," wrote Stephen Berger, global head of government and regulatory policy at Citadel Securities, in the Aug. 14 letter.

The SEC did not seem to agree, though.

In its ruling on the proposal, the regulator wrote that there was no sufficient evidence proving that the D-Limit order type will require "material changes" to brokers' routing strategies whether they be for an individual order or an intermarket sweep order that is sent to multiple exchanges at the same time.

"To prevent the [Signal] from observing away executions and turning 'on' before an order sent to IEX can execute on IEX, a broker-dealer need only continue to apply current routing techniques prevalent today," the SEC wrote.