How D-Limit makes a meaningful impact on IEX Exchange’s midpoint trading
IEX Exchange has long been known for its rich midpoint liquidity. However, over the past year, much of the attention on IEX has focused on D-Limit and its impact on the growth of IEX’s displayed book.
That may lead some to ask whether IEX has moved away from its focus on the midpoint.
The answer is — absolutely not!
Nearly fifty percent of the volume on IEX is still executed at the midpoint, and in Q1 of 2021, we were the #1 midpoint venue in U.S. equities. Given our position as a market leader, we wanted to share a few key nuances of midpoint trading on IEX that we think will be relevant to our trading partners. Specifically:
- The quality of D-Peg trading has improved after the launch of D-Limit, driven by D-Peg’s ability to source price improvement.
- IEX midpoint market share increases with share price and spread bin, a trend in direct contradiction to what we see on other exchanges.
- IEX stable volume % remains high regardless of price bucket, even though the stability % falls considerably for other venues as share price increases.
Midpoint Trading Doesn’t Operate in a Vacuum
The introduction of D-Limit has had a meaningful impact on IEX’s midpoint trading, especially the performance of D-Peg.
As we’ve written about before, when the Signal is off, D-Peg has discretion to step up to the midpoint to trade, but only steps up as far as it needs to trade with the incoming counterparty.
This means that orders willing to trade past the midpoint provide de-facto price improvement to resting D-Peg orders. Since the introduction of D-Limit on IEX in October 2020, a higher percentage of D-Peg volume is trading at the touch or inside the NBBO (i.e., at a better price from the resting order’s perspective than the midpoint). We think there are two primary drivers of this trend:
- Spread-Crossing Counterparties: The growth of IEX’s displayed quote driven by D-Limit has attracted more orders willing to cross the spread on IEX. D-Peg rests behind displayed orders, but as some firms oversize IEX’s quote or blind ping IEX (i.e., cross the spread even if we don’t have displayed interest), D-Peg orders end up trading at the NBBO and capturing the spread when the Signal is off.
- Inside-the-Spread Trading: Over the past year, we’ve seen a noticeable rise in “inside-the-spread” trading. While much of it has been attributed to retail, there is also more on-exchange volume trading at these prices. IEX’s share of this exchange “Inside the Spread, Non-Mid” trading has also grown and is now nearly 10%. As orders interact with this flow, D-Peg orders “step up” to trade at these “better than midpoint” prices, also while the Signal is off.
As a result of D-Peg trading at more passive prices since the introduction of D-Limit, trade-to-mid markouts for D-Peg resting orders have also improved, driven by the fact that a higher portion of the volume is achieving some degree of spread capture.
When The Price Is Right
While IEX had the #1 market share in midpoint trading overall for the first five months of 2021, there is fluctuation depending on the price of the stock. Essentially, the more expensive the name, the higher IEX’s midpoint market share. This is different from what we observe from just about every other exchange, which generally has lower midpoint market share as share price increases.
One potential reason for this dynamic may be that there is more “native” midpoint liquidity on IEX than on other exchanges. In tighter-spread securities, which tend to fall into lower price bins, the midpoint is typically the most aggressive price at which an order can rest. However, as spreads widen to more than 1 cent, firms can simply display an order at a more aggressive price rather than rest at the midpoint non-displayed. For instance, if the NBBO is $10.00 x $10.01, one cannot display a buy order anywhere between those two price points, leaving the midpoint as the only option. Conversely, if the NBBO is $10.00 x $10.10, firms wishing to be more aggressive than the bid can post an order at $10.01, $10.02, etc. On IEX, however, market participants may be sending midpoint orders not because midpoint is the only option, but because they are deploying a specific strategy aimed at midpoint trading. Indeed, looking at exchange midpoint market share by spreads seems to confirm this theory. The gap between IEX and other venues not only widens as spreads increase but is even wider than the price bin gap.
It’s also worth noting that IEX’s midpoint fills outperform those of other exchanges by a wider margin in high-priced names. We measure this by calculating the “stability” of these trades across exchanges. For each execution, we determine whether it was followed by a quote change in the 2ms after the trade. While the execution quality of midpoint trades drops off as price increases on other exchanges, performance on IEX remains strong and reliable across price buckets.
This suggests that IEX’s midpoint liquidity is unique, and as symbols get less liquid and harder to trade, the gap between IEX and other venues grows. The combination of IEX’s Speed Bump and Signal, which, in tandem, are designed to ensure the most accurate midpoint pricing goes a long way in fostering midpoint trading during stable market conditions. At IEX Exchange, we’re very proud of our leading market share and market quality in midpoint trading. Though IEX’s midpoint trading compares favorably to that of other venues across the board, there are specific areas of significant outperformance. We hope this is of interest to our trading partners as they continue to optimize IEX usage. If you would like to look at the specifics of these dynamics in your trading on IEX, or to discuss further, please reach out to your IEX Exchange contact.