Apr 16, 2024

April 16, 2024

A 28-Mil Head Start

D-Limit’s unique features allow brokers to achieve an average of 28 mils of pre-trade price improvement per share, compared to 0 at all other exchanges.

Source: IEX Market Data

IEX D-Limit is the only displayed exchange order type to offer the possibility of pre-trade price improvement (PI), getting filled at a price better than your original limit price. For example, an order can begin its life bidding 10.00, be moved to 9.99 due to IEX’s Signal firing1, then buy at 9.99 once the NBB (National Best Bid) changes. In this scenario, D-Limit delivered pre-trade price improvement of 1 penny/share. We believe this aspect of D-Limit represents a unique value proposition that can be incredibly valuable to institutional brokers, especially from a parent order level perspective.

Brokers typically evaluate the quality of displayed order types on exchanges in 2 ways:

1. Likelihood of getting a fill, using hit or fill rates

2. Quality of fill, generally using markouts to measure adverse selection

We have written a lot about how IEX D-Limit’s signal protection allows it to deliver superior markouts compared to other exchanges, but we believe the ability for pre-trade price improvement offers a different value proposition to the quality of fill for a displayed order.

D-Limit pre-trade price improvement, when applicable, is like starting a trade with a head start. This advantage can position you more favorably against implementation shortfall and VWAP benchmarks before the trade even happens, as it allows the market to move towards you at a more favorable price as opposed to executing right before the market shifts. This price improvement vs. arrival can be uniquely beneficial in reducing slippage vs. arrival at the parent-order level, which is often even more important than optimizing child-order level fill quality.

In the chart above, we have added the net average pre-trade PI (28 mils) to D-Limit’s markout curve for institutional brokers in 1c spread names, as a way to quantify D-Limit's fill quality in one metric. This visualization underscores how D-Limit's average pre-trade PI is a huge number in the context of markouts, giving institutional brokers “real” spread capture well after the trade. We think this framing can help better compare D-Limit's true performance against other exchanges’ markouts (since other exchanges cannot offer pre-trade price improvement to displayed limit orders).  As we saw in our last chart of the month, the average 1s markout on maker-taker exchanges is in the -25 to -30 mils range, plotted on the above graph in dark blue.

But we know from our experience that this is an apples-to-oranges comparison, as institutional brokers tend to have worse markouts than market makers, and thus worse markouts than an exchange’s average. While it's difficult to know exactly how much lower, we’ve estimated those values by applying the difference between Institutional brokers and the overall average on IEX, and assumed the same gap exists on other exchanges. While this is just an estimate, it helps illustrate the stark contrast between D-Limit and lit adding on other exchanges: the difference between capturing most of the spread and paying most of the spread.

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Disclaimer: IEX classifications are on a best-efforts basis by member firms’ trading sessions.

1. While 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.