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IEX True Price Matching Engine (Patent-Pending)

What is True Price?

A Matching Engine that is designed to calculate the True Price for a stock uses real-time pricing information consolidated from displayed protected markets and ensures that its market participants cannot receive and act upon changes in market data before the market itself, on the market's own matching engine. True Price determines a trading venue's ability to price trades of a stock when calculating the National Best Bid and Offer (NBBO)2.

Why is True Price important to an Exchange or ATS/Dark Pool?

Various trading venues, including Exchanges, ECNs, ATSs/Dark Pools, and their participants, including Brokers, Trading Firms, and Investors, access market data1 services at varying speeds (e.g. SIP4 vs. Direct Feeds3). When a venue consumes market data at a slower speed than some of its participants, it is possible for the venue to calculate pricing information at a slower rate than its own market participants.

In other words, a participant on the venue may have more up-to-date information than the venue itself about the real-time price of a stock.

What does this mean in practical terms? When a venue is slower than its participants to process changes in stock prices and lets its participant have the fastest possible access to its matching engine (i.e. through colocation), the result can be the venue executing trades at a Stale Price giving the "faster" trading participants' orders an advantage at the expense of orders relying on the venue for accurate pricing.

How does IEX provide the True Price to ALL of our market participants?

IEX is using cutting edge technology:

  1. A low-latency ticker plant to normalize market data from all protected US equity venues*. This currently allows the IEX Matching Engine to calculate the NBBO, which will then be used to price trades on our market, in under 350 microseconds.
  2. IEX's POP Architecture (patent-pending) introduces a 350 microsecond communication buffer between the IEX Matching Engine and all IEX participants**. This ensures that any IEX subscriber who is able to calculate the NBBO faster than IEX cannot execute a trade against another participant on IEX before our Matching Engine can calculate the True Price for all participants at any given moment, but most importantly following a quote change.

* IEX uses direct proprietary market data feeds for all of the 11 registered exchanges and LavaFlow ECN.
** The IEX POP adds 350 microseconds to order and trade communications including e.g. new orders, order cancellations/modifications and trade execution reports.

  • SIP: IEX uses the SIP to read the Consolidated Last Sale, Limit Up-Limit Down Reference and Band Prices, and Administrative messages including Halts, Pauses, Resumes and, additionally, as redundancy for the direct proprietary feeds.

What questions should a Venue answer to determine if it provides you True Price?

  1. What kind of market data service for each protected market does the Venue use to calculate the NBBO (SIP, Direct Feeds), and more specifically, how quickly does it receive and process quote changes to calculate the NBBO in its Matching Engine?
  2. Does the Venue offer co-location? (i.e. cross-connect in the same facility)

Note:
Even a venue that takes Direct Feeds3 may be slower than its participants that are using hardware assisted feed handlers, algorithms and other technologies tuned for the absolute minimal latency. A Venue that offers products to speed up market access such as colocation, binary communication protocols, 40Gb Ethernet and microwave communication may further enable its Participants in calculating and responding to changes in the NBBO faster than the Venue's own matching engine, contributing to the occurrence of Stale Price executions.

What are examples of orders that may be impacted by a Venue providing True Price executions?

True Price would be relevant in the following order scenarios:

Example: Midpoint Peg Order

The NBBO is currently 10.00 x 10.04 with a midpoint price of 10.02

An investor has an order resting on the order book: SELL 10,000 XYZ @ MIDPOINT PEG, which is determined to be 10.02.

The NBBO updates to 10.03 x 10.04 with a new midpoint price of 10.035

A Venue that provides True Price will only allow the Midpoint Peg Sell order to execute at $10.035, the most up-to-date and accurate midpoint price.

A Venue that is slower to update the quote change than some of its own participants may allow a fast participant to execute a Buy order against the Midpoint Peg Sell order at the stale midpoint price of $10.02, a price $.01 outside the National Best Bid price and $.015 worse than the new midpoint price.

Example: Resting Buy Order

The NBBO is currently 30.00 x 30.05

The NBBO updates to 29.95 x 30.00

An investor has a non-displayed order resting on the order book to Buy 10,000 XYZ @ 30.04

A Venue that provides True Price will not allow the Buy order to execute at a price above $30.00, the most up-to-date National Best Offer price.

A Venue that is slower to update the quote change than some of its own participants may allow a fast participant to execute a Sell order against the resting Buy order at the stale price of $30.04, a price $.04 outside the National Best Offer price (in this example costing the buyer $400).

True Price is most critical during periods when the quote is changing.

An academic study produced jointly by Shengwei Ding (Wells Fargo Securities), John Hanna (Redline Trading Systems, a market data technology company), and Terrence Hendershott (University of California, Berkley) was published on January 3, 2014. The study compared the price dislocations between the NBBO calculated by Direct Feeds versus the SIP. The study found, for example, an average of 49,624 price dislocations in Apple (AAPL) over four days in May of 2012 (May 2nd, 10th, 18th, and 25th).

Terms you need to know:

Market Data 1

From Wikipedia: In finance, market data is price and trade-related data for a financial instrument reported by a trading venue such as a stock exchange. Market data allows traders and investors to know the latest price and see historical trends for instruments such as equities, fixed-income products, derivatives and currencies.

The market data for a particular instrument would include the identifier of the instrument and where it was traded such as the ticker symbol and exchange code plus the latest bid2 and ask price and the time of the last trade. It may also include other information such as volume traded, bid and offer sizes and static data about the financial instrument that may have come from a variety of sources. There are a number of financial data vendors that specialize in collecting, cleaning, collating and distributing market data and this has become the most common way that traders and investors get access to market data.

Bid/Offer/NBBO 2

From Reg NMS Rule 600

  • (7) Best bid and best offer mean the highest priced bid and the lowest priced offer.
  • (8) Bid or offer means the bid price or the offer price communicated by a member of a national securities exchange or member of a national securities association to any broker or dealer, or to any customer, at which it is willing to buy or sell one or more round lots of an NMS security, as either principal or agent, but shall not include indications of interest.
  • (42) National best bid and national best offer means, with respect to quotations for an NMS security, the best bid and best offer for such security that are calculated and disseminated on a current and continuing basis by a plan processor pursuant to an effective national market system plan; provided, that in the event two or more market centers transmit to the plan processor pursuant to such plan identical bids or offers for an NMS security, the best bid or best offer (as the case may be) shall be determined by ranking all such identical bids or offers (as the case may be) first by size (giving the highest ranking to the bid or offer associated with the largest size), and then by time (giving the highest ranking to the bid or offer received first in time).
  • Direct Proprietary Market Data Feeds 3

    From Wikipedia: Delivery of price data from exchanges to users, such as traders, is highly time-sensitive and specialized technologies, direct proprietary market data feeds, designed to handle collection and throughput of massive data streams are used to distribute the information to traders and investors. The speed that market data is distributed can become critical when trading systems are based on analyzing the data before others are able too, such as in high frequency trading.

    SIP 4

    From the Exchange Act of 1934 as amended
    (22)(A) The term "securities information processor" means any person engaged in the business of (i) collecting, processing, or preparing for distribution or publication, or assisting, participating in, or coordinating the distribution or publication of, information with respect to transactions in or quotations for any security (other than an exempted security) or (ii) distributing or publishing (whether by means of a ticker tape, a communications network, a terminal display device, or otherwise) on a current and continuing basis, information with respect to such transactions or quotations. The term "securities information processor" does not include any bona fide newspaper, news magazine, or business or financial publication of general and regular circulation, any self-regulatory organization, any bank, broker, dealer, building and loan, savings and loan, or homestead association, or cooperative bank, if such bank, broker, dealer, association, or cooperative bank would be deemed to be a securities information processor solely by reason of functions performed by such institutions as part of customary banking, brokerage, dealing, association, or cooperative bank activities, or any common carrier, as defined in section 3 of the Communications Act of 1934, subject to the jurisdiction of the Federal Communications Commission or a State commission, as defined in section 3 of that Act, unless the Commission determines that such carrier is engaged in the business of collecting, processing, or preparing for distribution or publication, information with respect to transactions in or quotations for any security.