IEX Launches the Next Generation of Investor and Member Protection

Doubles Predictive Power and Expands Application of the IEX Signal to Trading at the NBBO

NEW YORK, April 10, 2017 – IEX®, the Investors Exchange, today announced that it had completed the rollout of two breakthrough enhancements, more than doubling the predictive power of the IEX Signal and extending its protective capability to the exchange's Primary Peg order type. The Signal, first integrated into IEX's Discretionary Peg™ (D-Peg®) order type, is a centerpiece of IEX's evolving market design, which sets a new standard for investor and Member protection not available on other U.S. stock exchanges.

Due to heavy market fragmentation and the varying speeds at which market participants – including U.S. stock exchanges – receive data, the NBBO (National Best Bid and Offer) is not a uniform indication of stock prices. Instead, multiple "best prices" can exist at any given moment, each one representing a different participant's point of view. This discrepancy between diverging views of the market creates windows of time in which predatory trading strategies can exploit investors' and other participants' reliance on older views of the best price.

While the IEX Speed Bump is designed to address this problem after changes to the NBBO occur, but before they are widely disseminated, algorithmic prediction models enable another form of predatory, speed-based trading. This type of strategy is based on the ability to recognize early indications of price movement and predict price shifts tiny fractions of a second before the NBBO changes. This predictive ability gives predatory traders another way to trade at soon-to-be stale prices at the expense of less informed participants.

To protect participants from this form of arbitrage, IEX developed the IEX Signal. The Signal uses a proprietary model to predict declines in the National Best Bid (NBB) or increases in the National Best Offer (NBO) before those changes occur and are communicated to market participants. When the Signal is on, D-Peg orders behave less aggressively to prevent them from trading in adverse conditions.

On March 28, IEX deployed a new, upgraded version of the Signal, more than doubling its ability to predict those price changes in the market. Initial results show that the new IEX Signal correctly predicts approximately 26% of the total price changes in the trading day, up from 9% with the previous version. On a volume-weighted basis, the Signal now predicts the direction and timing of 44% of price changes.

The IEX Signal has been integrated into the IEX D-Peg order type since November 2014.

"Since its inception, IEX's aim has been to produce a fair marketplace, and a huge part of this has been by minimizing the ‘relativity effects' in a disparate geographical marketplace," said William Lishman, Head of Trading, Americas at Schroders, a global asset management company with $490.7 billion in assets under management globally as of December 31, 2016. "D-Peg has played a significant role in reducing negative selection over the infinitesimally small timeframes that some market participants live in, and has helped create a positive environment for seeking block liquidity."

IEX also modified its Primary Peg order type to extend the protections of the IEX Signal to trading at the NBB for buy orders and the NBO for sell orders. Primary Peg orders will now be pegged 1 MPV ("minimum price variant", equal to $0.01 for most stocks) lower than the NBB for buy orders and 1 MPV higher than the NBO for sell orders. They can then "step up" to trade at the NBB or NBO except when the IEX Signal predicts that the price is about to decline for a Primary Peg buyer or increase for a Primary Peg seller. Based on testing, IEX expects new Primary Peg orders to experience 15% less adverse selection, or trading at soon-to-be stale prices.

"IEX's commitment to protecting investors means working and evolving continuously to improve the exchange on their behalf," said IEX CEO Brad Katsuyama. "These new innovations complement and extend the protective benefits of the IEX Speed Bump to deliver even better trading outcomes for investors, their brokers, and market makers on IEX and further distance us from the legacy exchange model."

IEX released a white paper detailing the research and development behind the new version of the Signal. The white paper describes the process of evaluating potential variables for use in the Signal and testing their efficacy in improving predictions about imminent price changes.

The new IEX Signal, its impact on D-Peg, and its integration with Primary Peg represent IEX's latest initiatives to level the playing field for investors and other participants by combatting unfair advantages and structural inefficiencies that benefit only legacy exchanges and a small segment of the trading community. Building on these upgrades, IEX will continue to prioritize high-quality trading on the exchange through targeted, high-impact improvements.

IEX D-Peg with the new IEX Signal and the updated Primary Peg are both made available to each of the more than 150 broker-dealer Members connected to IEX. Learn more about the upgraded IEX Signal in our new white paper and read more about the role that the Signal plays on IEX on our blog.

Additional detail on the updates to the Signal and Primary Peg can be found in Trading Alert #2017-006 and Trading Alert #2017-007. A full list of Members connected and ready to trade are available on the IEX website.

About IEX

IEX is the Investors Exchange: a fair, simple, and transparent stock exchange dedicated to investor and issuer protection. Built on the belief that every investor is entitled to the same right to trade on equal terms on every single trade, IEX is on a mission to level the playing field by eliminating unfair advantages from the markets.

On September 2, 2016, IEX launched as America’s newest stock exchange, and regularly matches over 140 million shares daily with a notional value of nearly $6 billion. On February 21, 2017, IEX reached a record market share of 2.3% of total U.S. equity volume. IEX plans to begin listing publicly-traded companies in 2017.