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IEX Announces: Discretionary Peg™ Functionality and Other Upcoming Deployments

IEX Trading Alert #2014 - 022

Please Route To: Trading, Trade Support, and Technology

What you need to know:

  • IEX announces Discretionary Peg™ functionality with IEX Crumbling Quote Protection will become available on November 3, 2014.
  • The following deployments were previously announced and will be available on the dates below:
    • October 14: For orders marked IEX-only (non-routable), IEX is changing the behavior of Pending Order Amendment and Pending Order Cancel messages. (Trading Alert #2014-020 & #2014-021)
    • October 28: IEX is updating the values populated in FIX Tag #851 "LastLiquidityIndicator". (Trading Alert #2014-020)
    • October 28: IEX will offer increased flexibility for Subscribers to specify "Composite" or "Minimum Execution" method for satisfying the Minimum Quantity (MQTY) order parameter on a per-order basis. (Trading Alert #2014-021)
  • Starting Monday, October 6, Subscribers are encouraged to test their implementation of any of the above deployments, in the IEX Certification environment.

What is the IEX Discretionary Peg™ Order?

Historically, and as offered by a number of national securities exchanges today, "Discretionary Orders" rest at one price and are willing to "exercise price discretion" to meet the limit price of an incoming order. Discretionary orders will always exercise the least necessary price discretion.

  • Upon entry, IEX's Discretionary Peg™ Order is priced by the System to be equal to the Midpoint Price.
  • Unexecuted shares are posted to the Order Book priced equal to the primary quote and automatically re-priced by the System in response to changes in the NBB or NBO.
  • While resting during times of "quote stability" (as determined by the System):
    • The order may exercise price discretion up to the Midpoint Price to meet the limit price of an incoming order.
    • The order may Recheck the IEX Order Book up to the Midpoint Price to trade against contra interest.
  • While resting during times of "quote instability" (as determined by the System):
    • IEX Discretionary Peg™ Orders are not eligible for Book Recheck and do not exercise price discretion.

How Price Discretion works (during times of "quote stability" only):

  • Discretionary Peg™ Orders exercise the least amount of price discretion necessary, from the resting price to the less aggressive of the Midpoint Price or the peg's limit price, to meet the limit price of orders entering the IEX Order Book.
  • Discretionary Peg™ Orders maintain time priority at the primary price. When exercising discretion these orders are prioritized behind any orders resting at that price.
  • Except during periods of quote instability Discretionary Peg™ Orders are eligible to Recheck the IEX Order Book to the Midpoint Price.

Why is IEX offering Discretionary Peg™ with Crumbling Quote Protection?

Investor protection is IEX's market model focus.

IEX is offering Discretionary Peg™ with Crumbling Quote Protection to provide Subscribers with increased ability to manage the price of their resting orders, while protecting them from being disadvantaged by structural inefficiencies in the dissemination of market information.

A slow degradation of the bid/offer, i.e. "crumbing quotes", increases the predictability of a price move in the stock. In such situations, trading at the Midpoint Price can lead to adverse selection; therefore the order will not exercise discretion and remain pegged at the primary quote.

How does IEX define quote stability?

IEX has created the Crumbling Quote Indicator, a specific market calculation within the IEX System, which identifies inefficient quote transitions, or "crumbling quote" situations. This calculation is derived through an IEX proprietary assessment of relative quoting activity of Protected Quotations over a sub-second period. An inefficient quote transition is generally characterized as multiple market quote updates indicative of an impending NBB or NBO price change occurring over a period of time longer than calculated tolerances.

While IEX endeavors to utilize data and calculations that it believes to be reliable, IEX cannot ensure the timeliness, accuracy, reliability or completeness of any data or calculations, including our measure within the Crumbling Quote Indicator.

What are the tradeoffs and other considerations for using Discretionary Peg™ Orders?

Discretionary Peg™ Orders are not eligible for routing, and execute at IEX only. Discretionary Peg™ orders must be defined with a TIF of FOK, IOC, DAY, or GTT.

Book Priority:

  • Discretionary Peg™ orders will have time priority at the primary quote, their resting price.
  • When exercising discretion, and executing at price levels between the primary up to and including the Midpoint Price, Discretionary Peg™ orders will cede priority to all non-Discretionary Peg™ orders and resting limit orders at those price levels, but maintain time priority against other Discretionary Peg™ orders at those levels.

Broker Self-Cross:

  • Discretionary Peg™ orders enjoy Broker Self-Cross with free internalization while resting at the primary quote.
  • When exercising discretion, and executing at price levels between the primary up to and including the Midpoint Price, Discretionary Peg™ orders enjoy Broker Self-Cross only amongst other Discretionary Peg™ orders only after all resting orders at eligible price levels have been exhausted.

What is a typical use case for Discretionary Peg™ Orders?

When utilizing IEX as a resting destination, Subscribers should consider if using Discretionary Peg™ as an alternative to Midpoint Peg is consistent with their execution objectives. Discretionary Peg™ offers enhanced order protection with flexibility to execute up to the Midpoint Price in stable quote conditions.

To illustrate with several examples: NBBO is $.10 x $.14, and an unpriced Discretionary Peg™ buy order is resting on the IEX Order Book at $.10.

  • Exercising price discretion to the Midpoint Price against an inbound order during a period of quote stability.
    • An unpriced Midpoint Peg sell order enters during a period of quote stability, and the Discretionary Peg™ exercises discretion to execute at the Midpoint Price: $.12.
  • Declining to exercise price discretion during a period of quote instability.
    • An unpriced Midpoint Peg sell order enters at a time IEX determines the NBBO to be inefficiently transitioning to $.09 x $.13, and therefore not exercising price discretion, so no trade occurs.
  • Once the Crumbling Quote Indicator determines the newly established NBBO to be stable, Book Recheck will invite the Discretionary Peg™ Order to exercise discretion to the midpoint and execute against the resting Midpoint Peg seller at the new Midpoint Price: $.11
  • Exercising the minimum necessary price discretion to meet the limit price of an inbound order during a period of quote stability.
    • A sell order with an $.11 limit enters during a period of quote stability where the market is $.10 x $.14, and the Discretionary Peg™ exercises discretion to execute at $.11.
  • Declining to exercise price discretion against an aggressively priced incoming order regardless of quote stability where the market is $.10 x $.14.
    • A sell order with a $.10 limit enters during a period of quote instability and executes against the Discretionary Peg™ resting on the near-side quote at $.10.

Additional examples may be found in the FIX Certification Notes for Product Managers document.

How does the Discretionary Peg™ behave in locked and crossed markets?

Discretionary Peg™ Orders behave exactly like Primary Peg Orders in both locked and crossed markets. For a detailed explanation, refer to IEX's Product Enhancement Proposal #4: Primary Peg Functionality.

Where can I learn more?

About IEX

Dedicated to institutionalizing fairness in the markets, IEX provides a more balanced marketplace via simplified market structure design and cutting-edge technology. IEX operates a fair-access platform accessible by any qualified broker dealer. IEX is driven by a team of cross-industry experts with backgrounds spanning market venues, electronic trading, and broker-dealers. IEX is the first equity trading venue seeded exclusively by a consortium of buy-side investors, including mutual funds, hedge funds, and family offices. Learn more at: iextrading.com.