Update to the Quote Stability Calculation Used By Discretionary Peg Orders

IEX Trading Alert #2016 - 038

Overview

IEX is updating the quote stability calculation used by Discretionary Peg orders to improve the accuracy of identifying a crumbling quote. The new calculation largely preserves the number of true positives (instances where IEX prevents trades during a crumbling quote) while cutting in half the number of false positives (instances where trades were prevented when the quote didn't fully crumble)*.

Deployment will begin on Wednesday, August 10 and complete Friday, August 12. The new quote stability calculation will be used by the System for securities on either the IEX ATS or Investors Exchange as IEX transitions to a registered exchange. The new calculation was filed as a change to IEX Rule 11.190(g).

* Determined through back-testing the new quote stability calculation against IEX ATS trading data.

Quote Stability Calculation

IEX is updating the existing quote stability coefficient values, and adding two new coefficients and variables to an updated quote stability calculation. The new quote stability calculation is represented as follows (updates highlighted):

1/ (1 + e ^ -(C0 + C1 * N + C2 * F + C3 * N-1 + C4 * F-1+ C5 * E + C6 * D))

The two new quote stability variables are described below:

  • E = A Boolean indicator that equals 1 if the last two quotation updates have been quotations of protected markets moving away from the near side of the market on the same side of the market and at the same price.
  • D = The number of these three (3) venues that moved away from the near side of the market on the same side of the market and at the same price in the prior one (1) millisecond: Nasdaq Stock Market (XNGS), EDGX Exchange (EDGX), or BATS BZX Exchange (BATS).

The updated quote stability coefficient values are below:

  • C0 = -1.3493
  • C1 = -1.1409
  • C2 = 0.2671
  • C3 = 0.5141
  • C4 = -0.1970
  • C5 = 0.1347
  • C6 = 0.6862

Lastly, IEX is updating the quote instability threshold to 0.6, meaning IEX will consider the NBB or NBO as crumbling when the quote stability calculation results in a value above 0.6.

Protected Quotations

IEX does not consider its own quotations in the quote stability calculation. Only protected quotations of away trading centers are used in the calculation.

Crumbling Quote Duration

IEX is reducing the amount of time the crumbling quote determination is active. When IEX has determined either the NBB or NBO is crumbling, the System will consider the price level as crumbling for 2 milliseconds, rather than 10 milliseconds, since quotes typically crumble within 2 milliseconds of detection.

More Information

Please contact IEX Market Operations or Sales with any questions:

About IEX

IEX is on a mission to build fairer markets. Founded in 2012 and headquartered in New York City, IEX introduced its first trading venue in 2013 and launched as a U.S. stock exchange in 2016. IEX is the stock exchange that believes that every investor has the right to trade on equal and fair terms, on every trade. Learn more at: iextrading.com.