What is the IEX Signal?
The IEX SignalTM (also known as the “Crumbling Quote IndicatorTM” or “CQITM”) is a predictive model that forecasts when the price of a stock is likely about to change. The current price of a stock is a compilation of the best prices published by the 13 stock exchanges. Prices don’t change as a single event; rather, they often occur as a sequence of updates over a sub-second timeframe, which is only complete when the final exchange’s price changes.
Similar to making a prediction about whether the last in a series of dominos will fall and the time at which it will hit the surface, it’s possible to examine the sequential price updates from exchanges to identify when a series of price updates has started, meaning the current price is likely to change in the immediate future.
Specifically, IEX considers a price as “unstable” or “crumbling” when the Signal determines that the National Best Bid (NBB) is likely about to decrease or the National Best Offer (NBO) is likely about to increase. When the determination is made, the Signal “fires” and is “on” for 2 milliseconds, or until the price changes.
Certain sophisticated traders are able to identify a crumbling quote and leverage their speed advantage to trade ahead of and pick off slower participants. This arbitrage strategy is opportunistic and only available to a limited number of participants – "structural insiders" – and on average is nearly instantly profitable. IEX developed the Signal to identify these moments and protect investors’ orders from "crumbling quote arbitrage," a modern form of latency arbitrage.
How does IEX use the Signal?
IEX launched the Signal in conjunction with the introduction of the Discretionary Peg order type in 2014. Since then, IEX has iterated on the model to increase its efficacy and incorporated the Signal into two additional features of the Exchange.
IEX Discretionary PegTM
IEX’s signature, patented order type. When the price is stable, D-Peg orders are willing to trade with incoming orders halfway between the NBB and NBO (the “Midpoint Price”). However, when the Signal indicates the price is unstable, D-Peg orders are priced at the less aggressive of one (1) Minimum Price Variant (MPV, $0.01 for most stocks) lower (higher) than the NBB (NBO) for buy (sell) orders or the order’s limit price.
IEX Primary Peg
When the price is stable, P-Peg orders are willing to trade with incoming orders at the NBB or NBO. However, when the Signal indicates the price is unstable, P-Peg orders are priced at the less aggressive of one MPV lower (higher) than the NBB (NBO) for buy (sell) orders or the order’s limit price.
IEX Crumbling Quote Remove Fee
Charges participants the maximum fee ($0.30 per 100 shares) for trades that remove liquidity when the Signal indicates the price is unstable (if this strategy represents a substantial portion of a participant’s trades on IEX).
The Signal is designed to protect D-Peg and P-Peg orders by cueing them to behave less aggressively when the price is likely about to change in their favor – buyers will be able to buy at lower prices and sellers will be able to sell at higher prices. The Crumbling Quote Remove Fee aims to further protect resting orders and improve the quality of trading on IEX by disincentivizing predatory strategies that target investors when the price is about to change.
How is the latest version of the Signal different?
IEX completed the rollout of the newest version (v.5) of the Signal on May 1, 2018 (see rule filing here). Compared to previous versions, the updated model is more flexible, makes more dynamic predictions, and is more effective in a wide variety of market conditions, including volatile periods:
- Re-firing: The Signal now continues to evaluate whether a quote is unstable while it is already “on,” allowing it to be extended for longer than 2 milliseconds if the quote is still unstable, or to re-fire right after a price change. This is particularly important on volatile days, when prices can change in quick succession. The Signal can now re-evaluate quote stability immediately after a price change or after just 200 microseconds.
- Inputs: The Signal now incorporates more relevant information into the model. Previously, the Signal examined data over the past millisecond or since the last price change for that stock, on either the bid or offer side. It now looks (over the past millisecond) at bid-side data since the last price change on the bid side and offer-side data since the last price change on the offer side.
- Updated precision: After making these updates, IEX retrained the statistical model and accordingly optimized the coefficient values to make the Signal as effective as possible.
This page may include only a partial description of the IEX product or functionality set forth herein.
For a detailed explanation of such product or functionality, please refer to the IEX Rule Book and/or IEX Trading Alert 2018-017.
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