D-Limit vs D-Scriminatory

Sometimes people use the words “stock exchange” and lump all 13 US exchanges into the same category but that really isn’t fair.  There are the three families (NYSE, Nasdaq and Cboe) which are for-profit, public companies which seem to always create “innovations” that are designed to increase their own bottom line. And then there is that outlier stock exchange, IEX, which seems to always put investors first.  

A perfect example of this difference is Cboe’s EDGA Liquidity Provider Delay Mechanism (a.k.a. asymmetric speed bump) vs IEX’s newly proposed D-Limit order.


According to Eric Stockland of IEX, this is the definition of a D-Limit order:

“D-Limit is an IEX order type that behaves like a regular displayed limit order for nearly all of the trading day. It differs from a regular limit order by leveraging the IEX Signal (i.e., the Crumbling Quote Indicator or CQI), which identifies brief moments in time when the quote is “crumbling” — a strong indication that the price is about to change.”

In other words, D-Limit orders are designed to help displayed orders not get picked off when a quote is about to change.  We found this statistic from Eric to be extremely telling:

“The Signal is “on” for only 0.02% of the trading day on a volume-weighted basis — but 24% of all IEX displayed trading happens when the Signal is “on.”

What this means is that there is a massive race to pick off stale investor orders.  HFTs, which have paid top-dollar for high speed data related products, race to pick off stale orders from investors who haven’t necessarily paid for the same low latency technology.  And within this predatory HFT category, there are a few that seem to be winning the speed race. According to IEX:

“In November 2019, just 3 member firms at IEX were responsible for 55% of all the lit taking volume while the Signal was “on,” even though those firms accounted for only 13% of the total volume on IEX.”

D-Limit seeks to prevent these HFT firms from picking off those stale limit orders which are extremely profitable for them. 

*It’s important to note that the D-Limit order is available for any broker-dealer to use and therefore is not a discriminatory order type.

Cboe EDGA Liquidity Provider Delay Mechanism

The SEC just announced that they will be delaying decision on this proposal until February 21, 2020.  We’ve written about this proposal in the past and noted that its asymmetric design was discriminatory and designed to allow liquidity adding orders to cancel due to their 4 millisecond advantage.  The SEC’s Investor Advocate has also just weighed in on this proposal and believes “it will have a detrimental impact on the majority of investors”. The SEC Investor Advocate is particularly concerned about the one-sided benefits of EDGA’s proposal:

“We believe there is a significant imbalance between, on the one hand, the speculative market quality benefits that might emerge from the asymmetric speedbump and, on the other, the undisputed discriminatory benefit provided to the class of market makers capable of using the speedbump to their advantage.”

We believe EDGA designed this 4 millisecond speed bump to assist market makers in the hopes that it will drive more volume to their exchange.

Our Thoughts

The Cboe has a track record of implementing conflicted order types (remember “hide not slide) and we think the EDGA Liquidity Provider Mechanism is just another example of a proposal that was designed to improve their own market share and their bottom line.  IEX, on the other hand, is trying to address the displayed limit order problem that has plagued the market for years. Their solution is truly innovative and could increase the amount of displayed limit orders which would contribute to the price discovery process.

However, anything that threatens the status quo market data revenue system will upset the the entrenched players and we’re pretty sure that the D-Limit proposal is going to spark a backlash amongst some in the trading community. 

  • We expect that the major stock exchanges will cry foul and invent some reason why D-Limit is not fair.  They will do this not because they want to protect investors but because they need to protect the billions of dollars that they continue to make from selling proprietary data, colocation space and other data related products to their high speed clients.
  • The opposition will most likely be joined by the predatory HFT firms that have enjoyed picking off these stale quotes for years. Anything that levels the playing field is not a good thing for these firms.
  • We’re not sure how the electronic market makers will react.  On one hand, the D-Limit order will protect their quotes as well. But the larger market makers can protect themselves and they probably won’t like the fact that they will have to pay 3 mils to post on IEX rather than collecting their usual 30 mil rebate on the other exchanges.

We expect the comment letter period to be pretty active and we’ll be filing a letter in support of the D-Limit proposal. The IEX solution is a protection for ALL liquidity providers and we think that is an innovation that needs to be supported.