If You Build It, Will They Come? Maybe Not!

Although June was IEX’s record displayed market share month, the majority of IEX’s volume still trades non-displayed, at the midpoint. We have described the value of this market model to investors in previous blog entries, but still, much has been made about IEX’s displayed quote and relative lack of displayed volume.

The story isn’t that simple and this post will show that even when a displayed quote on IEX is part of the NBBO, many market participants still aren’t effectively accessing it.

How Often Is the IEX Displayed Quote Accessed?

Of the 12 U.S. stock exchanges, only BATS BYX, Nasdaq BX, EDGA, and IEX do not currently pay rebates to add liquidity, and are therefore cheaper sources to “remove” liquidity, i.e. crossing the spread to access the displayed quote. BX and BYX pay a rebate of up to 15–16 mils, IEX is free, and EDGA charges 3 mils.

For June 2017, we used public data to identify trades that occurred across various combinations of these “cheap to take” exchanges when all four had quotes at the NBBO. For example, if we only saw trades on BX and BYX, then the “BX, BYX” combination was counted; if we saw trades go off at all four venues, then the “BX, BYX, EDGA, IEX” combination was counted. For now, we’ve focused only on cases where at least one of the “cheap to take” exchanges — and not any of the other eight exchanges — had a trade.

Exhibit 1 reveals a very interesting pattern: any “cheap to take” combination that involves IEX ranks at the bottom in terms of shares traded. In other words, IEX appears to be targeted a fraction of the time compared to other “cheap to take” venues. In aggregate, over 3 billion shares traded across BX, BYX and EDGA while IEX was also quoting at the inside but was not accessed. This is over 92% of the volume from Exhibit 1.

To be clear, we recognize that routers often access venues in order of cost (as Exhibit 1 shows); what we are showing here is that even factoring in cost, IEX appears underutilized. For example, the BX, BYX, EDGA combination was home to over seven times as much traded volume as the BX, BYX, IEX combination.

Pulling Our Weight

An immediate retort may be: “Yes, but it’s probably because IEX just doesn’t have much size at the inside.”

We also measured how many shares were quoted at each venue at the inside and expressed that as a % of the total shares displayed across the four “cheap to trade” exchanges. For example, let’s compare this distribution when BX, BYX, and EDGA are accessed vs. BX, BYX, EDGA, and IEX. Clearly, there isn’t much of a difference.

The IEX Quote is an Afterthought

Finally, we examined how often trades occur on BX, BYX, EDGA and at least one traditional maker-taker venue, without trades also occurring on IEX. Simply put, how often is IEX just being skipped or ignored?

This analysis provides important insights because traditional maker-taker exchanges (such as NYSE, Arca, Nasdaq, EDGX and BZX) traditionally sit lower on routing tables, since they charge high access fees to liquidity removers in order to offset the large rebates they pay to liquidity adders. As such, these venues are more likely to be accessed as part of a market-wide sweep, rather than in situations when only the “top crust” of a quote is accessed.

So if a quote on a maker-taker exchange is accessed while IEX is ignored (when IEX is also at the inside), it’s a strong indicator IEX sits quite low on routing tables, despite its low cost to remove liquidity.

Exhibit 1 isolated circumstances when only “cheap to take” exchanges were accessed. Now, we can expand our search and include circumstances in which maker-taker exchanges are also involved. Then, we can compare what % of the time we see at least one maker-taker exchange accessed without IEX being accessed (even though IEX was quoting at the inside). In short, how often is IEX being skipped?

Let that sink in for a second: when other “cheap to take” venues are being accessed along with at least one of the maker-taker exchanges, IEX is being skipped on nearly 40% of the volume! The volume in which IEX does not partake (but maker-taker venues do), is over three times greater than the volume that trades on BX, BYX and EDGA alone from Exhibit 1.

We think this is compelling evidence that IEX sits towards the bottom of the routing tables for no logical reason. This is despite the fact that IEX is one of the cheaper exchanges to take liquidity and despite IEX’s #1 rank for price improvement, as evidenced in our white paper and previous blog post.

So why might firms be ignoring IEX at an abnormally high rate relative to other “cheap to take” exchanges?

The most common retort we hear is that IEX’s speed bump hinders the ability to achieve high fill rates on IEX. Two datapoints disprove this:

• First, IEX’s own Smart Order Router (which traverses the speedbump as well) consistently achieves fill rates over 99% when accessing IEX.
• Second, two of the most active accessors of IEX’s displayed quote are Bulge Bracket banks, both of which have indicated that their fill rate on IEX is close to 100% and ranks near the top among all exchanges.

These are important datapoints to be considered both by brokers and their clients when determining venue selection.

Our next blog entry will examine yet another side effect of IEX’s low ranking on routing tables: foregone price improvement.

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. IEX plans to begin listing publicly-traded companies in 2017.

© 2017 IEX Group, Inc. and its subsidiaries. Neither the information, nor any opinion expressed herein constitutes a solicitation or offer to buy or sell any securities or provide any investment advice or service. The information herein is believed to be reliable, but the Firm makes no representation as to the accuracy or completeness of, and undertakes no duty to update, information herein.