The $1.3 Million Dollar Question
In our prior blog post, we discussed IEX’s rank on broker routing tables and provided evidence that IEX’s displayed quote is being “skipped” far too often, given our unique combination of low cost and price improvement. This post evaluates the most opportune times to access IEX’s quote and dives into the price improvement opportunity uniquely available on IEX, which dwarfs what is currently being realized by investors, brokers and other market participants.
In general, we believe routers should consistently prioritize IEX due to the potential price improvement available. However, there are some market-wide signals that point to the most opportune times to do so.
One Easy Beacon for Price Improvement
One such signal is whenever BX, BYX, or EDGA (three “cheap to take” exchanges) are displaying a quote that’s part of the NBBO.
When this is the case, there is a 34% chance that for S&P 500 symbols, IEX has non-displayed liquidity at a price better than the prevailing NBBO. In other words, in those moments you have a 34% chance of receiving price improvement if you route to IEX. To that end, we have received positive feedback from firms pinging IEX’s midpoint prior to accessing displayed quotes.
Even more compelling than the likelihood of price improvement is the amount available on IEX. When IEX did have liquidity at a better price, this hidden interest was more than ten times greater than the collective quote size on BX, BYX, and EDGA.
As it turns out, too often firms pass up the opportunity to interact with it.
Quantifying the Opportunity Cost
We can actually quantify how much price improvement is foregone by not routing to IEX (or at least checking IEX’s midpoint).
We identified transactions at the NBBO, and looked at the IEX order book at the time of these transactions to see whether IEX had non-displayed liquidity at a better price.
For example, if the NBBO is $100.00 by $100.04, and we see a trade of 300 shares at $100.04 on another venue, we looked to see whether IEX had a seller at $100.02. If the sell order on IEX was for 200 shares, we capped the would-be price improved shares at 200.
Here is how much volume was executed across each exchange in June 2017 that could have executed at a better price on IEX.
Over 2.2 billion shares of foregone price improvement is eye-opening. Moreover, knowing exactly how much price improvement was foregone on each transaction allows us to calculate the impact of not taking advantage of the better price on IEX. This amounts to nearly $330 million in annualized foregone price improvement — over $1.3 million every trading day. This is the opportunity being missed by not interacting more effectively with IEX’s quote, or at the very least pinging IEX’s midpoint before crossing the spread elsewhere.
In a way, foregoing price improvement and routing for rebates belong to the same conflict-of-interest paradigm. When orders are routed for rebates, the worse execution is borne by the client, but the rebate is kept by the broker. Conversely, the price improvement is a benefit received directly by the client, and does not appear to act as a strong motivator for the broker, particularly in the face of potentially higher fees.
Our last blog post demonstrated that IEX’s quote is often “skipped.” The consequences of such a decision are not just borne out in our displayed volume or market share. Instead, they create a significant opportunity cost for market participants — to the tune of more than $1 million every single day.
 Why is this signal such a strong indication of potential price improvement on IEX? One possible explanation involves exchange pricing. Compared to other exchanges, BX, BYX, and EDGA are relatively “cheap” venues to remove liquidity, so participants often route there first. Knowing this, traders and market makers often display quotes on these venues in order to move up in the intermarket queue — in other words, to increase the likelihood that their quote will trade earlier than quotes displayed elsewhere. This benefit comes at a price — since these exchanges charge a fee to post displayed quotes — so the willingness to pay this fee suggests a strong desire to achieve intermarket queue priority. Sometimes, it is strong enough to warrant resting interest at the midpoint as well, as expressing a more aggressive price obviously increases execution priority.
 The observations of IEX quoted interest are duration-weighted by symbol and expressed as a ratio of IEX resting interest to the total quoted shares across BX, BYX, and EDGA. These values are then volume-weighted by each symbol’s traded volume.
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.