Discretionary Peg (D-Peg®) Order Predicts Price Changes

IEX is the newest stock market in the United States, founded by Brad Katsuyama and colleagues who sought answers to questions others did not even know existed.  Brad and his team were recently depicted in the “Flash Boys”, the Best Seller by Michael Lewis.

IEX’s proprietary D-Peg order was designed to protect against structural arbitrage by predicting changes to the NBBO.  HFTs know when the NBBO is going to change, because they can cobble together the faster direct feeds from each exchange, and build their own NBBO.  If you are trying to get a fill at the midpoint of the NBBO, you do not want to get a fill and then have the market immediately move against you.  The proprietary signal by IEX attempts to predict that upcoming change to the NBBO, and will move D-Peg orders out of harm’s way.

For example, if you have an order in to trade at the midpoint of the NBBO, while the market is 33.95 x 33.96, a favorite strategy of the HFT is to see the quote changing to 33.94 x 33.95, sell the midpoint to you at 33.955 right before the quote change occurs, thus allowing them to buy it back immediately at 33.95 and make a half-cent profit.  To highlight just how much this strategy is occurring, in January 2017 47% of all midpoint volume on EDGX executed within 2ms of an NBBO change.

Another way to look at it would be to see how often there is no price movement after a trade at the midpoint, which is what you want to ideally see.  On EDGX, for example, there is no price movement within the following one second following a midpoint execution, only 46% of the time.  

IEX’s D-Peg orders are designed to keep you out of this predatory environment by moving you away from the midpoint if the NBBO is about to change.  There is no change in the NBBO one second after a midpoint execution on IEX 78% of the time, and only 5% of IEX’s midpoint volume is done within 2ms of a change in the NBBO.

This “crumbling quote indicator” does not in any way impede regular trading, as it is only activated for a very short period of time, five seconds per day per symbol, on average volume basis.  Protecting resting orders during times of high HFT activity can provide higher trading quality on IEX, and make a huge difference to investors.

Great Point Capital uses both IEX’s D-Peg and Primary Peg Orders.  Contact Great Point Capital today for collaboration of successful day trading strategies.

Great Point Capital has been serving the trading community since 2001 and our 100+ prop traders actively trade the firm’s capital, specializing in equities and equity options.  We are headquartered in Chicago with a location in Austin, TX.  Contact Great Point Capital LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.  We are one of the very few firms able to offer access to Takion Software Platform, enhancing your online equity trading performance.