Introducing Midpoint for Retail on IEX

Serving a new standard for retail trading on exchanges.

A new approach to serving retail on a national securities exchange

Since its early days as an ATS, IEX has been known for its rich midpoint liquidity, which allows investors to trade in size at the midpoint of the national best bid and best offer — often considered the fairest price — without leaking information that can dramatically move the price of a stock.

In fact, this dynamic is one of the primary reasons that the Investors Exchange (IEX) dramatically outperforms every other exchange in trading quality as measured by effective spread and price improvement — two widely-accepted proxies for trading quality — as well as block and midpoint percentage.

Why is IEX’s midpoint liquidity so different from that on other exchanges? First, IEX is designed to protect midpoint-eligible orders via the IEX “speed bump,” which aims to ensure that pegged orders are executed at the correct price. D-Peg orders that execute at the midpoint are further protected by the IEX Signal (i.e., the Crumbling Quote Indicator), which is designed to prevent orders from trading at the midpoint when the price is unstable. Second, midpoint trading on IEX benefits from a network effect: because investors trust IEX to protect their orders and information, they rest large orders on the exchange — which in turn makes it more likely for natural investors to meet at the midpoint.

IEX’s support from the institutional buyside is a testament to the money that large investors save by trading in size at the midpoint on IEX. But just because the pennies add up faster for those larger players doesn’t mean that they are the only investors who can — or should — benefit from IEX’s midpoint.

Serving investors large and small

At IEX, we’ve always looked to serve a diverse array of market participants, and we wanted to find a way to give retail investors access to the deep midpoint liquidity on IEX.

IEX’s newly-proposed retail-specific features represent IEX’s approach to doing just that. Designed specifically to bring high-quality midpoint trading to retail orders, this will be the first retail offering from an exchange that aims to give retail orders half the spread (an effective spread of zero) on every trade.[1]

So how will it work? 2

IEX is introducing two new order types to serve the retail trading ecosystem.

1. Retail Liquidity Provider (RLP) orders: RLP orders are resting Discretionary Peg (D-Peg) orders that will only execute against Retail orders (defined below). This order type is designed to attract liquidity to interact with Retail orders from a broad range of participants and can therefore be sent by any broker-dealer member of IEX, including market makers, broker principal trading desks, or agency brokers representing retail or institutional investors. RLP orders cede priority to all other eligible midpoint interest.

2. Retail orders: These orders will benefit from the liquidity provided by RLP orders, as well as the already deep midpoint liquidity on IEX. Retail orders will originate from regular people — “natural persons” in the legalese — and will be sent to IEX from “Retail Member Organizations” (RMOs) that are approved by IEX. [3]

Retail orders must be eligible to remove liquidity at the midpoint upon entry (D-Peg or Midpoint Peg orders with a TIF of IOC or FOK).[4] When Retail orders execute on IEX, they will get half the spread by executing at the midpoint.[1]

Why do it this way?

Through these order types, IEX aims to provide high-quality midpoint trading for both sides of the trade: Retail orders and those providing liquidity at the midpoint.

Additionally, the offering is designed to ensure that we won’t compromise the quality of trading on IEX for any participants. In particular:

• Retail and RLP orders will not be identified on any IEX data feed, or the SIPs, on a pre- or post-trade basis in order to protect the information of all of our participants.
• RLP orders will be prioritized behind Midpoint Peg and D-Peg orders at the midpoint to reward those willing to trade against any counterparty.
• Because RLP orders are D-Peg orders, they are protected by the IEX Signal and will only exercise discretion to trade with Retail orders when the quote is stable (i.e., the IEX Signal has not determined that the quote is “crumbling”).

As we roll out Retail and RLP orders on IEX, we look forward to closely analyzing the quality of trading for these orders and any impact on the broader market. We intend to collaborate with brokers, market makers, and investors to ensure we’re setting a new standard for retail trading on exchanges.

[1] Excluding locked/crossed markets.

[2] Subject to SEC approval of File No. SR-IEX-2019–05.

[3] To be approved as an RMO, a broker-dealer must have written policies and procedures (including an attestation) reasonably designed to assure that substantially all orders it designates as Retail orders meet the applicable requirements.

[4] For workflow purposes, if other orders are flagged as Retail, the flag will be disregarded. The order will not be cancelled, but it will not be eligible to trade against RLP orders.

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