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And then there is that outlier stock exchange, IEX, which seems to always put investors first. It differs from a regular limit order by leveraging the IEX Signal i. 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:. And within this predatory HFT category, there are a few that seem to be winning the speed race. According to IEX:. D-Limit seeks to prevent these HFT firms from picking off those stale limit orders which are extremely profitable for them. The SEC just announced that they will be delaying decision on this proposal until February 21,
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Specifically, as with their hidden D-peg order, the D-limit order would be re-priced to a less aggressive price whenever the CQI signals a deteriorating quote. Adjusting limit prices in the face of imminent adverse price changes helps to reduce adverse selection and enhance limit order performance. Indeed, IEX provides some compelling statistics to support the effectiveness of CQI, evidence which strongly supports the claim the CQI can be a useful tool in managing adverse selection. On its face, the D-Limit could add significant value by providing the broader trading community a means to compete with the more sophisticated, high-frequency traders when posting limit orders. But, as discussed below, some unanswered questions exist surrounding how D-Limit varies across stocks, how it would perform in volatile markets — especially in times of market stress —and what impact a broad adoption of these types of tools across protected venues would have on the market as a whole. The big draw of the D-limit is that it provides limit order traders access to similar tools used by market makers, helping to level the playing field. Indeed, one of the key drivers of limit order performance is management of adverse selection, so tools that help mitigate adverse selection should provide meaningful improvements to performance. But one additional aspect of D-Limit that makes it especially helpful is that the D-Limit is done at the exchange level natively, whereas HFTs and other low-latency traders must have their signals reside on their own servers. Further, these other traders must pass through the famous IEX speedbump, whereas the D-Limit responds without delay. The net effect is a sophisticated pricing engine with a speed advantage that is available to all limit order traders.
The buyside consortium has submitted a joint comment letter to the Securities and Exchange Commission endorsing the IEX plan. All of the 27 firms agree that D Limit and IEX would be promoting displayed orders — without simply offering a greater rebate or unfair option to select market participants. The important aspects of the proposal enumerated by those on both the buy and sell side have laid out a thoughtful case for D-Limit:.