Tuesday, 11 April 2017

IEX Signal or IEX 2.0




IEX: Dark Fader - come to the dark side
On April 10, IEX kicked off a publicity launch for a branding exercise they seem to call IEX 2.0. The launch relates to their new crumbling quote indicator, or auto-fader, they're branding IEX Signal.

That is, this update concerns yet another update to the IEX Dark Fader's formulae. I've written about IEX's Fader's formulae previously with: IEX Discretionary Peg (DPEG) calculation and patent; and, IEX innovation killing innovation.

You're best advised to spend your time on more productive pursuits than reading this. I have little new to meander around that doesn't rhyme, even if it is not exactly a verbatim self-flagellating repetition of thoughts I've previously covered.

As part of the IEX 2.0 launch, IEX released a whitepaper on their slightly sketchy - sans sanity - Signal, "The Evolution of the Crumbling Quote Signal." It isn't going to win any awards for academic rigour, but it doesn't have to. IEX is all about marketing, not reality.

On the same marketing front, IEX issued a blog post, which contained the "IEX 2.0" sub-header, and a press release as part of their newly offensive new offensive. Be careful though, "Fighting Math with Math" may make you too feel a little like throwing up. A generous interpretation: IEX now acknowledge that their innovation, designed to stop your innovation, was flawed. Now, with this new newly flawed innovation, they hope to continue the stifling of your innovation and further deteriorate the role of public price discovery with more parasitic behaviour, both literally and figuratively.

Oh, please :-|  What wrath has the SEC wrought?

Lewis' fictional "Flash Boys" and other IEX marketing is the pestilence. The IEX exchange approval process was the fire. It seems IEX is hoping their parasitically dark capture and subversion of the role of public markets with their hall of mirrors will become their flood. Good common sense is suffering from acute famine.

Details


Back on March 10 IEX put forward yet another revision to their crumbling quote calculation:
SR-IEX-2017-06
34-80202Mar. 10, 2017Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend Rule 11.190(g) to Modify the Quote Instability Coefficients and Quote Instability Threshold Included in the Quote Instability Calculation Specified in Subparagraph (g)(1) for Purposes of Determining Whether a Crumbling Quote Exists
Comments due: 21 days after publication in the Federal Register
Additional Materials: Exhibit 5
On March 13, the SEC approved, amongst other things, the use of non-displayed quote fading via the crumbling quote indicator for the Primary Peg order type on IEX:
SR-IEX-2016-18
34-80223Mar. 13, 2017Order Granting Approval to a Proposed Rule Change to: (i) Amend Rules 11.190(a)(3) and 11.190(b)(8) to Modify the Operation of the Primary Peg Order Type; (ii) Amend Rule 11.190(h)(3)(C)(ii) and (D)(ii) Regarding Price Sliding in Locked and Crossed Markets to Simplify the Price Sliding Process for Both Primary Peg Orders and Discretionary Peg Orders Resting on or Posting to the Order Book; and (iii) Make Minor Technical Changes to Conform Certain Terminology
See also: Notice: Rel. No. 34-79883Notice: Rel. No. 34-79502
On March 29, IEX corrected some typographical errors to their presented formulae from the March 10 filing:
SR-IEX-2017-08
34-80331Mar. 29, 2017Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Correct Typographical Errors in SR-IEX-2017-06
Comments due: 21 days after publication in the Federal Register
Additional Materials: Exhibit 5
On April 10, as mentioned and linked to above, IEX launched the promotion of these initiatives culminating to this new IEX Dark Fader 2.0.

In the "puzzle masters" continuing quest to simplify ordering types (sic), the quote instability factor, or QIF, has been added to the Primary Peg (PP) as well as being updated for the Discretionary Peg (DPEG).

The Primary Peg will be an HFT order type of choice at IEX. Its judicious use will best enable the capturing of the spread. The PP's automatic non-displayed quote fade, enabled by the QIF, will assist in stopping market makers being traded through. However, PP will leave those poor dumb bunnies using IEX's displayed quotes to be hit. Suckers. That is, the naive passive participants at best who have chosen to use displayed quotes will be unable to move out of the way in time. Displayed quotes don't have the time cheat enabled by dark orders at IEX.

IEX's speed-bump's poor QIF innovation disables external innovation, quashing the ability of market participants, whether they be funds, brokers, or traders, to improve their service to their own constituents. Buggy whips for everyone. It's just weird.

It is sad that the SEC appears to have been so influenced by the pressure and marketing around IEX that they couldn't see the obvious flaws. The saving grace is that being a dark and expensive market impedes IEX's trade growth and potential tape revenue. Not many people should think they will be fulfilling their customers' best execution obligations by sending an order to IEX. If they do think that, then either they don't understand the obligation, or they don't quite understand IEX's real market structure. Regretfully the odour of the Order Protection Rule may force them to route to IEX despite it not being in their best ex interest.

The New New Thing


Anyway, here is the new newly stupid IEX QIF formulae which will now go by the schmarketing pseudonym of IEX Signal:

Crumbling quote `if QIF>{(0.39, if spread <= $0.01), (0.45, if $0.01 < spread <= $0.02), (0.51, if $0.02 < spread <= $0.03), (0.39, if $0.03 < spread) :}`

The variable definitions below are quoted from pages 33 & 34 of Exhibit 5 to the March 10 IEX SEC filing. Note that in this filing instead of including all the markets in the number of protected quotations IEX has chosen to incorporate only eight exchanges (XNYS, ARCX, XNGS, XBOS, BATS, BATY, EDGX, EDGA), thus N and F may range from 1 to 8. Three exchanges (XNGS, EDGX, BATS) still get a special mention, as per the last formulae's iteration, in the Delta definition.

  1. N = the number of Protected Quotations on the near side of the market, i.e. Protected NBB for buy orders and Protected NBO for sell orders.
  2. F = the number of Protected Quotations on the far side of the market, i.e. Protected NBO for buy orders and Protected NBB for sell orders.
  3. NC = the number of Protected Quotations on the near side of the market minus the maximum number of Protected Quotations on the near side at any point since one (1) millisecond ago or the most recent PBBO change, whichever happened more recently
  4. FC = the number of Protected Quotations on the far side of the market minus the minimum number of Protected Quotations on the far side at any point since one (1) millisecond ago or the most recent PBBO change, whichever happened more recently
  5. EPos = a Boolean indicator that equals 1 if the most recent quotation update was a quotation of a protected market joining the near side of the market at the same price
  6. ENeg = a Boolean indicator that equals 1 if the most recent quotation update was a quotation of a protected market moving away from the near side of market that was previously at the same price.
  7. EPosPrev = a Boolean indicator that equals 1 if the second most recent quotation update was a quotation of a protected market joining the near side of the market at the same price AND the second most recent quotation update occurred since one (1) millisecond ago or the most recent PBBO change, whichever happened more recently.
  8. ENegPrev = a Boolean indicator that equals 1 if the second most recent quotation update was a quotation of a protected market moving away from the near side of market that was previously at the same price AND the second most recent quotation update occurred since one (1) millisecond ago or the most recent PBBO change, whichever happened more recently.
  9. Delta = the number of these three (3) venues that moved away from the near side of the market on the same side of the market and were at the same price at any point since one (1) millisecond ago or the most recent PBBO change, whichever happened more recently: XNGS, EDGX, BATS.

From the whitepaper [p28] here is a description of IEX's results with this new false positive machine,
"On our example day of December 15, 2016, our current formula resulted in about 1 million true positives and 975,000 false positives. This new candidate formula would have produced about 2 million true positives and 2.1 million false positives."
Interpret that how you will.

The IEX QIF remains a weak adverse selection criteria that tries to shoehorn in one set of formulae for all stocks. Many market participants could do much better if left to their own devices but they are prevented from innovating by the perversion that allows IEX to use future data in this way.

I do feel we should all refuse to use the name IEX Signal and rather prefer IEX quote fading factor or just IEX's dark fader for short.

If NYSE, BATS, or Nasdaq would like to send their data over, I'd be happy to provide them with a better performing quote fading factor. It's not too hard to do a lot better. Just sayin'...

No news. Just more of the same. Enjoy your false positives and happy trading,

--Matt.

2 comments:

  1. From blog post from the end of 2016 I came across this:

    IEX is the Second Largest Midpoint Exchange
    We examined the TAQ data further and found that just a few months after launching as an exchange, IEX is already the second largest exchange by midpoint volume. The concentration of midpoint volume on IEX is a large part of why the effective spread on IEX is so low.
    This further demonstrates our unique value proposition: a market that is designed to effectively combine exchange trading with quality midpoint executions.
    (https://medium.com/boxes-and-lines/2016-in-review-americas-newest-stock-exchange-4f4b1171159e)

    Seems they are happy to still be dark pool...

    -EP

    ReplyDelete
    Replies
    1. Subverting the role of a public exchange shouldn't be something a public exchange is proud of - you'd think.

      Delete