Smart Execution with Quote Depletion Protection

Image for post
Image for post

Cboe launched the Quote Deletion Protection (QDP) enhancement on Midpoint Discretionary Orders (MDO) on the Cboe EDGX and EDGA exchanges on June 11. A number of Cboe customers immediately adopted QDP and it’s been steadily gaining popularity since. QDP is designed to provide users with a way to counter adverse selection and capture liquidity more opportunistically. The distinguishing factor for QDP orders is the order’s ability to smartly toggle discretion based on expected near-term price trends. This decision-making is driven by a proprietary indicator that prevents the order from exercising price discretion for 2 milliseconds. Below you’ll find our analysis of customer usage of QDP and trends that we have observed so far.

Usage Trends
QDP orders have steadily been gaining popularity, and now average more than a million shares per day across EDGA and EDGX. Given its larger market share, EDGX has seen a larger portion of QDP usage. EDGA saw massive growth in July and the trend has held steady in August.

Image for post
Image for post
Figure 1 QDP Usage Trend

QDP Trigger Price Trends
As described earlier, the QDP signal is designed to protect orders from adverse selection by detecting short-term price moves. It is triggered at the bid side when price is expected to move lower, and on the ask side when price is expected to move higher, based in each case on the execution of the exchange’s best bid or offer on the same side of the market below one round lot. During the trigger window, QDP orders avoid exercising discretion to trade at more aggressive prices due to the expectation of a potentially more favorable price once the trigger expires. When triggered, QDP shuts off discretion for 2 milliseconds, unless the QDP active period is refreshed by subsequent executions during the initial 2 millisecond period.

When studying the National Best Bid or Offer (NBBO) trend between trigger activation and the trigger end time, we found that on EDGX the price moves in a more favorable direction after QDP trigger expires around 60% of the time. This enables QDP orders to avoid adverse selection successfully around 60% of the time on EDGX. In about 2% of the triggers on EDGX, the QDP signal predicts a potentially favorable move after QDP trigger expires but an adverse price move is observed instead. On EDGA, QDP successfully avoids adverse selection about 30% of the time. Similar to EDGX, the QDP signal predicts a favorable move after QDP trigger expires where the market instead realizes an adverse one under 2% of the time.

Image for post
Image for post
Image for post
Image for post
Figure 2 QDP Trigger to Expiration Markout Trend

When studying markouts post-order completion, there is a notable improvement in both venues for MDOs with QDP, compared to standard midpoint pegged orders. As Figure 3 illustrates, in both venues the post-fill markouts show an improvement by about 5% of the spread when compared to midpoint pegged orders in the same venue.

Image for post
Image for post
Image for post
Image for post
Figure 3 Post-Trade Markout for QDP vs. Midpoint Peg Orders

Fill Location Breakdown
Our study shows that, on average, QDP orders on EDGX realize about 10% of fills at the near side. The trend has remained stable on EDGX over time. EDGA shows a much higher concentration on near-side fills, with the total notional filled on EDGA ranging between 20 to 50%.

Image for post
Image for post
Figure 4 Percentage Notional Filled By Spread Location

Total Cost
Since QDP orders are designed to trade passively, we studied total cost that the order incurs during its lifetime.1 This cost includes the opportunity cost paid (or saved) when the order goes unfilled, in addition to the cost vs. arrival price. MDO with QDP orders outperform by about 5% of the spread on EDGX, and by about 3% of the spread on EDGA, when compared to standard midpoint pegged orders. Such orders may therefore be better able to provide overall cost savings and allow investors to work the parent ticket more efficiently by avoiding potential adverse selection events.

Image for post
Image for post

In addition to improvement on the total cost, QDP comes with a cost-efficient fee structure when compared with similar products at other public exchanges and Alternative Trading Systems (ATS).2,3 Since QDP is offered at a public exchange, it also reduces complications of true ‘access’ that may be experienced on an ATS due to segmentation.

As shown, QDP is competitive when considering the ‘all-in’ cost of execution, but our work is not done. Both the signal and tactics built around it are being studied to further improve user experience. We are continuously evaluating signal accuracy as QDP usage grows. We’re also evaluating the use of different routing instructions on EDGX like ‘Book-Only,’ as opposed to the current default, ‘Post-Only’ to improve the experience of liquidity seeking algorithms. Cboe’s dedicated team of execution consultants can advise on using QDP and other products in regard to performance. To learn more and receive usage recommendations, please reach out to the Cboe Global Markets Execution Consulting or Coverage teams. You can also visit Cboe’s website for more about QDP.

Footnote 1: Total Cost was calculated as the sum of orders arrival cost (average price vs. NBBO at arrival) and opportunity cost of the unfilled shares priced at the NBBO at the time order termination. Positive sign indicates beating the benchmark.
Footnote 2
Footnote 3

2020 Cboe Exchange, Inc. All rights reserved.

The information in this article is provided for general education and information purposes only. No statement(s) within this article should be construed as a recommendation to buy or sell a security or to provide investment advice. Supporting documentation for any claims, comparisons, statistics or other technical data in this article is available by contacting Cboe Global Markets at www.cboe.com/Contact.

Written by

We’re #DefiningMarkets to benefit all participants through product innovation, leading edge technology and seamless trading solutions.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store