The Power of Price Improvement

Investors are increasingly focused on execution quality, especially in the Canadian trading environment. Whether flow is aggressive or passive, Cboe offers unique execution options through its four Canadian venues (MATCHNow, NEO-L, NEO-N, and NEO-D. Cboe recently enhanced the MATCHNow book, Canada’s largest dark venue, with the addition of conditionals via Cboe BIDS Canada. Cboe’s North American Execution Consulting team examined the value proposition of price improvement (PI) in MATCHNow’s continuous book for orders that are not large enough to qualify as conditional orders, and found that MATCHNow facilitated $12.7 million in price improvement for the first quarter of 2023.

MATCHNow’s trading sequence is comprised of liquidity providing orders at the midpoint (MID), minimum price improvement (MPI), or at the touch (ATT) price levels – and marketable aggressive orders that interact with them at the best price level available,  far-touch National Best Bid or Offer (NBBO) or better. Being pro-rata, liquidity providing orders are rewarded for size and get priority based on how much price improvement they are willing to provide.

In a previous analysis, we charted the impact of the UMIR regulatory change in February 2020. Our analysis showed that the more stringent definition of size requirement on direct ATT orders cut Canadian dark market share in half across all venues. Notably, over the last twelve months, Cboe’s MATCHNow book has seen growth in market share even as overall Canadian volumes decrease. As of April 2023, MATCHNow had a monthly market share of 3.28% 

Source: Cboe

Dark pools provide price improvement, but how much per order?

On MATCHNow, active orders not given an execution instruction will sweep all the price levels available, in order of most price improvement. The chart below provides an example of an active order sweeping each price level.

Lifecycle of an Active Order on MATCHNow

Helpful Terms to Remember

MID = Midpoint | MPI = Minimum Price Improvement | ATT = At-the-Touch | OL = Odd Lots

The lifecycle starts with passive liquidity being sent to different price levels, while active orders come in and assess every price level in order, respecting broker-preference.

• First checking the midpoint bucket, the active order will fill as much as possible. For first-quarter 2023, 60% of active volume traded at MID, with an average PI of five basis points (bps). Passive midpoint liquidity is also eligible for a randomized 1 to 3 second auction against other passive orders.
• Next, for the remaining portion of the active order, MPI is checked for a  one tick (1¢, or ½¢ on a 1¢ spread) price improvement. For first-quarter 2023, 9.7% of active volume traded at MPI, with an average PI of 2.4 bps.
• Then, the remaining portion of active orders that were originally Universal Market Integrity Rules (UMIR) 6.6 size (orders greater than 50 board lots and $30,000 value, or $100,000 value) search for non-price improving liquidity. For first-quarter 2023, 16% of active volume traded ATT.
• Finally, any unfilled portion smaller than a boardlot is checked against the odd lot book, also priced ATT. For first-quarter 2023, odd lots (OL) accounted for 14% of active volume traded.

Out of all these price levels, only the midpoint and MPI offer price improvement. Depending on the execution instruction, the active order may only reach the MPI or MID bucket before canceling, for price improvement and midpoint only instructions, respectively. Since there are multiple ways to achieve different execution price levels, it’s helpful to visualize this distribution. for the chart below maps out all executed aggressive volume, linking execution price levels with the instructions provided.

MATCHNow Active Executed Volume by Order Instruction (Q1-2023)

Source: Cboe

As shown above, 60% of volume activity consists of midpoint executions and comes primarily from sweep all—default order behavior — order instructions. In first-quarter of 2023, half of the volume came in as sweeps executed at midpoint, the highest level of price improvement available to active orders. This is followed by ATT and OL executions making up roughly 20% of sweep volume each. MPI ranks last in terms of executed volume for both compatible instructions. However, MPI does not have the same ATT size requirement on active flow orders, which presents a compelling opportunity for liquidity providers. Offering one tick price improvement (i.e. MPI) only costs two bps of spread on average, but lets you jump the ATT queue entirely and interact with marketable active orders first, as well as active flow that would not qualify for ATT.

Looking at a longer time horizon, it is evident that the levels of price improvement quoted in figure 2 have held steady with an average of five bps for MID and two bps for MPI. When blended together as a single measure, volume weighted, price improvement for active orders comes out to 4.38 bps for first-quarter 2023.

Source: Cboe

On an absolute term basis, the MATCHNow book facilitated a total of $12.7 million in price improvement for the first quarter of 2023, with $11 million in midpoint orders and $1.6 million in MPI. This was a 10.9% increase over the $11.4 million realized price improvement in fourth-quarter 2022.

Source: Cboe

In measuring execution quality, we also examined the average trade sizes in each bucket. Midpoint executions have been hovering between 300 and 350 shares over the last year, while MPI executions are usually 2/3 the size, at about 200 shares on average. In comparison, ATT executions were much larger, with an average order size of 6,800 in first-quarter 2023, but traded less frequently. In the first quarter there were approximately 10,000 ATT order executions per month, compared to approximately 1.4 million executions between MID and MPI.

Source: Cboe

From the perspective of the passive participants that these active orders are interacting against, an average of 70% of order activity is sent in as Primary Peg. Keeping in mind that there are many other factors as to why an order did or did not trade, we suggest participants who are posting at primary peg to consider also posting at MPI for the increased potential of active interaction. As seen earlier, the majority of executed active volume came in through sweeping all levels. In these scenarios, sacrificing one cent, approximately two bps, of spread puts you ahead of all competing ATT orders, including broker-preferenced ATT orders.

Source: Cboe

In 2022, MATCHNow facilitated $50 million, or 4.68 bps, in active price improvement and continues to trend upwards in 2023 year-to-date (YTD). Cboe’s MATCHNow offers a compelling destination for both active order flow seeking price improvement and passive orders willing to provide it. The majority of executed active order volume sweeps the full book, where price improvement is mainly provided at midpoint. As we saw, there is significant opportunity here for passive liquidity providers who are willing to provide price improvement as those active orders are checking MID and MPI before going to  ATT.

Please contact your Cboe North American Equities representative to learn more about execution quality and the potential for price improvement, as well as how Cboe’s full suite of offerings further enhance investors’ experience in the Canadian and global market space.

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