Cboe Equities Update: April 16, 2020

Adam Inzirillo
April 16, 2020

These past few weeks have challenged us all, as the pandemic puts enormous pressure on our healthcare system and continues to undermine our economy.

But if the last month has shown our industry anything, it is the importance of our capital markets. We are especially appreciative to regulators and industry participants for coming together to ensure that equity markets remain open and free to continue performing all necessary functions. Balancing this period of volatility while working remotely has also shown us the importance of communication. With that in mind, I wanted to provide a few Cboe updates that I think you’ll find useful.

Retail Priority

Retail Priority is gaining momentum among investors. The fill rate for Retail Priority Orders continues to improve and we’ve also seen a recent surge in shares filled per second across retail orders. As you know, the Retail Priority model focuses on enhancing execution quality and trading outcomes for individual investors, and the firms facilitating their orders, by reducing their time to execution, which ultimately increases participation rates.

Volume and Volatility

With extreme market swings, we’ve seen very active trading, including record volumes across our exchanges. However, greater volume does not necessarily lead to easier trading situations or more accessible liquidity. Although the overall industry has experienced increased volume and volatility, it may be more difficult to trade as we’ve a seen a decrease in average displayed size represented on the inside. There could be a number of factors leading to this sudden shift, including but not limited to: an increased risk of improving the quote due to Limit Up/Limit Down (LULD) halts or Rule 201 being in effect, and the use of more aggressive/tactical based trading strategies to immediately access liquidity.

Generally, when there is a decrease in available displayed size there may be an increase in available mid-point liquidity across maker-taker exchanges, but recently the opposite is true– making it challenging to find available liquidity. We’ve noticed an increase in the use of hidden orders related to the percentage of overall market total composite volume. This all implies that, while volume is up, it is difficult to determine available liquidity at the best bid or offer. In addition, the ability to receive price improvement through the interaction of mid-point has decreased.

Midpoint Discretionary Order (MDO)

Midpoint Discretionary Order (MDO), available on Cboe’s EDGA and EDGX exchanges, is a blended order type that incorporates the characteristics of Primary Peg, Midpoint Peg and Discretionary Orders. Members can use MDOs to post displayed or non-displayed liquidity at the National Best Bid/National Best Offer (NBBO) for buy or sell orders with a discretionary range extending to and including the NBBO midpoint, but MDOs will not execute at a price more aggressive than the NBBO midpoint

Recently, Cboe filed an update to MDO to incorporate Quote Depletion Protection (QDP), which, when activated, would disable discretion for a limited period to prevent participants from trading in undesirable circumstances – like buying right before a price declines or selling right before it rises. In addition, this may protect investors from trading against aggressive oversized orders. The top 100 symbols where QDP was triggered on EDGX and EDGA had the discretionary range disabled for an average of 5 seconds. The use of MDO with QDP is an excellent choice for algorithms that are passive in nature that would prefer to execute passively during favorable conditions.  This is just one of Cboe’s many innovative product solutions in the works and we’re looking forward to continuing to define markets with new tools to enhance the experience for all types of investors.