Introducing Cboe Quote Depletion Protection

Eugene Davidovich
June 17, 2020

On Wednesday, June 10, Cboe introduced the new Quote Depletion Protection (QDP) enhancement for use with our Midpoint Discretionary Order (MDO). Eugene Davidovich, Head of U.S. Equity Sales and Account Coverage, recently reached out to clients, detailing how QDP may enhance trading outcomes. Learn more about the potential benefits of MDOs and QDP below.

MDOs allow participants to post displayed or non-displayed liquidity at the National Best Bid or Offer (NBBO) with discretion to execute up to and including the midpoint of the NBBO. See our press release for more details.

By pairing a QDP instruction with an MDO, brokers may now be able to minimize potential outliers and protect themselves from adverse selection. In that light, I wanted to share some data analysis that demonstrates the effectiveness of QDP.  

Enhancing Trading Outcomes with QDP

To test the potential performance of the QDP instruction, Cboe analyzed 10 trading days in February 2020 and observed market movements on its Cboe EDGX and EDGA Equities Exchanges in the two milliseconds following instances where QDP would have been enabled due to the execution of the best bid or offer on the exchange below one round lot. That review found that the national best bid (offer) moved to an inferior price –i.e., to a lower (higher) price from the perspective of an order to buy (sell) – approximately 50% of the time for EDGX and 23% of the time for EDGA. 

By contrast, the national best bid (offer) moved in the opposite direction only 1.7% of the time for EDGX and less than 1.0% of the time for EDGA, with the market remaining static for the remaining time. Overall, the discretionary range for MDOs entered with a QDP instruction would have been disabled for less than 400 milliseconds on average across all securities for both EDGX and EDGA. Therefore, the opportunity cost of not trading within the discretionary range is minimal versus the potential outlier as described in the previous paragraph.

Innovation Guided by Customer-First Approach

Cboe maintains a customer-first approach in every product we create. The MDO was designed to provide our customers with a greater selection of trading tools that may result in efficient executions and price improvement. We are pleased to enhance upon MDO further with the QDP feature, and continue to innovate, differentiate and provide a unique public exchange offering that is available to all market participants.