NEW YORK (Reuters) – Exchange operator IEX Group on Tuesday said it plans to introduce a new way to place stock orders that will reduce the chance of trading when the price is likely to move away, leveling the playing field between fast and slow traders.
IEX has asked regulators to approve an order type called Discretionary Limit, that uses machine learning to predict when a stock price is about to change – something only the fastest traders can react to – and then updates the prices of resting orders on the exchange so they are not hit during those times.
The New York-based exchange said its machine learning-based “crumbling quote indicator” is on for 0.02% of the trading day, but during that time 24% of all displayed trading happens, indicating that sophisticated traders are taking advantage of tiny windows of time when prices are changing. (link.medium.com/30b6IADFu2)
IEX was thrust into the spotlight in 2014 when it was featured in Michael Lewis’s book “Flash Boys: A Wall Street Revolt,” which claimed markets were rigged to favor high-speed traders. IEX was a private trading venue, known as an alternative trading system (ATS), and the book followed its founders as they set out to build an exchange that would counter the advantages of the fastest traders.
IEX currently executes around 3% of daily stock volume and the majority of its focus has been on protecting hidden orders, but it said the new order type would improve the performance in displayed trading for all market participants.
“Would you want to buy a stock at $10 when less that two milliseconds later you could buy it at $9.99? No one would want to buy it at $10,” IEX President Ronan Ryan said in an interview.
Matching buyers and sellers of stocks is hyper-competitive, with 13 exchanges, including five run by New York Stock Exchange parent Intercontinental Exchange Inc, four by Cboe Global Markets, and three by Nasdaq Inc. Regulators also recently approved a new exchange and two more are pending, and there are around 30 ATSs.
In that fragmented environment, the fastest traders have had an advantage over others.
“Frankly, we’re not able to identify the crumbling quote and get out of the way,” said Mehmet Kinak, global head of systemic trading at T. Rowe Price. “IEX is saying, ‘hey, the quote is crumbling, you’re not fast enough to do it yourself, we’ll do it for you.’”
Reporting by John McCrank; Editing by Nick Zieminski