Thursday, 22 June 2017

IEX MM-Peg follow up

It has been pointed out to me by more than one person that though they are not fans of IEX they would like to see the MM-PEG order allowed as submitted. I poured scorn on this order type here, "IEX's new order's unintended consequences."

My scorn stands but I understand the dilemma best captured by Mr Adam Nunes here,


The issue that this order type is addressing is having a continuous presence in the market. This is the rather ridiculous requirement set to a one hundred percent obligation for official market makers in the US.

Now, this order type is not really ever expected to trade. It is close to a spoof in that regard except for the idea that you'd be happy if it did trade. Such a happy intention takes it away from being a spoof, but the silliness remains. That is, buying 8% below the NBBO or selling 8% above the NBBO would likely be welcome.

The issues around the timing of the order are real in that it may bake in a systemic advantage or disadvantage at that price level, far from the market where it doesn't really matter. This may then set a precedent allowing IEX to extend such a latency problem all the way to the BBO which would be a bigger problem.

The right answer would be for the SEC to only require market making obligations for some high but not crazy percentage of the time, say 95%. Then this order type, that is never expected to trade, would not be required. We need to fix the issues rather than skirt around the edges with such MM-Peg artifices.

I do wish we could stick to a small set of atomic primitives from which all order types may be created. Then participants could ignore the more complex order types if they chose to. Until then, we'll all have to be "puzzle masters."

Happy trading,

--Matt.

1 comment:

  1. Obviously, this is IEX giving tools to their MMs for names they hope to list come October. Makes you wonder if they really intend to "protect" companies that list on their exchange with an order type that fulfills market makers requirements, but doesn't actually enforce market maker obligations (i.e. buying when everyone is selling and selling when everyone is buying). Yet, these same market makers will gain the advantage of short selling the stock without a borrow and have long dated settlements...Hmmm...Doesn't sound too company friendly to me...

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