D-Limit and Crumbling Quote Indicator

Question

I've been following the development of the D-Limit order at IEX for some time. In the last couple of days I see the SEC has been sued by Citadel Securities for approving this order type.

Can anyone explain to me how the Crumbling Quote Indicator they use works - particularly the machine learning/AI component, and how they will be able to give their customers enough information about why their orders have/have not been executed during these periods?

As for the legal case, the claim is that this will harm market participants and damage liquidity - is this a reasonable claim?

Answer 1

The calculation is described in the IEX Rule Book, section 11.160 (g). See Quote Instability Factor (QFI) and the accompanying thresholds:

$$ QIF = \frac{1}{1+e^{-x}}$$

where $$x = C_0 + C_1N + C_2F + C_3NC + C_4FC + C_5EPos+C_6ENeg+C_7 EPosPrev+C_8ENegPrev + C_9Delta$$

The coefficients $C_n$ are hard-coded and are updated once in a while with a corresponding SEC filing. The variables refer to the current and historical (1ms prior) order book state on other exchanges. For example:

(9) $Delta$ = the number of these three (3) venues that moved away from the near side of the market on the same side of the market and were at the same price at any point since one (1) millisecond ago or the most recent PBBO change on the near side, whichever happened more recently: XNGS, EDGX, BATS.

In a nutshell, $QIF$ is high when other venues are departing the NBBO.

More details are available in the Evolution of the Crumbling Quote Signal on SSRN.