Overview
Title
Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify the Circumstances Under Which Post Only Orders May Remove Liquidity on Entry
Agencies
ELI5 AI
The Investors Exchange (IEX) wants to change a rule so that a special type of order, called a "Post Only" order, can only be used if it gets a little extra money, like a penny more. This change is to make sure that there are more buying and selling choices available, just like at other big marketplaces such as Nasdaq.
Summary AI
The Investors Exchange LLC (IEX) has filed a proposed rule change with the Securities and Exchange Commission (SEC) on April 23, 2025, to modify how "Post Only" orders operate. The change will make such orders only execute upon entry if they receive at least $0.01 in price improvement. This new rule aims to encourage more displayed liquidity on the exchange and bring IEX's operations in line with other exchanges like Nasdaq and NYSE Arca. The SEC has fast-tracked the proposal, believing it doesn't pose new issues, and invites public comments on it by May 28, 2025.
Keywords AI
Sources
AnalysisAI
The document under review is a notice from the Investors Exchange LLC (IEX) regarding a proposed rule change filed with the Securities and Exchange Commission (SEC). The specific focus of this proposal is the operation of "Post Only" orders within the exchange's systems. The primary amendment suggests that these orders should execute upon entry only if they receive a price improvement of at least $0.01.
General Summary
This proposal by IEX aims to modify the current system by ensuring that "Post Only" orders, which are typically used by traders to add liquidity to the market rather than take it, will only remove liquidity upon entry if they achieve the specified price improvement. This update is intended to align IEX's practices with those of other major exchanges, like Nasdaq and NYSE Arca, where similar rules are already in place. The SEC is expediting this process, viewing that it poses no novel issues that require more extended deliberation.
Significant Issues and Concerns
The document raises several technical points concerning the execution and conditions for "Post Only" orders, but some issues deserve attention:
Lack of Rationale for $0.01 Price Improvement: While the document consistently mentions the requirement for a $0.01 price improvement, it does not provide a clear rationale for this specific amount. Readers unfamiliar with trading nuances might question why this threshold is set as such and how it impacts trading strategies.
Potential for Ambiguity: The comparison of IEX's practices to Nasdaq and NYSE Arca could benefit from clearer distinctions or similarities, ensuring that readers understand whether IEX is merely aligning strategies or innovating on existing systems.
Complex Financial Terminology: The document includes several terms (e.g., "Sum of Fees calculation," "Midpoint Peg order") that might challenge readers without thorough financial knowledge. Definitions or explanations would enhance clarity.
Dense Regulatory References: The document is densely packed with regulatory references and legal terms, which can be cumbersome for a general audience. Simplifying explanations or providing summaries could make the document more accessible.
Public Impact
This regulation may be indirectly relevant to the general public, particularly retail investors. The broader goal of encouraging more displayed liquidity in the market can contribute to more transparent and efficient trading environments. However, the intricate details of execution rules and pricing improvements would be more immediately relevant to individuals and institutions actively involved in market making and trading.
Impact on Stakeholders
Market Participants: Traders and institutions using "Post Only" orders will need to adjust strategies considering this new parameter. The requirement for price improvement may influence how often and under what conditions these orders are executed, potentially encouraging strategies that add rather than remove liquidity.
IEX Competitors: The alignment with other exchanges might strengthen IEX’s competitive position by removing any perceived disadvantages due to differing rules about order execution.
Regulators: Adoption of such rules may streamline oversight processes if exchanges like IEX employ similar standards, simplifying comparisons across platforms.
In sum, the document seeks operational changes to harmonize IEX’s activities with broader industry practices, potentially fostering a more unified trading environment. While specific problems need addressing to enhance clarity and relevance to a wider audience, the overall initiative reflects an ongoing effort to enhance market efficiency and transparency.
Financial Assessment
The Federal Register document outlines a proposed rule change by the Investors Exchange LLC (IEX) regarding Post Only orders, specifically focusing on the conditions under which these orders would be permitted to remove liquidity upon entry. This proposal includes significant financial references and implications that warrant explanation for a general audience.
One of the primary financial references in this document is the concept of price improvement, particularly the threshold of at least $0.01. This threshold is crucial because it dictates when a Post Only order will execute upon entry by determining if the incoming order receives sufficient price improvement compared to the less aggressive price between the order's limit and the contra-side Protected Quotation. The document repeatedly emphasizes this price improvement requirement, suggesting that it enhances the utility of Post Only orders and encourages more stable and predictable trading outcomes.
In context, the document mentions that the price improvement requirement is intended to bring IEX's practices in line with those of other market operators like Nasdaq and NYSE Arca. These exchanges already require a minimum of $0.01 price improvement for a Post Only order to be executed upon entry. The introduction of this identical threshold at IEX is seen as a move to make its rules consistent with these industry standards. By aligning itself with market practices elsewhere, IEX anticipates the adoption of this rule could lead to increased liquidity—a key concept in trading that refers to the ease with which assets can be bought or sold in the market without affecting the asset's price.
The change replaces a more complex calculation, previously known as the Sum of Fees, which compared the potential execution value when removing liquidity to the value of providing liquidity, factoring in fees and rebates. This older method assessed whether removing liquidity versus posting to the order book was more financially viable based on said fees and rebates, sometimes resulting in Post Only orders executing with only $0.005 of price improvement. The proposed change simplifies this process by setting a clear and uniform price improvement requirement, thereby offering greater determinism for traders.
One notable issue with the document is the lack of a clear rationalization for why exactly a $0.01 threshold was established, aside from its alignment with competitor practices. While the proposal claims benefits such as increased liquidity and predictability (determinism) for traders, the document could benefit from more concrete data or evidence to elucidate these benefits and the impact of the proposed rule on market dynamics more comprehensively.
In conclusion, the rule change discussed in the Federal Register document involves specific financial thresholds and practices aimed at fostering market liquidity and competitive parity with other exchanges. The focus on a fixed $0.01 price improvement threshold is presented as a means to simplify trading operations and encourage the use of Post Only orders on the IEX, ultimately contributing to an integrated and efficient trading environment in line with broader industry standards.
Issues
• The document mentions 'price improvement of at least $0.01' repeatedly, but it lacks a clear explanation of how this value was determined or why it is significant. It could be beneficial to include a rationale.
• The regulation changes concerning 'Post Only orders' apply primarily to the IEX but also refer to practices of other exchanges like Nasdaq and NYSE Arca. The document would benefit from a clearer comparison of these approaches to avoid ambiguity.
• The use of financial terminology (e.g., 'Sum of Fees calculation', 'Midpoint Peg order') might be complex for some readers. It would be helpful to provide clear definitions or explanations of these terms within the document.
• Throughout the document, there is reference to multiple calculations involving fees and rebates (e.g., Sum of Fees). However, the document could be clearer in illustrating these with visual aids or step-by-step examples.
• The document references several footnotes for detailed information, but it may be difficult for readers to follow these while reading the main text. A summary of critical footnotes could improve readability.
• The proposal claims benefits of increased liquidity and determinism for market participants, but it lacks concrete data or examples to support these claims, which could help justify the changes.
• The document is lengthy and densely packed with regulatory references and legal terms, which may make it inaccessible to a general audience not familiar with securities regulations.