The IEX Signal
What is the IEX Signal?
The IEX Signal—also known as the Crumbling Quote Indicator, or CQI—is a mathematical formula that powers some of IEX Exchange’s signature order types, including Discretionary Peg (D-Peg) and Discretionary Limit (D-Limit).
The development of the Signal is based on the understanding that stock prices—the official best bids and offers in the market—don’t always change as a single event; rather, they often occur as a sequence of updates over a sub-second timeframe, which is only complete when the final exchange’s price changes. During these moments, it is sometimes possible to examine the sequential price updates from exchanges to identify when the current price is likely about to change—similar to making a prediction that the last in a series of dominos will fall once the row has started to tumble.
Specifically, IEX Exchange considers a price as “unstable” or “crumbling” when the Signal determines that the National Best Bid (NBB) is likely about to decrease or the National Best Offer (NBO) is likely about to increase. When the determination is made, the Signal “fires” and is “on” for 2 milliseconds, or until the price changes.
The Signal is also enabled by the IEX Speed Bump, which gives IEX Exchange a time buffer in which to determine if a price is unstable before trades are executed.
How does IEX Exchange use the Signal?
IEX launched the Signal in conjunction with the introduction of the Discretionary Peg order type in 2014. Since then, IEX has iterated on the model to increase its efficacy and incorporated the Signal into additional features of IEX Exchange.
Discretionary Peg TM (D-Peg®)
IEX Exchange’s signature, patented order type. When the price is stable, D-Peg orders are willing to trade with incoming orders up to halfway between the NBB and NBO (the “Midpoint Price”). However, when the Signal indicates the price is unstable, D-Peg orders are priced at the less aggressive of one (1) Minimum Price Variant (MPV, $0.01 for most stocks) lower (higher) than the NBB (NBO) for buy (sell) orders or the order’s limit price.
The Signal is also incorporated into the Corporate Discretionary Peg (C-Peg) order type, which is a variation of D-Peg designed for corporate buyback orders.
Discretionary Limit (D-Limit)
Behaves like a regular limit order (displayed or non-displayed), except when the IEX Signal indicates a price is unstable. This triggers D-Limit orders to automatically reprice to 1 MPV outside that level.
The Signal is designed to protect D-Peg, and P-Peg, and D-Limit orders by cueing them to behave less aggressively when the price is likely about to change in their favor—the goal is for buyers to be able to buy at lower prices and sellers to be able to sell at higher prices.
Primary Peg (P-Peg™)
When the price is stable, P-Peg orders are willing to trade with incoming orders at the NBB or NBO. However, when the Signal indicates the price is unstable, P-Peg orders are priced at the less aggressive of one MPV lower (higher) than the NBB (NBO) for buy (sell) orders or the order’s limit price.