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Dumb finance question thread of the day - I'm going to try & explain how IEX's D-Limit order works below. For those who know more than me, please tell me if I'm close to right or completely off-base. Thanks in advance:
Imagine the market for Tesla exists like below on the lit stock exchanges. Limit orders of varying amounts & prices rest on the order books of each exchange. NYSE has the "best" bid of $1,000 at the time.pic.twitter.com/VODCfnYLKT
Now imagine a Big Buyer wants to buy 100 shares of TSLA. It will first buy the 30 shares at NYSE at $1,000, then the 50 Nasdaq shares at $1,001 and the 10 BATS shares at $1,003. Big Buyer has now pushed prices up by $3 and needs 10 more shares to complete its order.pic.twitter.com/AcxWVqdYJg
Before Big Buyer can get the last 10 shares, an HFT firm buys the shares before anyone else & sells to Big Buyer at $1,006. The HFT firm now has $1 of riskless profit & Big Buyer paid $1 more for its shares. This is called "latency arbitrage"pic.twitter.com/JPYUdvwg4A
In comes IEX's D-Limit order type. IEX sees the market for TSLA moving up & trips its "crumbling quote" signal, which automatically re-prices its 10 shares from $1,005 to $1,006 so HFT firm can't profit from them. Big Buyer completes its order & still pays $1,006.pic.twitter.com/gqJMIXV97q
Upside of D-Limit Order: - prevents HFT firm from profiting off latency arbitrage Downside of D-Limit Order: - doesn't really lower costs for Big Buyer which is goal in the first place
Is this right? Am I dumb? How would you describe the D-Limit Order? I appreciate any & all feedback.
You can time the swipe to hit IEX first, everything else later. What you can't do is notice somebody else hit Nasdaq and then hit IEX
This is the key. Primary take with modern router will have no problem hitting d-limits.
In your example, the prices are layered at different levels but in reality that’s not where IEX D-Limit comes in. Its more effective (for the liquidity providers) when there is activity at the same price levels at other exchanges and IEX may reprice its bid lower by a penny.
Second, it doesn’t have to be a large sweep. It could also be the bidders on other exchanges cancelling their bids at the same time which may make IEX signal think price is going down. But often the two are correlated (market sell orders and bid cancels).
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