Notice2025-11887
Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend IEX Rule 11.190(g) To Add a Quote Imbalance Indicator
Primary source
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Published
June 27, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 122 (Friday, June 27, 2025)</title>
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[Federal Register Volume 90, Number 122 (Friday, June 27, 2025)]
[Notices]
[Pages 27703-27709]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-11887]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103318; File No. SR-IEX-2025-11]
Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend IEX
Rule 11.190(g) To Add a Quote Imbalance Indicator
June 24, 2025.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on June 12, 2025, the Investors Exchange LLC (``IEX'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Pursuant to the provisions of Section 19(b)(1) under the Act,\4\
and Rule 19b-4 thereunder,\5\ the Exchange is filing with the
Commission a proposed rule change to amend IEX Rule 11.190(g) to
introduce a new proprietary mathematical calculation designed to
identify periods of quote imbalance in a particular security. As
proposed, Users \6\ seeking to employ a relatively passive trading
strategy would be able to submit Discretionary Peg (``D-Peg'') \7\ and
primary peg (``P-Peg'') \8\ orders with an instruction to not exercise
price discretion during periods of quote imbalance. The Exchange has
designated this proposal as non-controversial and provided the
Commission with the notice required by Rule 19b-4(f)(6)(iii) under the
Act.\9\
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\4\ 15 U.S.C. 78s(b)(1).
\5\ 17 CFR 240.19b-4.
\6\ See IEX Rule 1.160(qq).
\7\ See Rule 11.190(b)(10).
\8\ See Rule 11.190(b)(8).
\9\ 17 CFR 240.19b-4(f)(6)(iii).
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The text of the proposed rule change is available at the Exchange's
website at <a href="https://www.iexexchange.io/resources/regulation/rule-filings">https://www.iexexchange.io/resources/regulation/rule-filings</a>, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend IEX Rule 11.190(g) to introduce a
new proprietary mathematical calculation (the ``quote imbalance
indicator'' or ``QII'') to make ``quote imbalance'' determinations for
each security (i.e., to turn ``on'' when it assesses there is an
imbalance in the supply and demand for that particular security).\10\
As proposed, for D-Peg and P-Peg orders, which are non-displayed order
types, the QII would be an alternative to IEX's existing ``crumbling
quote indicator'' or ``CQI''.\11\
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\10\ See proposed IEX Rule 11.190(g)(2).
\11\ See IEX Rule 11.190(g)(1).
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The CQI is an IEX proprietary mathematical calculation, which is
designed to assess the probability of an imminent change to the current
Protected NBB \12\ to a lower price or an imminent change to the
current Protected NBO \13\ to a higher price for a particular security
(i.e., a ``quote instability'' determination). When the CQI makes a
quote instability determination, it turns ``on'' for a period of two
milliseconds; when the CQI is on, it restricts D-Peg and P-Peg orders
resting on the Order Book from exercising discretion to meet the price
of an active order.\14\ As proposed, when the QII turns ``on'', it
would remain on until it determines there is no longer a quote
imbalance for that particular security; as with the CQI, when it is
``on'', the QII will restrict D-Peg and P-Peg orders from exercising
quote discretion to meet the price of an active order.
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\12\ See IEX Rule 1.160(cc).
\13\ See IEX Rule 1.160(cc).
\14\ As described below, the CQI is used by two other order
types: Discretionary Limit (``D-Limit'') and Corporate Discretionary
Peg (``C-Peg'') orders. However, the proposed QII would not be used
by D-Limit orders, which, as described below, use the CQI to
determine whether to reprice a displayed or non-displayed D-Limit
order. Additionally, the proposed QII would not be used by C-Peg
orders, because C-Peg orders are essentially D-Peg orders with an
additional price constraint (based on the last reported sale price),
which IEX believes would not provide any benefits to Users who can
already use D-Peg as part of their trading strategy.
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The Exchange expects the QII to be ``on'' for greater portions of
Regular Market Hours \15\ than the CQI, and believes that Users \16\
seeking to employ
[[Page 27704]]
a comparatively more passive trading strategy may prefer to utilize the
QII rather than the CQI for D-Peg and/or P-Peg orders. Accordingly, IEX
proposes to amend IEX Rule 11.190(b)(10) and 11.190(b)(8) to allow
Users to submit D-Peg and P-Peg orders with an instruction that the
System \17\ apply either the QII or the CQI, when determining whether
to restrict the orders' exercise of price discretion.
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\15\ See IEX Rule 1.160(gg).
\16\ Pursuant to IEX Rule 1.160(qq), a User means any Member or
Sponsored Participant who is authorized to obtain access to the
System pursuant to IEX Rule 11.130. Member is defined in IEX Rule
1.160(s), and Sponsored Participant is defined in IEX Rule
1.160(ll).
\17\ See IEX Rule 1.160(nn).
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Additionally, IEX proposes to make several conforming edits to IEX
Rule 11.190(g), which is currently titled ``Quote Stability.'' Because
the proposed QII would assess quote imbalances, and not quote
instability, IEX proposes to rename IEX Rule 11.190(g) with the title
``Quote Dynamics'' to reflect that it contains two different indicators
of the state of quoting in any particular security.
Background
IEX currently uses one proprietary mathematical calculation, the
``CQI'', to make quote instability determinations for all D-Peg, P-Peg,
C-Peg,\18\ and D-Limit \19\ orders. The Exchange has made incremental
changes to optimize and enhance the effectiveness of the CQI in
determining whether a crumbling quote exists several times since
Exchange launch.\20\ In 2022, the Exchange introduced the current
iteration of the CQI \21\ and until recently offered Users the option
of applying either the current or a prior iteration of the CQI to their
D-Peg, P-Peg, and C-Peg orders.\22\ In 2025, IEX retired the prior
iteration of the CQI based upon the similarity between the two CQIs, as
well as the higher usage and incrementally better performance of the
current CQI.\23\ The current CQI is comprised of nine separate rules
(``quote instability rules'')--each with specific conditions based on
either the price, size, or price and size of the Protected Quotations
\24\ of eleven exchanges (the ``Signal Exchanges'').\25\ Each of the
nine quote instability rules can trigger a quote instability
determination for either the Protected NBB or Protected NBO of a
particular security.\26\
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\18\ See IEX Rule 11.190(b)(16).
\19\ See IEX Rule 11.190(b)(7).
\20\ See Securities Exchange Act Release 78510 (August 9, 2016),
81 FR 54166 (August 15, 2016) (SR-IEX-2016-11); Securities Exchange
Act Release No. 80202 (March 10, 2017), 82 FR 14058 (March 16, 2017)
(SR-IEX-2017-06); and Securities Exchange Act Release No. 83048
(April 13, 2018), 83 FR 17467 (April 19, 2018) (SR-IEX-2018-07).
\21\ See Securities Exchange Act Release No. 96014 (October 11,
2022), 87 FR 62903 (October 17, 2022) (``CQI Proposal''); Securities
Exchange Act Release No. 96416 (December 1, 2022), 87 FR 75099
(December 7, 2022) (``CQI Approval Order'') (SR-IEX-2022-06).
\22\ See Securities Exchange Act Release No. 102556 (March 10,
2025), 90 FR 12195 (March 14, 2025) (SR-IEX-2025-04) (``Prior CQI
Retirement Filing'').
\23\ See Prior CQI Retirement Filing, supra note 22.
\24\ See IEX Rule 1.160(bb).
\25\ The Signal Exchanges are ARCX; BATY; BATS; EDGA; EDGX;
EPRL; MEMX; XBOS; XNGS; XNYS; and XPHL. See IEX Rule 11.190(g).
\26\ Quote instability rules must also be ``active'' to trigger
a quote instability determination; the rules become active or
inactive based upon a dynamic performance review designed to
optimize the frequency and accuracy of each rule. See IEX Rule
11.190(g)(1)(D).
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IEX periodically reviews the performance of the CQI in predicting
whether the Protected NBB or Protected NBO is in the process of moving
to a less aggressive price, and any potential alternative approaches
that would help counter the costs of ``adverse selection'' that
participants supplying liquidity incur when their orders are executed
at less desirable prices during periods of quote instability. Based on
that review, IEX developed the QII. Based on extensive testing, IEX
believes that QII is rigorously sound, supported by market data
analysis, and consistent with the Act as described below.
The QII is designed to determine whether there is an imbalance in
the market for a particular security, thereby indicating that the
market for the security may be in transition. Like the CQI, the QII is
comprised of a set of rules that can turn it ``on'' or ``off. These
rules, when ``on,'' enable the QII to restrict discretion for D-Peg and
P-Peg orders during periods of quote imbalance.
Based on informal feedback from Members,\27\ IEX understands that
different firms may prefer different levels of coverage for non-
displayed orders, i.e., how frequently a D-Peg or P-Peg order refrains
from exercising price discretion to meet the price of an incoming order
in response to either quote instability or a quote imbalance. In
particular, IEX understands that certain market participants seek to
avoid execution of orders at less optimal times to trade and thus
deprioritize ``fill rates'' (i.e., measuring the frequency and speed
with which orders are filled). In other words, in deploying such
passive trading strategies, these market participants' primary goal is
to prevent executions during potentially unstable market conditions
even if the passive trading strategies may prevent some trading
opportunities. IEX believes that providing a more passive alternative
to the CQI for D-Peg and P-Peg orders would be responsive to these
objectives. IEX thus proposes to add the QII as an alternative
indicator, in addition to the CQI, that Users may apply to D-Peg and P-
Peg orders.
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\27\ See IEX Rule 1.160(s).
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The Exchange is not proposing to make any changes to the use of C-
Peg or D-Limit orders, both of which will continue to use only the CQI.
Proposal
The Exchange proposes to introduce a new proprietary mathematical
calculation, the Quote Imbalance Indicator or QII, to make quote
imbalance determinations for each security during Regular Market Hours
(independently assessing whether the Protected NBB and Protected NBO
are imbalanced). As explained below, the QII would turn ``on'' during
periods when the QII identifies a quote imbalance for either the
Protected NBB, the Protected NBO, or the Protected NBBO on a security-
by-security basis; and would remain ``on'' until it identifies that a
security's quote is no longer imbalanced. As described below, the QII
is expected, on average, to be ``on'' for approximately 400
milliseconds each time in turns on, compared to two milliseconds for
the CQI. Since the QII remains ``on'' for the duration of a quote
imbalance, its duration per instance is longer than the CQI. As a
result, the QII is expected to be ``on'' for, on average, two and one
half hours of each trading day on either the bid or offer side.\28\
Therefore, by design, the QII would restrict D-Peg and P-Peg orders
from exercising discretion for a larger period of the trading day,
which will be understood by the Users who submit D-Peg and P-Peg orders
with a designation to apply the QII, because, as detailed below,
applying the QII to a D-Peg or P-Peg order allows a User to seek
executions in more stable market conditions, in exchange for not being
eligible to exercise discretion to trade for as much of the day. When a
User submits a D-Peg or P-Peg order to IEX, the User would be able to
designate whether to apply the QII or CQI to the order.\29\
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\28\ As noted above, the QII can turn ``on'' for either the bid
side, the offer side, or both sides. IEX expects the QII to be
``on'' for both sides for approximately 27 minutes per day.
\29\ As noted, supra, in note 14, IEX is not proposing to allow
Users to submit C-Peg orders with an instruction to apply the QII
because C-Peg orders, by definition, are designed for a specific use
case of assisting Users with compliance with specified aspects of
the Rule 10b-18 safe harbor for stock buybacks. See Securities
Exchange Act Release 87019 (September 19, 2019), 84 FR 50485
(September 25, 2019) (SR-IEX-2019-10) (Notice of Filing and
Immediate Effectiveness of C-Peg order type).
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As proposed, the QII will be comprised of three quote imbalance
rules, any of which can turn the QII
[[Page 27705]]
``on'' (i.e., the QII will be ``off'' only when none of the three quote
imbalance rules' conditions are satisfied for a particular security).
Like the CQI, the QII will be a fixed formula specified transparently
in IEX's rules.
As described in detail below, the three quote imbalance rules
independently assess: (1) whether the ``Book Skew'' \30\ of a
particular security exceeds a predefined threshold value set forth in
the rule; (2) whether there is an ``Order Flow Imbalance'' \31\ for a
particular security in excess of a predefined threshold value set forth
in the rule; and (3) whether there is a sufficient amount of displayed
interest in a particular security.\32\
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\30\ ``Book Skew'' is the ratio of the difference between the
volume of shares that comprise the Protected NBB and the Protected
NBO. See proposed Rule 11.190(g)(2)(B)(i).
\31\ ``Order Flow Imbalance'' measures the difference between
the volume of buy orders and sell orders at the Protected NBB and
the Protected NBO. See proposed Rule 11.190(g)(2)(B)(ii).
\32\ See proposed Rule 11.190(g)(2)(B)(iii).
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As noted above, the QII is based upon the CQI. Specifically, the
QII utilizes several of the same variables as the CQI, i.e., ``Signal
Best Bid'', ``Signal Best Offer'', ``Aggregate Best Bid Size'',
``Aggregate Best Offer Size'', ``Previous Aggregate Best Bid Size'',
``Previous Aggregate Best Offer Size'', ``Previous Signal Best Bid'',
``Previous Signal Best Offer'', ``Signal Spread'', and ``Update''.\33\
Thus, much of the functionality of the proposed quote instability rules
discussed below has already been considered and approved by the
Commission, and which has been refined by IEX several times since
Exchange launch. As explained below, the QII takes these common
variables, and the common approach of applying real-time market data to
a set of rules that can turn the indicator ``on'' or ``off'' and
employs them in an alternative, more passive, indicator.
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\33\ See proposed Rule 11.190(g)(2)(A)(i) (stating that these
terms have the same meanings set forth in IEX Rule 11.190(g)(1)(B)).
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The QII also introduces several new variables, which are derived
from the same data used by the CQI. These variables are:
<bullet> ``Signal Bid Delta'', which is determined based on the
relationship between the Signal Best Bid and the Previous Signal
Best Bid. Specifically: (i) if the Signal Best Bid is greater than
the Previous Signal Best Bid, then the Signal Bid Delta is equal to
the Aggregate Best Bid Size; (ii) if the Signal Best Bid is less
than the Previous Signal Best Bid, then the Signal Bid Delta is
equal to the Previous Aggregate Best Bid Size times negative one (1)
(i.e., the negative value of the Previous Aggregate Best Bid Size);
or (iii) if the Signal Best Bid is equal to the Previous Signal Best
Bid, then the Signal Bid Delta is equal to the Aggregate Best Bid
Size minus the Previous Aggregate Best Bid Size.
<bullet> ``Signal Offer Delta'', which is determined based on
the relationship between the Signal Best Offer and the Previous
Signal Best Offer. Specifically: (i) if the Signal Best Offer is
less than the Previous Signal Best Offer, then the Signal Offer
Delta is equal to the Aggregate Best Offer Size; (ii) if the Signal
Best Offer is greater than the Previous Signal Best Offer, then the
Signal Offer Delta is equal to the Previous Aggregate Best Offer
Size times negative one (1) (i.e., the negative value of the
Previous Aggregate Best Offer Size); or (iii) if the Signal Best
Offer is equal to the Previous Signal Best Offer, then the Signal
Offer Delta is equal to the Aggregate Best Offer Size minus the
Previous Aggregate Best Offer Size.
<bullet> ``Lookback Window'' \34\ is equal to: (i) the preceding
10 milliseconds if the Signal Spread is less than or equal to one
cent ($0.01); or (ii) the preceding 100 milliseconds if the Signal
Spread is greater than one cent ($0.01).
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\34\ The CQI also employs lookback windows, such as the
``Lookback Average Signal Spread Bin Value'', which averages the
Signal Spread Bin Value over the past twenty Updates. See IEX Rule
11.190(g)(1)(B)(xvi).
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<bullet> ``Bid Imbalance'' is equal to the Signal Offer Delta
minus the Signal Bid Delta. Bid Imbalance is measured each time
there is an Update to the Quote during the Lookback Window.
<bullet> ``Signal Bid Delta Imbalance'' is equal to the sum of
the Bid Imbalance values calculated during the Lookback Window
(considering only up to a maximum of the most recent 128 Updates
during the Lookback Window).
<bullet> ``Offer Imbalance'' is equal to the Signal Bid Delta
minus the Signal Offer Delta. Offer Imbalance is measured each time
there is an Update to the Quote during the Lookback Window.
<bullet> ``Signal Offer Delta Imbalance'' is equal to the sum of
the Offer Imbalance values calculated during the Lookback Window
(considering only up to a maximum of the most recent 128 Updates
during the Lookback Window).
<bullet> ``Delta Imbalance Threshold'' is equal to twenty (20)
times round lot multiples if the Signal Spread is less than or equal
to one cent ($0.01) or is equal to zero (0) if the Signal Spread is
greater than one cent ($0.01).
<bullet> ``Bid Book Skew'' is equal to the logarithm of the
Aggregate Best Offer Size minus the logarithm of the Aggregate Best
Bid Size.
<bullet> ``Offer Book Skew'' is equal to the logarithm of the
Aggregate Best Bid Size minus the logarithm of the Aggregate Best
Offer Size.
<bullet> ``Book Skew Imbalance Threshold'' is equal to 0.4 if
the Signal Spread is less than or equal to one cent ($0.01) or is
equal to 0.7 if the Signal Spread is greater than one cent ($0.01).
Like the CQI, the QII would apply the variables specified above to
the three quote imbalance rules, each of which can turn ``on'' the QII
for a particular security for either the bid side, offer side, or both
the bid and offer side. Typically, the QII would only turn ``on'' for
one side of a security (the imbalanced side of the market) but there
are circumstances when the QII will be ``on'' for both the bid and
offer sides. Specifically, the QII will be on for both sides of a
security either when there is very minimal volume of displayed interest
in the security at the Protected NBB and Protected NBO, or when the
Book Skew Rule and Order Flow Imbalance Rule each indicate an imbalance
for opposite sides of the security.
<bullet> Book Skew Rule: Rule Bid (Offer) BS indicates a period
of quote imbalance if the Bid (Offer) Book Skew is greater than the
Book Skew Imbalance Threshold.\35\
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\35\ See proposed Rule 11.190(g)(2)(B)(i).
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<bullet> Order Flow Imbalance Rule: Rule Bid (Offer) OFI
indicates a period of quote imbalance if the Signal Bid (Offer)
Delta Imbalance is greater than the Delta Imbalance Threshold.\36\
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\36\ See proposed Rule 11.190(g)(2)(B)(ii).
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<bullet> Minimum Size Rule: Rule Bid (Offer) MS indicates a
period of quote imbalance if the product of the Signal Best Bid
(Offer) and the Aggregate Best Bid (Offer) Size is less than one
thousand dollars ($1,000).\37\
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\37\ See proposed Rule 11.190(g)(2)(B)(iii).
On a security-by-security basis, if the specified conditions of any
of the quote imbalance rules are met, then the System will turn ``on''
the QII for that security.
One difference between the CQI and the QII is that the QII uses
different values for three variables when making quote imbalance
determinations for securities with spreads of $0.01 or less (``narrow
spread symbols'') than it does for all other symbols. Specifically, the
QII's Lookback Window, which is used by the Order Flow Imbalance rules,
is limited to 10 milliseconds for narrow spread symbols and 100
milliseconds for all other symbols.\38\ Additionally, as proposed, the
Book Skew Imbalance Threshold will be .4 for narrow spread symbols and
.7 for all other symbols, and the Delta Imbalance Threshold will be 20
times the round lot size for narrow spread symbols and zero for wider
spread symbols.\39\
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\38\ As noted above, if there are more 128 Updates to the Quote
during the Lookback Window, the QII will only consider the most
recent 128 Updates. See proposed Rule 11.190(g)(2)(A)(vi) and
(viii).
\39\ See proposed Rule 11.190(g)(2)(A)(xii) and (ix).
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IEX selected different variables for narrow spread symbols versus
all other symbols based upon extensive back-testing applying different
parameters to historical market data. Based upon this extensive
testing, the values resulting in the best model performance were
[[Page 27706]]
chosen for the Book Skew and Order Flow Imbalance Thresholds and the
Lookback Window.
For both D-Peg and P-Peg orders, when the QII determines that the
bid and/or offer for a particular security is imbalanced (i.e., the QII
is ``on''), any D-Peg or P-Peg orders on the imbalanced side of the
market would not exercise price discretion to meet the limit price of
an active (i.e., taking) order, and remain pegged to a price that is
the less aggressive of either (i) one (1) minimum price variant
(``MPV'') \40\ less aggressive than the primary quote (i.e., one MPV
below (above) the Protected NBB (NBO) for buy (sell) orders); or (ii)
the order's limit price (if any).\41\ Like it does with the CQI, the
System will continually evaluate whether the QII should be ``on'' for
any symbol. When the conditions for all three of the QII rules are no
longer met, the QII will turn ``off'' (unless and until the System
again determines that the quote is imbalanced).\42\
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\40\ See Rule 11.210.
\41\ See IEX Rule 11.190(b)(8) and (10).
\42\ In this regard, the QII differs from the CQI which
automatically turns off after two milliseconds (unless it made
another quote instability determination before turning off). By
design the QII remains on during times when it identifies that the
quote is imbalanced.
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IEX assesses the efficacy of the CQI by measuring its ``coverage'',
which is the percentage of all ``adverse'' Protected NBBO changes per
symbol (i.e., lower for bids, higher for offers) that were predicted by
the CQI. Using market data from January 2, 2025, to March 21, 2025, IEX
calculated that the CQI's coverage was 47%, meaning it predicted (and
therefore blocked discretion) with respect to almost half of all
adverse price changes. Using the same market data used to assess the
CQI's coverage, IEX calculated that the QII's coverage would have been
approximately 58%, meaning the QII would have approximately 25% more
coverage than the CQI.
Because the QII is designed to maximize the amount of trading
volume taking place in stable market conditions, even at the expense of
fill rates, IEX believes that markouts \43\ are another relevant metric
for QII's efficacy. Thus, IEX further assessed the efficacy of the QII
by determining the percentage of D-Peg and P-Peg orders that would not
exercise discretion because the QII was ``on'' and applied to those
orders, as compared to the percentage that would exercise discretion if
the QII was ``off'' and applied to those orders, and then analyzing
markout data to determine whether the orders using the QII showed
performance improvement. This analysis shows that the QII would have
restricted additional D-Peg and P-Peg volume from trading, but in
return, markouts of the orders that exercise discretion would have
improved by 7.9% of spread and 11.2% of spread, respectively, as
measured at one second.\44\ The following graphs demonstrate the
consistency of the QII's performance improvement across various time
horizons:
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\43\ Markouts are a standard metric used by market participants
to assess execution quality. For purposes of this filing,
``markouts'' refer to a comparison of the midpoint price at the time
of execution as compared to the midpoint price a certain amount of
time following the execution. A smaller markout as measured at a
certain time is indicative of a higher quality execution.
\44\ The analysis was also conducted using market data from
January 2, 2025, to March 21, 2025.
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BILLING CODE 8011-01-P
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[GRAPHIC] [TIFF OMITTED] TN27JN25.000
BILLING CODE 8011-01-C
As depicted in the above two graphs, D-Peg and P-Peg orders that do
not exercise discretion when the quote is imbalanced (i.e., the QII is
``on'') have materially better markouts, which demonstrates that there
is less market movement occurring after the trade, consistent with the
QII's design to avoid trading in unstable market conditions (i.e.,
during a quote imbalance).
As described above, the QII will remain ``on'' until the conditions
establishing a period of quote imbalance are no longer present. Based
on a notional value weighted average across all symbols, the QII is
expected to be ``on'' for approximately 2.5 hours during Regular Market
Hours, turning ``on'' for an average of 396.6 milliseconds each time.
Thus, the QII will be ``on'' for more of the day than the CQI. However,
as discussed above, the QII is not designed to maximize fill rates, but
rather to support passive trading strategies that seek to trade during
the most stable market conditions. Thus, Users that choose to designate
any of their D-Peg or P-Peg orders with the QII will do so expecting a
lower execution rate than if they had designated the orders with the
CQI, but also expecting more stable market executions.
Additionally, IEX notes that regardless of whether a User selects
to use the CQI or QII, when multiple pegged orders exercise discretion
at the same time, their relative priority is retained.\45\
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\45\ See IEX Rule 11.190(b)(8) and (10).
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Conforming Edits
IEX also proposes to make several conforming edits to IEX Rule
11.190(g) to reflect the adoption of the new QII. Specifically, IEX
proposes to:
<bullet> Rename IEX Rule 11.190(g) from ``Quote Stability'' to
``Quote Dynamics'' to reflect that IEX will now have two distinct
indicators, as opposed to one (or more) crumbling quote indicators.
<bullet> Revise the first sentence of the first paragraph of IEX
Rule 11.190(g) to read: ``The Exchange utilizes real time relative
quoting activity of Protected Quotations from eleven
[[Page 27708]]
exchanges (ARCX, BATY, BATS, EDGA, EDGX, EPRL, MEMX, XBOS, XNGS,
XNYS, XPHL) referred to as ``Signal Exchanges'' to: (i) make quote
instability determinations, as set forth in subparagraph (1) of Rule
11.190(g); or (ii) make quote imbalance determinations, as set forth
in subparagraph (2) of IEX Rule 11.190(g).'' Thereby deleting the
remainder of the current paragraph.
<bullet> Rename IEX Rule 11.190(g)(1) from ``Crumbling Quote''
to ``Quote Instability'' to reflect that this is the only quote
instability indicator rule.
<bullet> Revise the first paragraph of IEX Rule 11.190(g)(1) to
include the text removed from the first paragraph of IEX Rule
11.190(g). The paragraph will now read:
[cir] ``The Exchange utilizes nine proprietary mathematical
calculations (``the Quote Instability Rules'') to assess the
probability of an imminent change to the current Protected NBB to a
lower price or a Protected NBO to a higher price for a particular
security. Each Quote Instability Rule independently assesses the
probability of an imminent change to the current Protected NBB to a
lower price or Protected NBO to a higher price for a particular
security. When the quoting activity meets one or more Quote
Instability Rule's predefined criteria and that Quote Instability
Rule's current activation value pursuant to this IEX Rule 11.190(g)
(``Activation Value'') is greater than the Exchange's defined
threshold (``Activation Threshold'') for that Quote Instability
Rule, the System treats the quote as not stable (``quote
instability'' or a ``crumbling quote''). For each Quote Instability
Rule, the Activation Value is initialized at 0.5 at the start of the
Regular Session and updated during regular market hours as described
in this IEX Rule 11.190(g). During all other times, the quote is
considered stable (``quote stability'').''
<bullet> Revise IEX Rule 11.190(g)(1)(B)(vii) to add a period
that is missing from the end of the definition of ``Update''.
<bullet> Add IEX Rule 11.190(g)(2), ``Quote Imbalance'', which
will include the changes detailed above.
<bullet> Renumber IEX Rule 11.190(g)(2) to now be IEX Rule
11.190(g)(3) and revise the rule to include a reference to the new
quote imbalance functionality.
Implementation
The Exchange will announce the implementation date of the proposed
rule change by Trading Alert at least ten business days in advance of
such implementation date and within 90 days of effectiveness of this
proposed rule change.
2. Statutory Basis
IEX believes that the proposed rule change is consistent with
Section 6(b) \46\ of the Act in general, and furthers the objectives of
Section 6(b)(5) of the Act,\47\ in particular, in that it is designed
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest. Specifically, and as discussed in the Purpose section,
the proposal would provide a new alternative quote imbalance indicator
for D-Peg and P-Peg orders that is designed to restrict those orders
from exercising price discretion during periods of quote imbalance. As
discussed in the Purpose section, IEX understands that some market
participants utilize passive trading strategies that seek to avoid
execution of orders at less optimal times to trade and thus
deprioritize fill rates and place more emphasis on market stability.
The QII is responsive to that feedback and would provide an optional
tool for executing a passive trading strategy that seeks to avoid
trading when the market for the security in question may be in
transition, regardless of whether the strategy may prevent some trading
opportunities.
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\46\ 15 U.S.C. 78f.
\47\ 15 U.S.C. 78f(b)(5).
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The Exchange believes it is consistent with the protection of
investors and the public interest to provide the QII as an alternative
to its current CQI. As described in the Purpose section, the QII is
designed to support Users (both Members and Sponsored Participants) and
other market participants using passive trading strategies by
protecting D-Peg and P-Peg orders from potential unfavorable executions
during periods of quote imbalance. IEX believes that the QII, in the
aggregate and with respect to the specific changes proposed, is
rigorously sound, supported by market data analysis, and consistent
with the Act as described below.
The Exchange believes that it is consistent with the Act to utilize
a rules-based model for the QII, as it does with the CQI, to determine
whether a quote is imbalanced. As discussed in the Purpose section, the
Exchange believes that the proposed QII will potentially enhance the
protection available to market participants using D-Peg and P-Peg
orders that elect to use the QII, thereby removing impediments to a
free and open market.
The Exchange also believes that it is consistent with the Act to
apply different threshold variables to the Book Skew and Order Flow
Imbalance instability rules based upon whether the symbols have a one
cent spread, or a wider-than-one cent spread. As described in the
Purpose section, the different variables applied for narrower spread
stocks are designed to better assess the instability of a quote based
upon extensive back-testing and parameter tuning using historical
market data. IEX believes that these transparent criteria for the
different calculations conducted based upon the symbols' spread will
improve the QII's performance, to the benefit of all market
participants seeking a new means of employing a more passive,
stability-focused trading strategy.
The Exchange further believes that the proposed rule change may
result in more and larger sized D-Peg and P-Peg orders being entered on
IEX as a result of the ability to select the QII as an alternative to
the CQI which, as discussed above, is designed to support Users and
other market participants using passive trading strategies. To the
extent more orders are entered, the increased liquidity would benefit
all IEX Users and their customers.
Regardless of whether a User selects to use the CQI or QII, when
multiple pegged orders exercise discretion at the same time, their
relative priority is retained.\48\ Thus, the Exchange notes that the
proposed rule change does not raise any new or novel issues in this
regard.
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\48\ See IEX Rule 11.190(b)(8) and (10).
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Furthermore, the Exchange notes that all Users are eligible to use
D-Peg and P-Peg orders, and therefore all Users are eligible to benefit
from these order types' protections, and will also benefit if use of
the QII brings more liquidity to the Exchange. In addition, IEX
believes that the QII is consistent with findings in the Commission's
delegated approval of IEX's rule filing to adopt the current iteration
of the CQI. Specifically, the QII will activate without further action
from the User, and thus all Users will benefit equally regardless of
their technological capabilities and ability to take action within a
short prescribed period.\49\ Additionally, only non-displayed order
types would be able to utilize the QII and thus it would not affect
displayed liquidity.\50\ Accordingly, IEX believes that the proposal
promotes just and equitable principles of trade, removes impediments to
and perfects the mechanism of a free and open market and a national
market, and, in general, protects investors and the public interest.
---------------------------------------------------------------------------
\49\ See CQI Approval Order, supra note 21 at 75102.
\50\ Id.
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Further, the Exchange believes that the proposed conforming changes
described in the Purpose section are consistent with the Act because
the changes would promote clarity in IEX's rules.
Finally, the Exchange notes that, as proposed, the QII, like the
CQI will be
[[Page 27709]]
a fixed formula specified transparently in IEX's rules. The Exchange is
not proposing to change the functionality of any of its order types,
but rather seeks to provide the QII as an alternative for D-Peg and P-
Peg orders.
B. Self-Regulatory Organization's Statement on Burden on Competition
IEX does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. To the contrary, as discussed
in the Statutory Basis section, the proposal is designed to enhance
competition by incentivizing additional liquidity.
With regard to intra-market competition, the proposed QII would
apply equally to all Users on a fair, impartial and nondiscriminatory
basis without imposing any new burdens on the Users because D-Peg and
P-Peg are optional order types, and the QII (as proposed) would be one
of two choices of indicators that Users may apply to their D-Peg and P-
Peg orders. The Commission has already approved the CQI.\51\ As
discussed in the Purpose and Statutory Basis sections, the proposed
rule change is designed to provide the QII as an alternative indicator
for D-Peg and P-Peg orders, which is a variation of the SEC approved
quote instability calculation, as an optional indicator for D-Peg and
P-Peg orders; therefore, no new burdens are being proposed.
---------------------------------------------------------------------------
\51\ See supra note 21.
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With regard to inter-market competition, other exchanges are free
to adopt similar quote imbalance calculations subject to the SEC rule
filing process. In this regard, the Exchange notes that NYSE American
LLC until recently had a ``discretionary pegged order type'', see
former NYSE American LLC Rule 7.31E(h)(3)(D), which copied an earlier
iteration of the Exchange's quote instability calculation.\52\
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\52\ See Securities Exchange Act Release 99827 (March 21, 2024),
89 FR 21302 (March 27, 2024) (SR-NYSEAMER-2024-21) (modifying NYSE
American's discretionary pegged order type to remove its quote
instability calculation).
---------------------------------------------------------------------------
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A) of the Act \53\ and Rule 19b-4(f)(6) \54\ thereunder.
Because the foregoing proposed rule change does not: (i) significantly
affect the protection of investors or the public interest; (ii) impose
any significant burden on competition; and (iii) become operative for
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, it has become effective pursuant to
Section 19(b)(3)(A) of the Act \55\ and Rule 19b-4(f)(6) \56\
thereunder.
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\53\ 15 U.S.C. 78(b)(3)(A).
\54\ 17 CFR 240.19b-4(f)(6).
\55\ 15 U.S.C. 78s(b)(3)(A).
\56\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires the Exchange to give the Commission written notice of the
Exchange's intent to file the proposed rule change, along with a
brief description and text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission will institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#aedcdbc2cb83cdc1c3c3cbc0daddeeddcbcd80c9c1d8"><span class="__cf_email__" data-cfemail="1f6d6a737a327c7072727a716b6c5f6c7a7c31787069">[email protected]</span></a>. Please include
file number SR-IEX-2025-11 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-IEX-2025-11. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-IEX-2025-11 and should be
submitted on or before July 18, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\57\
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\57\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-11887 Filed 6-26-25; 8:45 am]
BILLING CODE 8011-01-P
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