Cboe launches a new trading tool to protect against quote depletion

Exchange holding company, Cboe Global Markets, Inc. announced launching new improvements – a new Quote Depletion Protection (QDP) feature that would offer new protective capabilities and increase the efficacy of its Midpoint Discretionary Order (MDO).

MDO is introduced by Cboe order type, designed to enable participants to trade more often with maximum price improvement. MDOs allow participants to post displayed or non-displayed liquidity at the National Best Bid or Offer (NBBO) with discretion to execute up to and including the midpoint of the NBBO.

Market participants will be able to choose whether to deploy QDP on MDOs on either the Cboe EDGX or EDGA Equities Exchange. QDP would disable discretion for a limited period as preventive measure against participants exercising discretion in undesirable circumstances such as buying right before a price declines, or selling right before it rises. The QDP would equip investors with a protective tool against adverse selection risk and strengthen trading outcomes when using MDOs.

Cboe Global Markets

The new tool would track significant executions of orders that constitute the best bid or offer on the EDGX or EDGA Book. The mechanism would activate if the best bid or offer displayed on EDGX or EDGA is executed below one round lot. During a QDP Active Period, an MDO would not exercise discretion for a specified period of time. If participants choose to not use QDP, an MDO works as originally designed.

In addition, market participants will be able to enter MDOs with an offset instruction to the NBBO. The idea is to enable participants to specify more or less aggressive pegged prices for MDOs resting on the order book in this way increase the flexibility when using this order type. MDOs with QDP will default to a less aggressive offset of 1 Minimum Price Variation, but can be increased to a greater amount if a larger discretionary range is desired. Member firms will have the flexibility to choose an offset that is consistent with the urgency and client’s order handling instructions.

Adam Inzirillo, Senior Vice President and Head of U.S. Equities at Cboe Global Markets, commented:

Cboe’s Midpoint Discretionary Order was created to provide market participants with a greater selection of trading tools that may result in efficient executions and price improvement. We are pleased to enhance upon this innovation further with the Quote Depletion Protection feature. Developed in close consultation with our customers, we believe QDP will offer enhanced functionality, which broker-dealers may be free to incorporate into their strategies, to mitigate against potential adverse selection risks.

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