Smart Execution with Quote Depletion Protection

Quote Depletion Protection (QDP) for Midpoint Discretionary Orders (MDO) is a popular order type for market participants who aim to avoid adverse selection while accessing hidden liquidity. 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. By pairing a QDP instruction with an MDO, brokers may be able to minimize potential outliers and protect themselves from adverse selection.

In January, Cboe rolled out an enhancement to QDP to reduce the opportunity cost of missing liquidity and increase the likelihood of executions while maintaining the desired outcome of mitigating adverse selection. In the two months since implementing this change, Cboe has observed improved executions in orders using QDP.

Improved Executions Using QDP on Cboe’s EDGX™ Equities Exchange

There was an immediate uptick in fill and hit rates on EDGX following the change. As the chart below details, originally, EDGX orders with QDP instructions realized a fill rate of about 1.52%. Fill rates have more than doubled to about 4.54% since QDP was enhanced in January. Additionally, the post-trade one second markout improved from 13.83% of the spread to 9.57%, indicating a nearly 30% improvement.

^{Figure 1 EDGX Performance Stats for QDP1}

As seen below, the post-order one to five millisecond markout trend for EDGX indicates similar improvement.

^{Figure 2 Post-order completion markout2}

In addition to enhanced order performance, the QDP signal continues to efficiently predict an adverse move, such as a downtick following a buy or vice versa for a sell, approximately 70% of the time.

^{Figure 3 EDGX QDP Signal Efficacy}

Improved Executions Using QDP on Cboe’s EDGA™ Equities Exchange

The hit rates and markouts on EDGA also improved following the QDP enhancements. Though fill rates declined slightly from 4.40% to 4.00%, markouts improved 15%, from 13.43% to 11.39%. Additionally, the efficacy of the signal led to a significant increase in correct predictions since the enhancements went into production.

^{Figure 4 EDGA Performance Stats for QDP3}

^{Figure 5 EDGA Order Markout}

Before the changes in January, EDGA’s signal correctly predicted an adverse move about 33% of the time. Since then, EDGA’s signal accuracy has improved about 8%, to 41%, on average.

^{Figure 6 EDGA QDP Signal Accuracy}

The latest enhancements to QDP have had a net positive impact on performance on both EDGX and EDGA exchanges. We will continue to conduct research on the QDP signal’s efficacy to further enhance the user experience for our customers in both markets.

The Execution Consulting Team is committed to continual analysis and the use of empirical evidence to keep our member firms apprised of Cboe’s latest innovative features and how to use them. Stay tuned for more details on Cboe’s plans to launch U.S. Periodic Auctions in the third quarter. Please don’t hesitate to reach out to a member of our team to discuss how we can help optimize your trading experience.

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1 Cboe Data: Marketable orders with size equal to or greater than 100 shares

2 Cboe Data: Marketable orders with size equal to greater than 100 shares

3 Cboe Data: Marketable orders greater than or equal to 100 shares

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The information in this letter is provided for general education and information purposes only. No statement(s) within this letter should be construed as a recommendation to buy or sell a security or to provide investment advice. Supporting documentation for any claims, comparisons, statistics or other technical data in this letter is available by contacting Cboe Global Markets at www.cboe.com/Contact.