Cboe Midpoint Discretionary Order

Midpoint Discretionary Order (MDO) is a patent-pending feature having a blended order type that incorporates the characteristics of Primary Peg, Midpoint Peg and Discretionary orders. Members can use MDOs to post displayed or non-displayed liquidity at the National Best Bid/National Best Offer for Buy/Sell orders with a discretionary range extending to and including the NBBO midpoint. MDOs do not execute at a price more aggressive than the NBBO midpoint. MDO is available on EDGA and EDGX exchanges, providing the opportunity to use MDOs in two different trading markets that offer comparable MDO advantages, but also provide a few distinguishing characteristics to meet varying needs of investors.

Behavior

• MDOs to buy are pegged to the NBB.
• MDOs to sell are pegged to the NBO.
• MDOs can be entered as displayed or non-displayed orders.
• MDOs can use offsets to adjust their pegged price to be less aggressive if displayed or to be either less or more aggressive if hidden. MDOs have discretion to execute at prices ranging to and including the midpoint of the NBBO, consistent with their limit price.
• If an MDO’s limit price does not reach the NBBO midpoint, then the MDO will have discretion to its limit price.
• MDOs allow access to midpoint liquidity, but at the same time preserve the ability to execute at more favorable prices.

Benefits and Distinguishing Characteristics

• Best Possible Execution Price for Resting MDOs - EDGA and EDGX
  • For any given contra order, Buy MDOs execute at the lowest possible buy price and Sell MDOs execute at the highest possible sell price.
  • Execution prices more favorable than the midpoint are received whenever contra-side orders are priced more aggressively than the NBBO midpoint.
  • Displayed MDOs receive displayed priority at their ranked price.
  • Non-displayed MDOs receive Hidden order priority at their ranked price.
• MDOs Maximize Execution Opportunities in EDGA
  • MDOs can execute against any eligible contra-side orders upon arrival.
  • MDOs can execute against contra-side MDOs at the NBBO midpoint.
• MDOs Add Liquidity in EDGX
  • Arriving MDOs in EDGX function similar to Post Only orders.

Technical Details

Members may send an MDO on EDGA and EDGX using either FIX or BOE, utilizing the following instructions:

Cboe Quote Depletion Protection

Quote Depletion Protection (QDP) is a patent-pending process including an optional instruction that market participants can use with MDOs on either Cboe's EDGX™ or EDGA™ Equities Exchanges. When activated, QDP will disable the discretionary range of MDOs for a short period of time in order to prevent executions at prices more aggressive than their ranked price when an execution of the exchange's quote indicates that the market may be moving against a resting MDO. QDP provides investors with an additional trading tool to protect against such adverse selection risk and enhance trading outcomes when using MDOs.

In addition to QDP, Cboe will now allow MDO orders to include offset instructions. This will allow MDOs to be ranked at prices less or more aggressive than the NBB for buy orders or the NBO for sell orders, while still maintaining discretion to the NBBO midpoint, consistent with their limit price.

Behavior

Highlights of MDO with QDP:

• QDP tracks executions of displayed orders that constitute the best bid or offer on the EDGX(A) Book.
• QDP is activated for buy (sell) orders if the best bid (offer) displayed on EDGX(A) is executed below one round lot.
• During a QDP Active Period, an MDO would not exercise discretion for 2 milliseconds.
• MDOs will always be executable at their ranked price.
• MDOs may be Displayed or Hidden at their ranked price.
• MDOs with a QDP instruction default to Hidden and to an offset 1 MPV less aggressive than the NBB (NBO) for buy (sell) orders, but can be set to a specific offset amount if a different discretionary range is desired.
• Offset instructions are automatically applied with the QDP instruction, but can also be independently applied to MDO orders.
• MDOs with QDP will be designated as Book Only orders, unless a Post Only instruction (EDGX only) is specified.
• Book Only MDOs with QDP will perform a book re-check at the end of each QDP activation period in an attempt to interact with any new liquidity that arrived during the QDP activation period.
• In order to maximize executions, Book Only QDP orders can interact with incoming Post Only orders where the Post Only order will be the Adder of liquidity on the transaction.
• If participants choose to not use QDP, an MDO operates and functions as originally designed.
• MDO with QDP will default to executing upon order entry.

Technical Information

MDOs can be specified by populating Tag 18 (ExecInst) with one of the following values:

• d = Midpoint Discretionary Order (Standard MDO without QDP)
• e = Midpoint Discretionary Order with Quote Depletion Protection

Offsets may be included in Tag 211 (Peg Difference):

• Displayed MDOs will only be allowed to have offsets that are less aggressive than the same side NBBO.
• Hidden MDOs will be allowed to have offsets that are more or less aggressive than the same side NBBO. (Note that orders entered with offsets that are more aggressive than the NBBO will not be protected by QDP.)
• MDOs will have full discretion from the offset ranked price to the less aggressive of their limit price or the midpoint of the NBBO.

Book Only and Post Only Routing Instructions in Tag 9303:

• All MDOs with QDP will be Book Only on EDGA.
• MDOs with QDP on EDGX will default to Book Only but may optionally include the Post Only instruction.

How It Works

Example 1

QDP Active Period = 2 milliseconds
NBBO: $10.00 x $10.01

Order 2, which is an MDO to buy, is ranked at $9.99 non-displayed with discretion to the midpoint price of $10.005. When Order 3 is entered it will trade a single share with Order 1 at $10.00, triggering a QDP Active Period for Order 2 because of the execution of the EDGX Best Bid below one round lot. This restricts the ability for Order 2 to exercise discretion for two milliseconds, and prevents the execution of Order 4 within Order 2's discretionary range. As a result, the Order 4 would be cancelled without an execution.

Example 2

QDP Active Period = 2 milliseconds
NBBO: $10.00 x $10.01

Order 2, which is an MDO to buy, is ranked at $9.99 non-displayed with discretion to the midpoint price of $10.005. When Order 3 is entered it would first trade 100 shares with Order 1 at $10.00. A QDP Active Period is then immediately enabled for Order 2 because of the execution of the EDGX Best Bid below one round lot. This restricts the ability for Order 2 to exercise discretion for two milliseconds, and prevents the execution of the remaining 100 shares of Order 3 within Order 2’s discretionary range. As a result, the remaining quantity of Order 3 would be cancelled.

Example 3

Book Only MDO with QDP executes with midpoint order after QDP period expires
QDP Active Period = 2 milliseconds
NBBO: $10.00 (Cboe Bid=0) x $10.01

Order 2, which is an MDO to buy, is ranked at $9.99 non-displayed with discretion to the midpoint price of $10.005. When Order 3 is entered it will trade 100 shares with Order 1 at $10.00 triggering a QDP Active Period for Order 2. Order 4, which is a Midpoint Peg sell order, arrives while QDP is still active for Order 2 and posts to the book at 10.005. Order 2’s discretionary range is reinstated after the QDP Active Period expires and trades 100 at $10.005 with Order 4.

Contact

Please contact the Cboe U.S. Equities Trade Desk ([email protected], 913.815.7001) or your Director of Sales with any questions. We appreciate your continued support of Cboe and look forward to earning more of your business.

Resources

• Midpoint Discretionary Order Fact Sheet
• Quote Depletion Protection Fact Sheet
• US Equities BOE Specification Version 2
• US Equities FIX Specification Version 2
• Trade Desk Notice
• Smart Execution with Quote Depletion Protection