Performance Files: How IEX's D-Peg Order Type Delivers Price Improvement and Markouts
Part one of three on how our functionality delivers strong performance for investors
As an exchange focused on execution quality, performance is at the heart of everything we do. Of course, “performance” is often in the eye of the beholder, and industry participants can have varying approaches to measuring it.
IEX Exchange is designed to deliver performance regardless of how you measure it. This includes both markouts, a common metric that compares the price at which a trade occurs to what happens in the market shortly afterwards, and a less frequently considered metric, price improvement. Price improvement (“PI”) measures the price you traded at compared to the price you were targeting.
In this three-part blog series, we will focus on demonstrating how IEX Exchange's various order types and functionality deliver price improvement and strong markouts to traders, covering D-Peg, IOC orders, and D-Limit.
IEX Exchange's original signature order type, D-Peg, or Discretionary Peg, is known for enabling high-quality trading at the midpoint. But how exactly does that happen? And what does that performance really look like?
D-Peg is a non-displayed, pegged order type that rests one 1 tick (minimum price variant, $0.01 for most stocks) outside of the NBBO. When the IEX Signal is “off” – meaning that it does not indicate that the price is unstable – D-Peg has discretion to trade up to the midpoint. When the Signal is “on,” D-Peg’s discretion is turned off, and orders remain resting 1 tick outside the NBBO. This functionality allows D-Peg to offer best-in-class markouts for midpoint trading, and it’s a big reason IEX Exchange has more stable midpoint volume than any other exchange.
D-Peg’s design elements work together to underpin a unique order type that can be integrated into a range of trading strategies. It’s not just about trading at the midpoint or avoiding trading during inopportune moments – it’s a full package that has benefits across a range of measurements, including price improvement and markouts.
D-Peg Price Improvement
D-Peg has always outperformed in terms of price improvement (“PI”), as we discussed in 2019 here. However, the numbers have only gotten better in the period since Q1 2020. The percentage of D-Peg orders receiving PI has approached 20% in some quarters, and the amount of PI has grown to 2-3x more than it was before 2020.
Overall, the average D-Peg PI in the first half of 2022 was 285 mils/share, which blends out to 26 mils. In other words, on average, D-Peg buyers ended up paying 26 mils less than the midpoint, and D-Peg sellers end up getting 26 mils more than the midpoint.
The obvious question is – why?
One key way in which D-Peg enables price improvement is through spread capture. While the Signal is off, D-Peg orders only step up as far as necessary to trade. This means that if there is an incoming spread-crossing order, D-Peg will trade at the near touch, rather than at the midpoint. Similarly, if the incoming order is priced past the midpoint but not quite to the far side, D-Peg orders will step up, but only exercise the minimum discretion necessary to trade.
Since early 2020, the dynamics of the market have shifted. Volatility has increased and spreads have widened. In this “new normal,” there are more opportunities for trading within the (wider) spread. That means more chances for D-Peg to trade at prices better than the midpoint – capturing that PI. What’s more, with wider spreads, when this does happen, the savings are larger than they were previously.
Price improvement is great, but it means nothing if your great buy at $10 is only worth $9 a few milliseconds later.
Fortunately, D-Peg’s Signal functionality – which instructs orders to stay more conservative while the price is unstable – is designed to protect orders from “adverse selection” or trading right before the price moves against you.
And despite the greater volatility over this period, the data shows that for shares that received price improvement, markouts are positive. This “true spread capture” is the holy grail of trading: buying the bid and it’s still the bid (or selling the offer and it’s still the offer) after a given time interval.
The Trades You Want
D-Peg was IEX Exchange's first innovative order type, but it’s far from out of date. Nearly eight years since its debut, D-Peg is still a cornerstone of the IEX Exchange’s ecosystem and continues to deliver strong performance for investors and traders.
Interested in more data on your D-Peg orders? Reach out to your IEX Exchange contact and we’d be happy to share more.
 Stable volume here is defined as executions that do not see the National Best Bid/Offer move in the following 2 milliseconds. In other words, they were not adversely selected.