Cboe Midpoint Discretionary Order

Midpoint Discretionary Order (MDO) is 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.

Behavior

  • Displayed MDOs to Buy/Sell are displayed at and pegged to the NBB/NBO with a non-displayed discretionary component.
  • Non-Displayed MDOs to Buy/Sell are non-displayed at and pegged to the NBB/NBO with a non-displayed discretionary component.
  • MDOs can be entered with or without a limit price.
  • 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 allow discretion to the midpoint of the NBBO, then the MDO will have discretion to its limit price.
  • The discretionary range will only be used if necessary. Incoming contra side orders that cross the spread will execute at the MDO's NBB or NBO resting price.

Pricing

EDGA MDO Execution Fee Code Fee
Adds/Removes liquidity at the discretionary range DM, DT $0.003/FREE
Adds/Removes liquidity at Displayed/Non-Displayed Price DA, DR $0.0003/($0.0024)
EDGX MDO Execution Fee Code Fee
Adds/Removes liquidity at the discretionary range DM ($0.0010)*

* Subject to other exchange non-displayed volume tiers.

Cboe Quote Depletion Protection

Quote Depletion Protection (QDP) is 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.
  • If participants choose to not use QDP, an MDO operates and functions as originally designed.

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.

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.


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.

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