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Evaluating Automated Trading on IEX Through Fill Quality and Route Costs

Article Quant Q&A · Author: Jim Bob
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Summary

The document considers whether automated trading can be profitable on IEX, whose design includes latency controls. The answers frame profitability as strategy-dependent rather than a simple consequence of whether automated traders use the venue. They distinguish strategies that depend on maker-taker rebates or latency arbitrage from those that may benefit from reduced exposure to latency-driven slippage.

For strategies seeking liquidity near displayed top-of-book thresholds, IEX could offer value if its routing and matching reduce adverse price movement enough to offset route costs and any differences in execution quality. The suggested assessment is to compare realized fill prices and completion rates with route costs, while accounting for the venue’s ability to match incoming flow. The discussion provides no measured profitability data, and notes that vendor analyses may be biased. Its conclusions are conditional on strategy, flow, and actual execution performance.

Key ideas

  • IEX profitability depends on the strategy’s execution needs and its reliance on rebates or latency arbitrage.
  • Reduced latency-driven slippage may benefit automated strategies that value protection near top-of-book liquidity.
  • Venue value should be assessed using realized fill prices, fill rates, and route costs.
  • The document offers no profitability measurements and cautions that vendor analyses may be biased.

Tags

EquitiesExecutionMarket microstructure
Full text
# Has automated trading produced profits at IEX?


# Has automated trading produced profits at IEX?












Is there evidence that automated trading is profitable on the latency-enforced portion of the exchange?

On the one hand, if automated trading was profitable when these limits existed naturally, it should be profitable, but on the other hand, if modern hardware is too expensive and older hardware too obsolete, costs may exceed revenues.

I believe the IEX is a self-inflicted wound, but if a global exchange could execute with equal amounts of time consumed, would it be profitable for automated traders to trade it?

Note: "Global exchange" in this context is a global trading network that can clear & settle within IEX time consumptions not a location specific trading hub.

## Answer by Bikenfly (score 0, accepted)

https://quant.stackexchange.com/a/16911

The systematic traders (aka "quants", "HFTs" or whatever you want) tend to be expertly efficient in evaluating trading strategies and market micro-structure. Therefore, reformulating your question "does IEX have "systematic traders that have been using the IEX platform consistently?". Only IEX can answer that one, but their CEO, Brad Katsuyama did say in a televised interview a few months ago that they had a few "HFT" (his words) subscribers. I don't know if that is still the case, but if it is, there is your answer.

## Answer by Nathan S. (score 2)

https://quant.stackexchange.com/a/16901

IEX is an ATS. The ECN/ATS business is dominated by rampant and well known conflicts of interest. A part of the IEX value proposition from the beginning was to offer an alternative to traders who were disenfranchised by this market structure.

If maker-taker rebates are part of your trading business model or if you engage in any strategy that could be deemed latency arbitrage then their value proposition is deliberately adversarial to your goals, because they're competing to take flow that feeds your strategy. They are specifically for the trader who wants to route through a different market structure.

If IEX routes deliver on the value proposition then they could potentially be more profitable for automated strategies around threshold level-one book liquidity levels who want to avoid having portions of their order slipped to worse pricing through latency arbitrage. As IEX increases their flow, their ability to deliver in this department should also increase. But they can also do this to the extent their algorithms are good at matching against external flow without allowing latency arb bots time to react.

Your analysis of the value has to focus on pricing of fills versus the costs you pay for the routes. There are many automated traders for whom latency arbitrage induced slippage could handily exceed the price difference on routes which are cheaper than IEX. Of course, this is all subject to how well they deliver in terms of order fill. And it's hard to get good analysis in a world of vendors who will only find statistics that support you giving them flow. If you haven't caught some of these guys lying then you haven't been paying attention. Once again, IEX is aiming for something different by unique transparency.

If you're saying that other ECNs/ATSs inflicted the competition from someone like IEX upon themselves, I think that's a fairly reasonable analysis of how competitive forces work.

Sorry if this answer uses too much jargon. I expect a lot of stackexchange users. But do feel free to ask in comments if I could provide more clarity.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.