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Why Exchanges Need Market Data and Routing Across Venues

Article Quant Q&A · Author: tillmo
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Summary

The document explains why an exchange such as IEX needs information about quotes displayed on other venues and the ability to route orders to them. Under the market rules described, an exchange may not execute a customer’s order locally at a price worse than a better displayed quote elsewhere. It therefore needs cross-market data to determine whether a superior price is available before filling an order.

The example is a buy order when IEX’s displayed ask is higher than another exchange’s ask. The exchange can route an order to take the better quote, then execute any remaining quantity locally if no better displayed offers remain. The explanation concerns the rules and routing process described in the document, rather than how an exchange calculates a consolidated average price. It gives a conceptual example but no technical details about routing systems or exceptions to the rules.

Key ideas

  • An exchange needs other venues’ quote data to identify better displayed prices.
  • The described market rules restrict local execution when another venue shows a better quote.
  • An exchange can route an order to take the better-priced quote on another venue.
  • Any remaining quantity may then be executed locally if no better displayed price is available.

Tags

EquitiesExecutionMarket microstructure
Full text
# Why does an exchange (IEX) need connection to other exchanges (like information about average prices)?


# Why does an exchange (IEX) need connection to other exchanges (like information about average prices)?












I have read "flash boys". The author describes how the Royal Bank of Canada uses THOR and an own SIP against certain practices of flash traders. I understand why a bank or a broker can make beneficial use of these tools. But then, the author describes that also the newly created exchange IEX uses such tools. But why should an exchange do this? As far as I know, the market price on an exchange is built from (limit) orders, and not via SIP as an average of all exchanges (which would be circular anyway). An why should an exchange send (via THOR) an order to all other exchanges? This does not make sense to me.

## Answer by LazyCat (score 1, accepted)

https://quant.stackexchange.com/a/46774

This is related to Regulation NMS and ISO orders. Imagine, that you like to trade on IEX, and IEX shows you the inside bid-ask on MSFT at 100.01 - 100.03. You'd like to go ahead and buy 100 shares @ 100.03, but according to market rules, you cannot do it, if another exchange, say Nasdaq, displays an ask quote @ 100.02. So the exchange needs

a) to know if there's a better quote at a different exchange (hence, the need to receive data from other exchanges) to decide if it can fill your order locally,

b) to be able to send orders to other exchanges on your behalf. E.g. in the case above, it should be able to send an order to Nasdaq to take that quote @ 100.02, and if there are no other quotes at better price execute the reminder of your order at IEX.

You can check, for example, https://iextrading.com/trading/router/

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.