SEC Approves IEX’s New Discretionary Limit Order Type (D-Limit)

September 4th | 2020

The SEC recently approved IEX’s proposed rule change to adopt a new order type, the Discretionary Limit order (“D-Limit”). The proposal was the subject of numerous comment letters and meetings with SEC officials. Some praised the proposal as step in the right direction to reduce latency arbitrage, which arguably has had the effect of decreasing displayed liquidity on national securities exchanges. Others argued that the proposal was unfairly discriminatory and would not be compliant with Reg. NMS.

IEX’s stated purpose for the D-Limit order type is to protect liquidity providers on IEX from potential adverse selection resulting from latency arbitrage trading strategies, and thereby encourage its members to submit more displayed limit orders to IEX. The D-Limit order type is essentially a pegged order whose price is adjusted when the Exchange detects an imminent change to the current Protected NBB to a lower price or Protected NBO to a higher price for a particular security.

After weighing the arguments in the proposal and the comments received, the SEC ultimately found that IEX’s proposal is consistent with the Exchange Act because it promotes the interest of long term investors in a narrowly tailored manner to the benefit of displayed markets, which will lead to increased displayed liquidity from which all market participants ultimately will benefit. Notably, the narrowly tailored nature of IEX’s D-Limit distinguishes it from a somewhat similar, though more broad, Cboe EDGA proposal that the SEC disapproved earlier this year.

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