After thus far competing for mid-point trading, which makes up about 14% of total US equities market volume, the Investors Exchange (IEX) is now making a bid for a larger slice of the market—the displayed trading segment—with the approval of its “discretionary limit” order type.

“There seems to be demand for new tools in areas that IEX hasn’t supported historically, and we think we can meet this demand,” says Ronan Ryan, president and co-founder of IEX. Moving into displayed trading, and later, the national best bid and offer (NBBO) non-mid sector, means that the exchange will be competing for a much wider section of the market.

On October 1, the exchange’s new discretionary limit order type, D-Limit, went live on the exchange after an eight-month regulatory approval period by the Securities and Exchange Commission (SEC).

D-Limit is designed to protect liquidity providers from potential adverse selection by latency arbitrage strategies, protecting members from losses that can occur when prices are unstable on resting orders, and likely to move against liquidity providers. It is an optional tool that members of the exchange can use when posting displayed or non-displayed orders.

IEX also plans to propose a second new order type, which is designed to address liquidity in the NBBO non-mid, which represents more than 19% overall market volume. The exchange is yet to file its plans for the NBBO non-mid order type.

“The industry and the market are looking for a solution that allows them to trade displayed, which is why D-Limit was supported by a broad group of market makers, brokers, and institutional investors,” Ryan says.

Indeed, 33 asset managers and 14 pension funds, including Goldman Sachs and T. Rowe Price, filed comment letters to the SEC expressing support for the D-Limit tool.

“IEX’s D-Limit order type is designed to equally benefit long-term investors, their brokers, and market-makers alike,” Mehmet Kinak, vice president and global head of systematic trading and market structure, and Jonathan D. Siegel, vice president and senior legal counsel legislative and regulatory affairs at T. Rowe Price wrote in that firm’s submission.

Kinak and Siegel said the firm has not supported earlier speed bump proposals from other exchanges that were also aimed at addressing latency arbitrage, such as Cboe’s EDGA LP2, which was disapproved by the SEC in February. They felt that these speed bumps would have harmful effects and introduce undue complexity.  IEX’s D-Limit, however, operates transparently, it addresses the root issue of latency arbitrage without adding complexity and confusion around issues like best execution, and doesn’t discriminate against any one type of market participant, regardless of their sophistication or technological capability, the letter said.

Rich Steiner, head of client advocacy and market innovation at RBC, wrote in a comment letter that the “D-Limit order type is based on a mathematical calculation that is codified in the IEX rulebook and is publicly available, which provides a high level of transparency into how this order type would function.”

In its ruling approving D-Limit, the SEC said that a lack of displayed liquidity can harm price discovery, and lead to more off-exchange trading, negatively impacting markets. The approval letter said, “Exchanges should be able to innovate to address this competitive imbalance in a manner that is consistent with the Exchange Act.”

D-Limit uses IEX’s “Signal”—more formally called the Crumbling Quote Indicator, a proprietary math calculation—to determine whether a particular quote is unstable (or “crumbling”), meaning that the NBBO is likely to change within the next two milliseconds. The Signal takes in real-time market data from multiple exchanges, and runs it through an algorithm to make the prediction. If the Signal predicts the best bid for a stock will decrease for a party displaying a bid, or predicts that the stock will increase for a party posting an offer, the Signal will automatically reprice the buy order or the sell order to one price increment lower or higher than the NBBO to mitigate profit loss.

 “So far, according to our data, trading when the IEX Signal is on is bad, trading when the IEX Signal is off is good, and the difference between them from an execution quality perspective is remarkable,” Ryan says.