By Oliver Sung, Head of North America Execution Consulting, and Matthew Healey, Senior Analyst, North American Equities at Cboe
Cboe’s Quote Depletion Protection (QDP) order type has experienced significant growth over the past year, prompting Cboe’s North American Equities Execution Consulting team to examine the effects of the increased usage and execution quality.
QDP is an optional instruction that market participants can use with Midpoint Discretionary Orders (MDOs) on Cboe’s EDGX and EDGA exchanges. This order type is popular among market participants who wish to avoid adverse selection while resting non-displayed liquidity. When activated, QDP disables the discretionary range of MDOs for a short period to prevent executions at prices more aggressive than their ranked price, during a period of short-term volatility.
QDP Adoption
As shown in the chart below, usage of the QDP order type has increased significantly since its launch in June 2020. Since the start of 2021, total QDP usage has grown by 1,038% from an average of 2.9 million shares traded per day in January 2021 to over 32.8 million shares traded per day in March 2023. The increase in adoption is primarily driven by usage on EDGX, where there has been consistent growth month-over-month. Recently, average daily QDP volume on EDGX increased by 5.7 million shares, or 36%, per day between January 2023 and March 2023.
This increase was driven by existing users sending more QDP orders as they continued to find utility in QDP’s performance. A number of new clients were also onboarded during this time with the roll out of a new port default setting that helped ease QDP implementation for some brokers. The continued success of this order type highlights the performance benefits market participants gain from QDP.
Execution Location
As QDP usage increased, so did the number of trades that were executed at midpoint on EDGX. In first-quarter 2021, 12% of all trades on EDGX were executed at midpoint. In first-quarter 2023, that number has increased to over 19%.
Source: Cboe
Figure 3 below shows the execution location of all QDP trades on EDGX. In first-quarter 2023, 92% of QDP trades were executed at midpoint, up 21% from first-quarter 2021, while 8% were executed between the National Best Bid or Offer (NBBO) and midpoint, including at the bid or offer. Less than 1% were executed lower or greater than the NBBO. QDP allows participants to receive midpoint fills while providing protection from negative market movements.
When QDP Signal Is Active
In addition to the execution location of QDP trades, we studied the time of day when the QDP signal is active and receives a fill. Figure 4 below illustrates the percentage of executed QDP volume in 30-minute increments. As expected, the QDP signal is more active following the market open and leading up to the closing auctions. 23% of QDP volume executed with an active signal occurred between 9:30 and 10 a.m. and 16% occurred during the last 30 minutes of regular trading hours. This highlights the necessary protection from adverse selection around the auctions that QDP provides.
Minimal Slippage
Post-trade mark-outs measure the change in NBBO midpoint from the time of execution. This is an important metric as it represents the amount of slippage an order realized after the trade occurred. Figure 5 below shows market participants who used the MDO order type with QDP experienced minimal slippage. One millisecond after the trade occurred, QDP orders saw a minimal -3% of unfavorable price movement, meaning the price declined on a buy order. This number remained minimal even at one second post-trade at -4% of spread.
The recent growth in QDP provides empirical evidence that the order type brings value to market participants by protecting them from adverse selection and minimizing potential outliers. As usage of the product grows, Cboe’s Equities Execution Consulting Team will continue to monitor QDP activity and performance through data to support market participants who want to leverage this unique order type.
To learn more, read about The QDP Difference and Smart Execution with Quote Depletion Protection on Cboe Insights.
