How Cboe North American Equities Evolved with the Changing Landscape in 2022

January 12, 2023

2022 was a busy and exciting year for Cboe’s North American Equities team. This year Cboe Global Markets completed the acquisition of NEO, strengthening our global equities and listing offering. As we brought NEO under the Cboe umbrella, we continued to integrate MATCHNow and BIDS Trading in Canada, offering new solutions to improve your trading experience and level the playing field.

Speaking of leveling the playing field, throughout the year, we collaborated with Cboe’s Market Policy and Government Affairs team to develop a thorough tick-reduction framework proposal. The main goal of our proposed framework was to ensure market structure benefits all investors. As we shared in the proposal, we believe it is incredibly important that any reforms made by the Securities Exchange Commission (SEC) are measured, evidence-based and truly beneficial to all investors.

This year, we also continued to provide timely, objective market analysis and new product enhancements to help our customers improve their trading experience. Read more about our work in 2022 and our plans for 2023 on Cboe Insights.

Market Trends and Observations

The North American equities markets continued to evolve and respond to the changing world in 2022. Our team remained dedicated to analyzing how these changes impact investors and sharing potential solutions. We explored how the timing of the pandemic-related market swing coincided with an amendment to the Universal Market Integrity Rules (UMIR) that impacted trading in dark venues. The change in UMIR Rule 6.6 increased the minimum size requirements for executing against resting dark liquidity at the quote. As a result, trading volume increased in MATCHNow Conditionals.

We observed that customers continued to benefit from early trading on Cboe EDGX and found that U.S> equities average daily trading volume (ADV) reached new records between March 2020 and March 2022 as market dynamics continued to change.

When big name stock splits made headlines, we investigated how they impact trading and found that the results are mixed.

We also analyzed how inverted exchanges provide continued value and steadily followed the evolution of retail investment activity.

U.S. Equities Product Updates

The U.S. equities market remains a fragmented marketplace with fierce competition among displayed market centers. The continued growth and competition from non-displayed market centers, as well as competition from other exchanges, has created an environment that rewards innovation. Our team’s focus on innovating and delivering solutions with trust and transparency has led to the creation of differentiated products driven by empirical evidence.

Retail Priority: Usage Persists, Execution Quality Continues to Improve

Retail Priority‘s distinct patent-pending allocation model differs from the traditional time-based allocation model used by most U.S. equities market centers by displaying individual investors’ limit orders at the front of the order queue for same-priced orders submitted on Cboe EDGX. This improves execution quality and trading outcomes for individual investors, and the firms facilitating their orders, by reducing the time to execution.

Though retail trading activity has declined from its peak during the meme-stock trading phenomenon in first-quarter 2021, use of Retail Priority remains strong, comprising a significant percent of the trading on EDGX. Currently, trades executed using Retail Priority represent 14.6% of average daily volume (ADV) on EDGX, or 182.4 million shares ADV (Exhibit 1).

Additionally, Retail Priority execution quality has improved significantly since its inception. On EDGX, the average time to first fill for orders with Retail Priority execution instruction in third-quarter 2022 was 0.6 seconds, compared to one second for regular retail orders, a 40% delta. Similarly, Retail Priority orders executed, on average, 137 shares per second, 29% higher than regular retail orders (Exhibit 1).

Learn more: How Retail Priority Benefits End Investors.

Cboe Market Close

Cboe Market Close (CMC) offers competitive closing auction pricing, with no tiering, and provides certainty for earlier on-close fills compared to the primary exchanges’ closing auctions. Cboe recently filed an amendment to move CMC’s MOC cut-off time from 15:35 p.m. to 15:49 p.m., bringing CMC’s MOC closer to market close, and the cut-off times for each of the primary exchanges.

Source: Cboe Data

Early Trading: Usage Growth Accelerates

Participation in Cboe’s Early Trading hours, which begin at 4 a.m., has more than doubled since it was implemented, growing from 9% market share in March 2021or 3.3 million shares ADV, to 19% recently, equivalent to 6.4 million shares ADV (Exhibit 2).

Quote Depletion Protection Steady Growth in Usage and Clients’ Cost Savings

Quote Depletion Protection (QDP) is a feature available for Midpoint Discretionary Orders (MDO) that empowers investors to trade more often with maximum price improvement while providing additional protection against adverse selection risk.

QDP usage on Cboe EDGX® has increased from 617,000 shares ADV in third-quarter 2020 to 13.6 million shares ADV in third-quarter 2022. QDP signal accuracy on EDGX remains consistent, with more than 75% accurate activation and only 1% incorrect activation. QDP continues to provide execution benefits to on both EDGX and Cboe EDGA®, with the current average potential cost savings at 3.92 and 3.39bps on EDGX and EDGA, respectively, compared to 2.23 and 2.05 in 2021 (Exhibit 3).

Dive deeper into the benefits of QDP: How Increased Quote Depletion Protection Usage Benefits Investors.

Periodic Auction: Continued Growth in User Base

We enhanced liquidity in the U.S. with the launch of Periodic Auctions (PA) on BYX®, a new trading mechanism designed to enhance intraday liquidity and price discovery in U.S. Equities public markets. PA is a useful trading mechanism to attract buyers and sellers in thinly trades securities or ones with wider bid-ask spreads. As of October 2022, 19 firms are participating in Periodic Auctions on BYX. (Source: Cboe Data).

Canadian Equities Product Updates

In June 2022, Cboe completed its acquisition of NEO, a next generation stock exchange focused on fairness, liquidity, transparency and efficiency. Joining Cboe’s leading non-displayed equities trading venue, MATCHNow, adding NEO to the Cboe umbrella further strengthens our position as one of the key players in the fragmented Canadian marketplace. Similar to our U.S. equities exchanges, our Canadian exchanges have continued to innovate and deliver solutions to participants of all kinds.

Cboe Canadian Equities: Innovative Venues

As Cboe’s Canadian presence grows, we aim to leverage the infrastructure, market expertise and innovative mindset Cboe is known for to enable Canadian investors to pursue global growth opportunities through a holistic equity offering with market data, access services and listings.

Cboe’s four current Canadian trading venues fill different market niches (Exhibit 4), expanding our network of trusted markets and developing a seamless trading experience across the board. The three NEO exchanges provide an innovative, investor-focused experience that gives queue priority benefits to retail and institutional long-term investors with added protections through a speed bump on liquidity removing orders. Alternatively, MATCHNow remains investors’ first choice venue for non-displayed liquidity in Canada with over 70% of pure dark market share, offering significant cost savings benefits with $67 million midpoint price improvements facilitated year-to-date in 2022.

NEO-L is our largest Canadian exchange, drawing participation from both retail and institutional investors. Learn more about what sets it apart.

MATCHNow and Cboe BIDS Canada: Sustainable Growth in Usage, Conditional Book and Willing To Trade (WTT) Enhance Block Liquidity Sourcing

Cboe BIDS Canada, the Conditional Book operated on MATCHNow, is another one of Cboe’s innovative Canadian equities market product offerings. The Cboe BIDS Canada Conditional Book facilitates block liquidity sourcing and helps improve execution quality for Canadian investors, as all executions in the book are inside the NBBO. Trading volume from Conditionals continues to grow, averaging 18 million monthly executed shares in September 2022 (Exhibit 5).

To further enhance the trading experience on MATCHNow, Cboe recently launched two new features called Willing To Trade and Willing to Trade Active.

Willing to Trade extends additional liquidity to MATCHNow subscribers by enabling their block-sized Firm Order to interact with Cboe BIDS Canada. Firm Orders are required to meet the Universal Market Integrity Rules(UMIR) 6.6 size threshold of greater than 50 standard trading units and $30,000 in notional value, or greater than $100,000 in notional value, in order to be eligible to match with Conditionals through the Opt-In Feature.

Willing to Trade Active further enhances investors’ ability to source block liquidity on the Canadian markets by enabling subscribers who opt-in with block size Immediate or Cancel (IOC) orders to interact with orders in Cboe BIDS Canada.

The additional liquidity benefit brought forth by WTT is substantial: the average trade size of WTT transactions, including executions against Conditionals and Firm Orders, are approximately 378 shares, compared to 178 shares of a regular non-WTT Firm Order (Exhibit 5).

Discover more about how WTT enhances investors ability to source block-sized liquidity.

What’s Next in 2023

In 2023, we will continue to build on the momentum we’ve gained this year, growing our presence across North American and fine-tuning our latest innovations. We will also continue to monitor and analyze market trends to help you make more informed trading decisions and will seek new ways to enhance the overall equities markets, as well as the customer experience on our own platforms.

Thank you for trusting Cboe Global Markets to meet your equities trading needs. We value your business and will strive to continue delivering innovative solutions in 2023. Please do not hesitate to reach out to a member of our team with questions or feedback.

^{The information provided is for general education and information purposes only. No statement provided should be construed as a recommendation to buy or sell a security, future, financial instrument, investment fund, or other investment product (collectively, a “financial product”), or to provide investment advice.}

^{Cboe®, Cboe Global Markets®, Bats®, BIDS Trading®, BYX®, BZX®, Cboe Options Institute®, Cboe Vest®, Cboe Volatility Index®, CFE®, EDGA®, EDGX®, Hybrid®, LiveVol®, Silexx® and VIX® are registered trademarks, and Cboe Futures ExchangeSM, C2SM, f(t)optionsSM, HanweckSM, and Trade AlertSM are service marks of Cboe Global Markets, Inc. and its subsidiaries.}

^{NEO Exchange Inc. (“ NEO Exchange” or “NEO”), a Cboe Global Markets Company,  is a FinTech Company that provides capital raising and liquidity solutions. For further information, refer to}^{https://www.neo.inc/en/home}^{. MATCHNow is a Canadian marketplace operated by TriAct Canada Marketplace LP, a Cboe Global Markets Company.  For further information, refer to https://www.cboe.com/ca/equities. MATCHNow and NEO are considered affiliates.}