CODA Liquidity Protection Rule

The purpose of the CODA Liquidity Protection Rule¹ (LPR) is to prevent a CODA Fuse or CODA Block auction from moving a stock’s price an unreasonable distance based on the size of the print and the liquidity profile of the stock. The rule is driven by an equation that is calibrated individually for every stock based on the pattern of its trades over the last 20 trading days. The calibration methodology is designed to reflect the typical price variance of each stock as a function of its notional turnover. The LPR takes the size of a CODA print as an input and returns the maximum distance the CODA engine will allow the auction to go up outside the NBBO as the output.

Trade Data Filtering

The calibration acts on all regular way trades reported to the SIP during regular market hours, exclusive of opening and closing auction volume as well as other trades that appear to be reported out of sequence or are otherwise unrelated to the prevailing market conditions.

Data Point Generation

For every trade, 5 windows are randomly created spanning sequential trades summing to a notional value of $100K – $250 MM. The price variation of the trades in the window is measured, creating a large set of (window size, price variance) data point pairs.

Regression Calibration

All data point pairs spanning the most recent 20 trading days are aggregated and organized into bins of similar notional value. A regression runs upon the median price variance for each notional bin to generate an equation that characterizes price variance as a function of notional turnover.

Optimizations

Several rules are applied to ensure that the results don’t offend our common sense, including but not limited to: a. Enforce monotonicity the equation curve is flattened out if necessary to guarantee that it never has as a negative slope, i.e., it never gives a smaller answer for a larger number of shares b. Not enough data – if a symbol does not trade enough to generate a statistically significant number of data points. We default to logic that hardcodes the LPR value at twice the average daily range of the stock, regardless of auction size. In such stocks, the minimum CODA auction size is large relative to the stock’s ADV so a more granular determination of a reasonable distance to move the stock’s price cannot be made.