What Is EDGX? A Breakdown of the Exchange Structure and Participants

Stock exchanges play a key role in financial markets by providing a platform for buying and selling securities. EDGX, part of the Cboe Global Markets network, offers traders and investors access to equities with specific pricing models and execution strategies. Understanding how EDGX functions helps market participants make informed trading decisions.

Exchange Structure

EDGX operates as an electronic stock exchange, meaning all transactions occur through a digital order book without a physical trading floor. It is part of the Cboe Global Markets network, which includes BZX, BYX, and EDGA. Each venue has distinct pricing models and execution strategies. EDGX follows a maker-taker fee structure, where liquidity providers receive rebates while liquidity takers pay fees.

The exchange uses a price-time priority model, executing orders based on price first and then by time entered. This benefits traders who submit orders early, increasing their chances of execution at the desired price. EDGX also supports midpoint peg orders, which allow trades to execute at the midpoint of the national best bid and offer (NBBO), improving price efficiency.

EDGX integrates with the Securities Information Processor (SIP), consolidating market data from multiple exchanges to provide a unified view of stock prices. It also connects to the Cboe One Feed, a proprietary data service offering enhanced market depth and liquidity insights.

Market Participants

EDGX attracts a diverse group of traders with different strategies and objectives. Institutional investors, such as mutual funds, pension funds, and hedge funds, execute large orders, often using algorithmic trading to minimize market impact. High-frequency trading (HFT) firms leverage speed and algorithms to capitalize on small price discrepancies across multiple exchanges.

Retail investors access EDGX through brokerage platforms. Brokers route orders based on factors like execution speed, cost, and price improvement opportunities. Some use smart order routing (SOR) systems, which analyze market conditions in real time to determine the best venue for execution.

Market makers provide continuous buy and sell quotes, ensuring liquidity and reducing price volatility. These firms profit from the bid-ask spread and are incentivized through exchange fee structures that reward liquidity provision. Proprietary trading firms, which trade using their own capital, contribute to market efficiency by identifying arbitrage opportunities and executing high-volume trades.

Order Types

Traders on EDGX can use various order types to execute their strategies efficiently.

Limit Orders

A limit order allows traders to specify the maximum price they are willing to pay when buying or the minimum price they will accept when selling. This ensures the trade will not execute at a worse price than desired but does not guarantee execution if the market does not reach the specified level. For example, a buy limit order for a stock at $50 will only execute if the stock’s price falls to $50 or lower.

Limit orders follow a price-time priority model, meaning orders at the same price level are executed in the order they were received. EDGX also offers pegged limit orders, which automatically adjust based on market conditions, and hidden limit orders, which do not display in the public order book but still execute when matching orders are available.

Market Orders

A market order is executed immediately at the best available price, prioritizing speed over price control. This type of order is useful when a trader needs to enter or exit a position quickly. However, because market orders do not specify a price limit, they can result in execution at a significantly different price than expected, especially in fast-moving or illiquid markets.

On EDGX, market orders interact with the exchange’s electronic order book, matching against existing limit orders. If the order size exceeds available liquidity at the best price, the remaining portion executes at the next best available price, potentially leading to slippage. To mitigate this risk, some traders use marketable limit orders, which function like market orders but include a price cap to prevent execution at extreme levels.

Stop Orders

A stop order becomes active only when a specified trigger price is reached, at which point it converts into a market or limit order. This type of order is commonly used for risk management, helping traders protect profits or limit losses. For example, a stop-loss order on a stock at $45 remains inactive until the stock trades at or below $45, at which point it executes as a market order.

EDGX supports stop-limit orders, which provide more control by converting into a limit order rather than a market order once triggered. This prevents execution at an unfavorable price but carries the risk of not being filled if the market moves too quickly. Traders often set trigger prices based on support and resistance levels.

Trading Fees

EDGX employs a fee model balancing liquidity provision with execution costs. The primary cost considerations include execution fees, routing charges, and rebates, all of which vary based on trading activity and order characteristics.

EDGX’s tiered fee schedule adjusts costs and rebates based on monthly trading volume. Firms executing large numbers of shares may qualify for reduced fees or increased rebates. Proprietary trading firms executing millions of shares per month, for example, could receive a lower per-share fee than an individual investor placing occasional trades.

Beyond standard execution costs, EDGX charges routing fees when orders are directed to external venues for execution. These fees depend on the destination exchange’s pricing model. Some firms offset these expenses by leveraging liquidity rebates, which reward participants for adding liquidity rather than removing it.

Regulatory Oversight

EDGX operates under a regulatory framework ensuring fair trading practices, market integrity, and investor protection. As a registered national securities exchange, it falls under the jurisdiction of the U.S. Securities and Exchange Commission (SEC), which enforces compliance with federal securities laws, including the Securities Exchange Act of 1934. This oversight mandates transparency in order execution, fair access to market data, and adherence to rules preventing manipulative trading practices such as spoofing and layering.

In addition to SEC regulations, EDGX is subject to oversight by the Financial Industry Regulatory Authority (FINRA), which monitors broker-dealer activities and enforces trading rules. FINRA conducts routine audits, investigates potential violations, and ensures firms comply with best execution requirements, which mandate that brokers seek the most favorable terms for their clients. EDGX must also comply with Regulation NMS (National Market System), which governs order routing and trade execution to promote price competition and prevent market fragmentation.