The Chicago Stock Exchange has proposed to implement a speed bump, mimicking an earlier move by IEX, the upstart stock exchange made famous by Michael Lewis in the book “Flash Boys”. In June, IEX won approval to impose a speed bump of 350 microseconds, or millionths of a second, a delay that it said is just long enough to protect investors from predatory high-speed trading that can front-run the orders of slower investors.
The Chicago market, a small exchange whose business has been shrinking for decades, said it needs its own delay to combat aggressive trading that has harmed firms making markets—meaning they place offers to buy and sell shares to help facilitate trading.
Recently, the New York Stock Exchange’s owner said it is considering ways to respond to IEX, while the Nasdaq Stock Market sought approval this month for a new function that would slow the market for some investors. Nasdaq wants to allow traders who agree not to cancel their quotes for at least one second to have their orders prioritised over similarly priced orders. Approximately 42% of orders that are fully cancelled are removed from exchanges within one second of being entered, according to SEC data.
The 134-year-old Chicago exchange says rapid-fire trading has recently cannibalised its ability to host trading for some of the most liquid securities in the world.
“We are trying to de-emphasise speed and emphasise real trading to the benefit of the investing public,” said John Kerin, the Chicago exchange’s chief executive.
The Chicago exchange filed its speed-bump proposal Monday with the Securities and Exchange Commission, which must approve the measure before it may be used.
The Chicago market proposed an IEX-like, 350-microsecond delay, but only for orders that remove shares from the exchange’s supply. The exchange wouldn’t impose a speed bump on firms—many of which are also high-frequency traders—that submit standing orders to buy or sell shares.
“What this says to me is they have liquidity providers who are getting picked off by high-speed proprietary traders, and they’re trying to get them some kind of buffer,” said Dave Lauer, a former high-frequency trader who is now chairman of Healthy Markets Association, a coalition of asset management firms.
The SEC also is considering whether to approve the sale of the Chicago Stock Exchange to a group led by Chongqing Casin Enterprise Group, a Chinese company that plans to list companies from that country on the US market if the deal is approved. Exchange executives have said they hope to complete the sale by the end of the year.
In a filing made with the SEC, the exchange said its speed-bump proposal is a “direct response” to problems that have dented its market share in the SPDR S&P 500 ETF, which is often the most frequently traded security in the U.S. equity market. The exchange’s share of trading the ETF, known as the SPY, fell to 0.57% in July from 5.73% in January, according to its proposal sent to the SEC.
The exchange said market makers have become less willing to trade in Chicago because faster traders have been able to pick off their orders at stale prices. The proposed speed bump, it said, would give its market makers enough time to update their quotes in response to market data coming from the futures and options exchanges, which traders use to price the SPY ETF.
Lauer said the exchange’s proposal is further evidence that some speed traders exploit flaws in stock-market infrastructure to trade against stale prices, a strategy sometimes known as latency arbitrage. “So many people deny the existence of latency arbitrage, and here you have an exchange attributing that kind of market-share drop to it,” he said.
Many high-frequency trading firms say those kinds of advantages no longer exist because so many traders have adopted the same technology and connections to market infrastructure.
“It’s unfortunate that CHX has chosen to ignore the best evidence that widespread ‘latency arbitrage’ is a myth,” said Bill Harts, chief executive of Modern Markets Initiative, a trade group founded by several leading electronic trading firms.
Write to Dave Michaels at email@example.com
This article was first published by The Wall Street Journal