Nasdaq proposes alternative to speed bumps

A proposal unveiled by the New York-based exchange giant on Wednesday would encourage investors to post buy and sell orders on the Nasdaq Stock Market that last at least one second—eons in today’s markets, where high-frequency trading firms enter and cancel thousands of orders in fractions of a second.

“What it’s really meant to do is improve the ecosystem and the quality of the market,” said Tal Cohen, head of North American equities at Nasdaq.

Initially, the plan would apply only to orders placed by retail investors, but Nasdaq aims to expand it to let all market players participate, the exchange operator said in a filing with the Securities and Exchange Commission. Nasdaq said it crafted the initiative to address the needs of long-term investors. High-frequency traders rarely hold stocks from one day to the next.

Nasdaq’s move illustrates how incumbent players are grappling with the impact of IEX, which won SEC approval to become a full-fledged stock exchange in June. Made famous by Michael Lewis’s “Flash Boys,” IEX has cast itself as the advocate of investors fed up with rapid-fire trading. Its best-known feature is its speed bump, which imposes a delay of 350 microseconds, or millionths of a second, on all incoming orders. IEX says that helps thwart certain predatory high-speed trading strategies.

Other exchanges have explored similar features. In August, the tiny Chicago Stock Exchange proposed its own version of a 350-microsecond speed bump.

Nasdaq chief executive Robert Greifeld first indicated that his firm was exploring an IEX-like feature in July, though details were adjusted as Nasdaq consulted with market players, the exchange operator indicated in its filing.

A spokesman for IEX said the firm was reviewing Nasdaq’s filing and not immediately able to comment.

The proposal, which is subject to SEC approval, would allow investors on Nasdaq’s flagship stock market to place “extended life” orders that couldn’t be canceled for at least one second. In return, such orders would be executed before competing orders at the same price.

Nasdaq didn’t say how long it would take to implement the plan, saying it was awaiting the SEC’s decision before moving forward.

Potentially, that could lead to “stickier” prices that are less likely to fluctuate as electronic trading firms cancel or adjust orders. But before the plan could have such an impact, Nasdaq’s proposal would need to be adopted by its customers. Unlike IEX’s speed bump, the Nasdaq scheme is an option that traders can choose to use or not each time they place an order.

It would also require a big change to the way Nasdaq prioritises incoming orders, which is likely to arouse opposition from high-speed traders accustomed to the current model.

Currently, Nasdaq and most other exchanges use “price/time priority” to determine when to execute incoming buy and sell orders. That means the best-priced orders are filled first, and when multiple orders come in at the same price, the first ones received are the first ones executed. In other words, they are placed in a first-in, first-out queue.

Knowing where one is positioned in that queue has grown increasingly important to traders in recent years, especially high-speed firms that constantly adjust their orders in response to market information, experts say. If a trader is last in line to buy or sell a particular stock, it is a warning sign that the price is about to move against them.

Nasdaq’s extended life orders would let traders jump to front of the queue, but only if they are willing to risk letting their order stay live for a full second. The proposal is expected to be most attractive to mutual funds, pension funds and other big investors, which are less sensitive to small price movements and can face delays if their orders get stuck in long queues.

“This is going to be a very beneficial order type for institutional investors,” said Larry Tabb, founder of Tabb Group, a market advisory firm.

High-speed traders may be less satisfied with Nasdaq’s proposal. Such firms often engage in market-making strategies, in which they continuously buy and sell the same stock and collect a small profit from the difference between the buying and selling price. Market makers frequently adjust or cancel their orders in less than a second.

The extended life order type “will increase complexity, discourage liquidity provision and impede market efficiency,” said Jamil Nazarali, head of execution services for Citadel Securities, a major electronic market-making firm.

Write to Alexander Osipovich at

This article was published by The Wall Street Journal

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