11.22.2016
By John D'Antona

CHX Readies IEX-Style Speed Bump

Imitation is said to be the most sincere form of flattery – and it holds true on Wall Street where the Chicago Stock Exchange is ready to introduce a speed bump mechanism into its marketplace – just like exchange operator IEX.

The proposal to adopt a Liquidity Taking Delay that seeks to introduce a delay of 350 microseconds for liquidity-taking orders before they are processed by the CHX order book. The LTAD is a direct response to recent declines in CHX volume and liquidity in the SPDR S&P 500 trust exchange-traded fund (“SPY”).

John Kerin

John Kerin, CHX

In an interview with Traders Magazine, John Kerin, CEO of CHX and AJ Kim, VP and Associate General Counsel, said that the exchange had selected the exact same time delay as IEX employs  – 350 microseconds – in part so that it can halt latency arbitrage and gaming within its marketplace. The delay, they said, will be instrumental in bringing back more liquidity providers to the Midwest-based exchange and further establish it as a venue of choice for the buy-side.

“We chose 350 microseconds as it’s the same number that that the SEC approved for IEX and thus the market has already evolved to accommodate this nuance in order to see more orders return to lit markets,” Kerin explained. “We noticed there were some in our marketplace that were using latency arbitrage on a subset of securities. This in turn caused some of our liquidity providers to reduce their activity to the detriment of the investing public.”

And CHX wants them back. Now.

The SEC is currently reviewing CHX’s petition for the implementation of the speed bump of delay in order execution. CHX said that it believes that the best way to minimize the effectiveness of latency arbitrage strategies on CHX with respect to resting limit orders is to implement an asymmetric delay, such as LTAD, to deemphasize speed as a key to trading success.

The exchange originally submitted is proposal back on September 16th because of trading behavior it noticed back in January of this year.

The regulator recently extended the comment period on the proposed change to further explore the delay. The regulator did the same when evaluating IEX’s business model and exchange application.

Interactive Brokers recently wrote to the SEC that they support CHX’s delay proposal.

“We support the proposal and believes it will have a positive impact on equities market structure with potential applications in other asset classes. The CHX proposal is similar to the more broad based, recently SEC approved 350 microsecond delay introduced by IEX,” Interactive wrote. “The proposed delay falls squarely within the SEC’s own interpretation of Rule 611 under Regulation NMS (Order Protection Rule) allowing for a de minimis intentional delay in order processing.”

Furthermore, Interactive wrote that the CHX functionality is also similar to the one advocated in a letter dated May 8, 2014 from its own Chairman Thomas Peterffy to Stephen Luparello, Director, Division of Trading and Markets, in which Interactive proposed the introduction of a randomized delay specifically applied to orders taking liquidity.

CTC Trading Group has also come out in support of the proposed delay.

However, as with IEX’s speed bump delay, LTAD has its detractors. Both Citadel and HRT have come out against the proposal. They cite that the delay is discriminatory against retail investors and liquidity takers. CHX counters that its delay, is long enough to neutralize microsecond speed advantages utilized by latency arbitrageurs, but is also too short to provide any incremental advantage to liquidity providers to react to information not already in their possession.

“We are very optimistic that LTAD will result in tighter and deeper markets and we believe we have presented a strong data-driven case for the SEC to evaluate,” said Kim.

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