05.17.2017
By John D'Antona

CHX Discusses Changes to ‘Speed Bump’

Back in the 1970s when disco was king, the ‘bump’ dance was the craze. Nowadays, doing the bump is becoming the craze among stock exchange marketplaces – or trying to have one.

A speed bump that is.

Nasdaq, NYSE and CHX have all petitioned and/or filed with the Securities and Exchange Commission to incorporate some sort of trading delay or speed bump to promote trading on their respective exchanges. Tuesday, the SEC approved NYSE’s petition for such a bump on its NYSE American exchange. The goal of the delays is to bring more trading volume into the public venues and away from dark pools and other off-board locations, not to mention weed out so-called predatory traders who use speed and other clandestine methods to sniff out and front run institutional traders’ orders.

James Ongena, CHX

Of course, this follows the trading model at IEX, which became the first exchange to have a 350 microsecond speed bump as part of its execution and order methodology. CHX was the first exchange after IEX to file for a similar speed bump mechanism (Liquidity Enhancing Access Delay – LEAD) and has been in a war or words with its two larger exchange brothers in New York and others.

To recap, LEAD will delay all incoming messages, with the exception of liquidity providing orders and cancel messages for resting orders submitted by LEAD Market Makers (LEAD MMs)—who will have to meet heightened market quality standards. LEAD is designed to enhance displayed liquidity by minimizing the effectiveness of latency arbitrage strategies.

In a response to SEC comment letters and shared with Traders Magazine, CHX’s General Counsel James Ongena wanted to make it clear that it wasn’t just the exchange itself that benefits by a slowing of trades.

First, CHX pointed out that LEAD benefits both retail and Institutional Investors, not just the LEAD MMs. “In minimizing the effectiveness of latency arbitrage, this initiative would allow LEAD MMs to quote tighter spreads and display larger size?—?this will provide valuable liquidity and price discovery to all market participants, particularly retail and institutional investors, which rely upon efficient price discovery to evaluate the quality of their executions, regardless of where they occur in the NMS,” Ongena said.

“In particular, the 350 microsecond delay will not completely eliminate instances of latency arbitrage at CHX and, as such, a LEAD MMs will still be subject to material risk when providing liquidity at CHX,” he told the SEC.

Secondly, CHX said the requirements to becoming a LEAD DMM are equal to, or in some cases, more demanding than, requirements for DMMs on the New York Stock Exchange and “Competitive Liquidity Providers” (CLPs) on the BATS BZX exchange.

Thirdly, in a direct response to several comment letters that said implementation of LEAD would skew the risk/reward balance negatively in the marketplace, the exchange says that’s not the case.

“Altering that balance is the entire point of this initiative?—?currently, the prevalence of latency arbitrage means that the risk of posting displayed liquidity often outweighs the rewards. LEAD attempts to change that.”

Furthermore, Ongena told the SEC  – and commenters – that for the avoidance of doubt or conflict, CHX provides its book feed free of charge to anyone that signs a terms of use agreement and under no circumstances does the it provide preferential access to the CHX book feed to anyone – IE the LEAD DMMs, as some argued.

Finally, CHX said its proposal is in line with the Firm Order and Oder Protection Rules as written.

“We believe that LEAD is (in fact) a de minimis delay so short as to not frustrate the purposes of the Rule 611 by impairing fair and efficient access to the Exchange’s quotations. In particular, all who seek to take liquidity from the CHX book will have fair and efficient access to CHX quotations in that LEAD will apply to all liquidity taking orders.”

Also, LEAD would not result in “maybe” quotations, as a LEAD MM would never be informed by CHX of its receipt of a marketable contra-side order, the exchange argued.

“Alternatively, when considering that any protected quotation today may be cancelled or adjusted prior to execution, LEAD would not render CHX quotes any more “maybe” than they are today,” Ongena said. “Also, the 350-microsecond delay is so short that it does not provide an incremental advantage to a LEAD MM other than neutralizing a structural bias that permits latency arbitrageurs to profit off of symmetric public information.”

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