March 9, 2020 All Industries
The U.S. Securities and Exchange Commission has rejected a controversial push by the Chicago Board Options Exchange (CBOE) to add a slight delay to certain types of trades.
Speed bumps can impact how a company’s shares exchange hands, impacting the price they’re traded at and the velocity in which they move. For smaller, less-liquid companies, it’s a way to prevent larger investors from gaining a trading advantage in the shares. The CBOE’s measure had many supporters, but also garnered a great deal of criticism. The SEC’s decision doesn’t completely close the door on future efforts by exchanges to prevent alterations related to high-speed trading from moving forward. But it could dampen any plans.
Last year, the CBOE filed an application with the SEC to add what’s commonly called a “speed bump,” or a delay in certain types of trades. In this case, the CBOE sought a 4-millisecond delay for certain orders on its EDGA Equities Exchange — while others would be processed as normal. The CBOE sought the change to give the exchange a moment to re-price orders, preventing high-tech traders from cashing in while order prices remained stale.
“The risk introduced by microsecond-level pick-offs, and the corresponding cost of the never-ending arms race for speed, has resulted in less-attractive pricing and inferior displayed liquidity on many markets and in many asset classes,” wrote Steve Crutchfield, CTC LLC’s head of market structure, in a comment letter in favor of the proposal, according to S&P Global Market Intelligence. “Asymmetric speed bumps are an efficient way to mitigate this risk and once again encourage competition to display liquidity.”
If approved, the bump would have been 10 times longer than any other delay on a U.S. exchange. The exchange run by the Investors Exchange Group became the first to have a speed bump when it launched with a 350-microsecond delay in 2016. The New York Stock Exchange instituted a similar delay on trading within its small-cap market that same year, but no longer utilizes the bump.
CBOE’s proposal received a significant amount of pushback from the likes of Citadel Securities, BlackRock and T. Rowe Price Group. They argued that the CBOE bump would unfairly advantage a small group of trading organizations, “at the expense of all other market participants including retail and institutional investors,” wrote Stephen John Berger, Citadel Securities’ managing head of government and regulatory policy, in a response to the proposal.
The SEC ruled that the CBOE had not “demonstrated why a 4-millisecond delay is sufficient time to effectively protect a wide range of market participants from the latency arbitrage issue,” according to the ruling.
In the short term, it could lead to a freezing of the trend towards using speed bumps to prevent some high frequency trading tactics, such as trading on mispriced shares.