Wednesday, August 31, 2016
America's stock market is slowing down
There's a new trend in trading: going slow.
The Chicago Stock Exchange this week outlined plans to adopt what it calls a Liquidity Taking Access Delay, a 350-microsecond delay for those who trade against resting orders on the exchange.
The Chicago Stock Exchange said in the filing that the LTAD was designed to neutralize high-speed traders engaged in latency arbitrage. In plain English, it is trying to stop buyers from taking advantage of out-of-date prices.
The simple way to explain this is to think of a scenario in which there are 13 different versions of eBay. Buyers and sellers are active across all 13 sites, and in theory a pair of sneakers on eBay1 should be the price as the same pair on eBay2.
Given the dynamic pricing, however, there are occasions in which buyers get to an old price before the seller can change it, or vice versa. That's kind of what is happening to the Chicago Stock Exchange.
Here's how the filing describes latency arbitrage:
"'Latency arbitrage' means the practice of exploiting disparities in the price of a security or related securities that are being traded in different markets by taking advantage of the time it takes to access and respond to market information."
The filing says:
"LTAD is designed to neutralize microsecond speed advantages exploited by low-latency market participants engaged in latency arbitrage strategies that diminish displayed liquidity and impair price discovery in national market system ("NMS") securities."
The move is in response to a change in the trading of the SPDR S&P 500 trust exchange-traded fund. The exchange said it first noticed latency-arbitrage activity in the SPDR in January and as a result of this market makers had "dramatically" reduced displayed liquidity. The filing said:
"The Exchange 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 de-emphasize speed as a key to trading success."
Now, if all this sounds familiar, it is because it is.
IEX, the company founded by the heroes of Michael Lewis' book "Flash Boys," is known for its "speed bump," a 350-microsecond delay. The trading venue is launching as an exchange, having won regulatory approval in Julyafter a drawn-out and often ugly consultation process.
The New York Stock Exchange and the Nasdaq, two establishment exchanges that had fought against IEX's approval, have announced their own features.
The NYSE has introduced a Discretionary Pegged Order, which IEX has said is a copy of an order type it created. The Nasdaq in mid-August introduced what it calls an Extended Life Order. Nasdaq CEO Bob Greifeld told Bloomberg TV that the feature was designed to reward investors willing to put in an order in a minimum period of time.
"If you want to put an order in for a longer period of time, we will give you a reward," he said, adding: "You're going to go to the front of the queue, so that means you'll get the earlier execution."