| NEW YORK, April 4
NEW YORK, April 4 U.S. stock exchanges that
spent decades speeding up markets with cutting-edge technology
are now rushing to slow them down.
The New York Stock Exchange, Chicago Stock Exchange and
Nasdaq Inc are all awaiting decisions by the U.S.
Securities and Exchange Commission on whether they can delay
trades through so-called "speed bumps" and new order types.
The SEC is expected to approve or reject their proposals in
the coming weeks.
The about-face comes after advances in technology made it
possible to complete trades almost at the speed of light,
prompting concerns by some market participants that
sophisticated high-frequency traders were eating the lunch of
Exchanges have profited from selling specialized services to
high-frequency traders, which make up more than half of U.S.
trading volume. But now they are looking at ways to attract a
wider range of investors, at least to certain of their trading
venues, or are making sure they are keeping up with each other.
The SEC approved the market's first speed bump last year,
but rules around intentionally slowing down trades are vague and
it is difficult to predict which, if any, of the proposals will
pass. SEC staff are scrutinizing how each exchange justifies its
plans, said a person familiar with the matter.
"Whenever you have something that applies to one group and
not others, it's discriminatory in some sense," said the person,
who asked for anonymity as they are not authorized to speak to
the media. "The question is, can you justify the
The proposals follow the launch of IEX Group, which burst
onto the scene last August with the market's inaugural speed
bump and other features they said would level the playing field
and protect small investors from high-speed trading chicanery.
Other exchanges were some of IEX's fiercest opponents and
there is still a heated debate about whether the upstart is as
altruistic as it was portrayed in Michael Lewis's best-selling
book "Flash Boys: A Wall Street Revolt." However, its new way of
doing business ultimately forced rivals to rethink their own
Exchanges' reputations hinge on their ability to execute
orders quickly and seamlessly for brokers, which are required to
get customers the best market prices.
Lewis's book scandalized Wall Street with its claim that
exchanges were rigging the market by allowing high-frequency
traders to use their speed to effectively jump the queue of
orders from ordinary investors, known in the industry as
"latency arbitrage." Many on Wall Street dispute that such a
Nevertheless, high-frequency trading firms pay exchanges
huge sums for near light-speed market access and data to drive
their algorithms, and have become an increasingly large player
in the stock market over the past decade.
IEX ran counter to the trend by establishing an exchange
that does not make speed the primary factor and does not sell
things like access to microwave and laser data feeds that give
ultra-fast traders an edge. The approach appealed to many
customers, including several institutional investors, and the
exchange now has 2 percent of the U.S. stock-trading market.
Most traditional exchanges initially opposed IEX's
speed-bump proposal, but have since had a change of heart, since
it has become clear that some investors want to see such change.
"The SEC, by approving IEX's exchange application, has
opened up the marketplace for the potential for innovation
around market structure that really has not been available to us
for the last almost 10 years," said Nasdaq Chief Executive Adena
In giving IEX the green light, the SEC said exchanges could
pause trades for up to a millisecond, as long as the delays were
not unfairly discriminatory or anti-competitive.
The NYSE, which is owned by Intercontinental Exchange Inc
, essentially wants to copy IEX's speed bump, as well as
an order type the startup pioneered. NYSE argues that while it
previously said the model was bad for the market, some
institutional investors prefer it and NYSE should be allowed to
offer them the choice.
NYSE, whose chairman once called IEX "un-American," also
plans to rename its proposed speed-bump exchange NYSE American
from NYSE MKT. NYSE's main New York Stock Exchange market would
In contrast, the Chicago Stock Exchange put forward a
speed-bump plan that some brokers can bypass if they meet strict
requirements to provide quotes for others. In doing so, it hopes
to create more liquidity.
Rather than a speed bump, Nasdaq wants to introduce an
"extended life" order type. It would apply only to orders
generated by regular, mom-and-pop investors, who tend to be less
informed and therefore coveted by professional traders. The
orders would sit exposed for at least a second and then jump
ahead of other investors to get filled.
Wall Street lacks consensus on whether the proposed delays
are a good idea.
Some high-frequency trading firms have asked the SEC to deny
the proposals, arguing that various time lags across 13
exchanges would make it difficult to know the true price of a
stock at any given time.
For its part, IEX has asked the SEC to reject NYSE's
proposal. In an interview, Chief Market Policy Officer John
Ramsay characterized some rivals' plans as disingenuous.
"The speed bump is just one piece of our market design and
it's designed to work with all of the other pieces in tandem,”
said John Ramsay, IEX's Chief Market Policy Officer.
Others support the new developments.
"The only one this impacts is the guy whose business model
is to rely on speed in somewhat, I would argue, a pernicious
manner," Doug Cifu, CEO of trading firm Virtu Financial Inc
, said in an interview.
(Reporting by John McCrank; Editing by Lauren Tara LaCapra and