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Chicago Stock Exchange plans new speed bump to curb fast traders
February 6, 2017 / 10:14 PM / 9 months ago

Chicago Stock Exchange plans new speed bump to curb fast traders

(Corrects paragraph 6 in Feb. 6 story to say earlier CHX speed bump proposal was withdrawn from the SEC, not that it was under review by the SEC)

A trader looks at an order board in Chicago, January 25, 2012. REUTERS/Frank Polich

By John McCrank

NEW YORK (Reuters) - The Chicago Stock Exchange has proposed a new speed bump that certain traders could bypass if they agree to strict trading obligations on the exchange aimed at making it easier for others to buy and sell stocks, according to a regulatory filing.

The move is the latest attempt by an exchange to address concerns by some investors that while decades of technological advances have cut trade execution times to near light speed, it is now nearly impossible to compete with the fastest trading firms for the best market prices.

The speed bump will help prevent opportunistic traders from exploiting the tiny differences in time it takes to price securities across 13 U.S. stock exchanges, CHX said in the Feb. 3 filing.

CHX said it has noticed “latency arbitrage” - when speedy traders detect a price change on one exchange and then race ahead to other exchanges to pick off quotes at stale prices - on its exchange. The practice has led firms that quote buy and sell prices for others to trade against to step back from the market, CHX said.

Firms that agree to trade and quote a specific amount on the exchange would bypass the proposed 350 microsecond pause for incoming orders, giving them time to update their prices.

Last August, CHX proposed another speed bump that would apply to all liquidity-taking orders. That proposal was withdrawn from the U.S. Securities and Exchange Commission on Feb. 3 and the new proposal was meant to replace it.

Supporters of speed bumps say they even the playing field for fast and slow traders, while detractors say the mechanisms further complicate an already complex market.

Author Michael Lewis wrote about the inner workings of the market, with its throng of look-alike electronic exchanges linked by fiber optic cables and a tangle of regulations, in March 2014’s “Flash Boys: A Wall Street Revolt.”

The book claimed exchanges reap huge profits by giving high-frequency traders systemic advantages over institutional investors. It followed the founders of IEX Group as they planned to create the first speed bump-equipped exchange.

IEX launched the Investors’ Exchange last August, taking a 2 percent market share.

The incumbent exchanges have begun to respond.

The New York Stock Exchange said on Jan. 25 its sister exchange, NYSE MKT, will be renamed NYSE American and include a speed bump and other features similar to IEX.

Nasdaq Inc (NDAQ.O) in August proposed an “extended life” order type that would deemphasize speed.

Reporting by John McCrank; Editing by Phil Berlowitz

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