Chicago-based exchange holding company Cboe Global Markets Inc. recently filed with the Securities and Exchange Commission (“SEC”) a proposal aimed at slowing down high-frequency trading and boosting liquidity by introducing a split-second delay (“speed bump”) feature on its Cboe EDGA Equities Exchange, the smallest of the four equities exchanges run by Cboe. Advocates of speed bumps, which impose a short delay on orders to trade stocks, say that the proposed protections can stop fast traders who make money by predicting miniscule market moves and swiftly buying or selling shares before anyone realizes that prices are fluctuating.
Cboe contended in its proposal that, if the speed bump is implemented, a liquidity-taking order that reaches EDGA would automatically pause for four milliseconds before trading with resting orders on the order book. According to Cboe, this would allow liquidity providers to take more risks and quote tighter spreads with time to re-price resting orders before devious traders can trade at old prices. Cboe noted that this system would be the first-ever delay mechanism in the U.S. equities market that would be “asymmetric” to protect liquidity providers.
The reviews of Cboe’s proposal are mixed. Eric Swanson, CEO of London-based proprietary trading firm XTX Markets LLC, wrote in an SEC comment letter that “the race for speed in trading has reached an inflection point where the marginal cost of gaining an edge over other market participants, now measured in microseconds and nanoseconds, is harming investors.” Swanson added that the proposed speed bump would allow “liquidity providers to narrow spreads and display larger size for the benefit of end investors while simultaneously reducing the barriers to entry for new liquidity providers who may have risk absorption appetite and unique pricing and time horizons.” On the other end of the spectrum, Larry Tabb, founder and research chairman of market research firm TABB Group, expressed his skepticism with the speed bump idea, writing in a comment letter that while Cboe “does make some compelling arguments about the risk of liquidity providers being picked off … it overtly makes our market uneven.” Stephen John Berger, Citadel Securities Managing Director and Global Head of Government & Regulatory Policy, shared the assessment that the Cboe speed bump would make our market uneven, writing that it would unjustly discriminate against other market participants and create an unfair advantage for “a small subset” of high-speed proprietary trading firms looking for market changes “at the expense of all other market participants including retail and institutional investors.”