Chicago Stock Exchange plans new speed bump to curb fast traders

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By John McCrank | NEW YORK

NEW YORK 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 is still
under review by the U.S. Securities and Exchange Commission.

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 in August proposed an “extended life”
order type that would deemphasize speed.

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