08.31.2016
By John D'Antona

CHX Proposes New Liquidity Taking Order that Incorporates Delay

The Chicago Stock Exchange, in a move designed to promote public market trading and displayed liquidity, has proposed new rule filing with the Securities and Exchange Commission.

The new rule filing, which CHX dubbed “Liquidity Taking Access Delay” or LTAD, incorporates a speed bump or delay in how an order is routed. The speed bump or delay concept is similar to what exchange operator IEX uses in its routing but, as CHX’s described, is different. However, CHX, like IEX, wants to bring liquidity back to the lit or public trading markets and away from the dark pools or other off-board trading destinations.

LTAD is a direct response to recent declines in CHX volume and liquidity in the SPDR S&P 500 trust exchange-traded fund (“SPY”), which the Exchange attributes to latency arbitrage activity in SPY first observed at CHX in January 2016.

In its filing, CHX said 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 the National Market System. LTAD would require all new incoming single-sided orders received during the Open Trading State7 that could immediately execute against one or more resting orders on the CHX book, as well as certain related cancel messages, to be intentionally delayed for 350 microseconds before such delayed messages would be processed by the Matching System.

“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 deemphasize speed as a key to trading success,” The filing read. “By delaying liquidity taking orders, and not delaying liquidity providing orders and related adjustment messages, LTAD would give liquidity providers a small amount of additional time, the same length as the Investors Exchange LLC (“IEX”) POP/coil delay (“IEX Delay”) recently approved by the Commission, to cancel or adjust resting orders on the CHX book to comport to the most recent market data before latency arbitrageurs could take such orders at potentially “stale” prices.”                                                                                                                                           

The filing continued that all other messages, including liquidity providing orders (i.e., orders that would not immediately execute against resting orders) and cancel messages for resting orders, would be immediately processed without delay. LTAD will not delay any outbound messages or market data.

The proposed rule change was filed on on August 29.

According to CHX, the Windy City exchange is the first exchange to propose its own speed bump to the SEC since IEX became an exchange just a few weeks ago.

First, LTAD is applied equally to any and all liquidity taking orders.

Secondly, LTAD encourages those providing liquidity to make tighter and deeper markets, which CHX said is good for the investing public.

Thirdly, LTAD encourages displayed liquidity by protecting orders from adverse selection during price transitions.

Lastly, the order type allows firms the opportunity to appropriately reprice their orders during market transitions.

The LTAD filing comes ahead of a similar new order type being developed by Nasdaq. The New York-based exchange has informally announced it is planning to launch ELO – the Extended Life Order. ELO would be given priority over other orders of similar price (but could be immediately cancelled) no matter when the orders were placed. According to Richard Repetto, analyst at Sandler O’Neill, this essentially creates a “price/commitment/time” priority market vs. the current price/time market that most traders have become accustomed to in the U.S.

Nasdaq plans to make the new order type available for use by the end of the year.

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