Markit’s Weisberger: IEX ‘Speed Bump’ Won’t Solve Latency Arb
No it won’t.
That’s what David Weisberger, head of trading and managing director at Markit has to say about the benefits of the time delay, or ‘speed bump’ that trading venue IEX argues will protect investors against latency arbitrage if its exchange application is approved by the U.S. Securities and Exchange Commission.
IEX argues that one of its main benefits is its 350-microsecond delay for all orders, which reduces the likelihood a latency-sensitive trader will execute a small arbitrage order ahead of a larger institutional order. The delay, IEX and many buy-siders have said, promotes a better trading experience in the form of larger trade executions, better price discovery and enhanced liquidity. If IEX were a public exchange instead of the alternative trading system it is now, IEX and its supporters say, these benefits would reach farther into the mainstream investing public.
Weisberger doesn’t buy the argument.
“IEX saying that their delay would help protect investors against latency arbitrage if they were an exchange is simply false,” Weisberger told Markets Media in an interview. “The delay will provide absolutely no protection for displayed, priced orders on IEX. If those orders are the last ones executed at a particular price, the investors will just find out about the trade 350 microseconds later.”
Weisberger went on to say that he has asked many supporters of IEX to explain how their speed bump protects priced, displayed orders, and none have been able to.
“To be clear, their speed bump is a good idea for a dark pool, but does nothing for displayed and priced orders,” he said. “Thus, the only way that they could protect displayed orders is if they added a displayed, pegged order type.” That would be bad for the market, he said, since it would significantly reduce the incentive to place firm, priced and displayed orders.
“Pegged orders contribute much less to price discovery since they can’t set a price and, if they reprice when other markets move, are not firm,” Weisberger said.
Weisberger said he still believes the SEC should approve the IEX exchange application with conditions, despite the speed bump issue. While he agreed that approving IEX’s application will allow the market to determine the value of their speed bump and pricing model, it is equally important to ensure that no regulatory advantage is provided to IEX or exchanges as a group.
“To accomplish this, we recommend that the SEC make the approval conditional upon IEX’s affiliated routing broker being subjected to the same delays as all other routing brokers,” Weisberger said. “I further suggest that IEX be required to clearly disclose their execution quality statistics for individual client segments and types of orders as part of marketing materials. I believe that such an approval order would accomplish the goal of supporting innovation, while mitigating the risks that approving IEX’s current model would create.”
Featured image via Dollar Photo Club
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