06.17.2019
By Rob Daly

OPINION: Everything Slow is New Again

Whether it is the Men in Black, John Wick, or the X-Men, the summer sequels are upon us. Some offer new characters and settings, but the filmmakers and studios want to keep some of the magic that the audience found in the original movies.

In this spirit, is not the time for the US Securities and Exchange Commission to develop and release Regulation NMS II: Electric Bugaloo?

The regulator, market participants, and exchange operators have been nibbling around the edges of revamping the national market structure for the past several years with various pilots and discussions regarding SIP reform.

Cboe Global Markets has filed the most recent request to tweak the market’s structure with its Liquidity Provider Protection feature that would act as a speedbump for its EDGA exchange.

Unlike the speed bumps the SEC has approved for the Investors Exchange and NYSE MKT, EDGA’s speed bump would not be symmetrical, applying the delay to inbound and outbound messages. Instead, the exchange operator proposes an asymmetrical speed bump that would only apply the four-millisecond delay to incoming liquidity-taking orders on the Cboe’s inverted exchange.

The idea behind the delay is to reduce the latency arbitrage occurring between orders sent from the CME’s data center in Aurora, Illinois to Cboe’s data center in northern New Jersey.

“The four milliseconds is the relative difference between messages sent via microwaves and standard fiber,” Bryan Harkins, executive vice president, co-head of markets division at Cboe, told Markets Media.

The delay would not affect inbound and outbound market data feeds, and the exchange still would use real-time market data for compliance and pricing orders pegged to the NBBO.

However, Cboe could run afoul of the Order Protection Rule if it treated the affected orders as automated quotations under Reg NMS, since the longest intentional delay an exchange may introduce is less than a millisecond, according to guidance by the SEC’s Division of Trading and Markets.

To avoid this, EDGA plans to treat its delayed quotations as manual quotations, which would remove their protected status.

More than a dozen years after the SEC the implementation of Regulation NMS to prod “slow” exchanges to become “fast” markets, an all-electronic exchange intentionally is converting a fast market into a slow one.

How market participants would interact with unprotected quotes, if approved by the SEC, raises serious best execution and compliance questions as well as yet another industry discussion regarding the future market structure.

Wouldn’t be easier to address market structure changes via a centralized approach like the SEC originally did with Reg NMS?

Let’s skip the trailers and jump to the main feature.

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