Exchange Speed Bumps: Needle Movers?
As NYSE plans to incorporate a 350-microsecond delay into its rebranded NYSE American exchange, industry observers question what impact speed bumps actually will have on the broader marketplace.
“I don’t know if it is a ‘must-have,’ but [the proposed speed bump] allows NYSE to compete in another aspect of how trades are executed,” said Richard Repetto, principal, equity research at Sandler O’Neill & Partners. “Since the regulators have now approved the speed bump, you are likely to see the other exchanges introduce that facet into their business model as well.”
The U.S. Securities and Exchange Commission started the race for delayed access in June 2016, when it granted the Investor’s Exchange exchange status and interpreting that de minimis delays in accessing stock prices did not violate the SEC’s Order Protection Rule as long as the delays were less than a millisecond.
Subsequently, Nasdaq announced in August 2016, and filed with the SEC in November, its plan to introduce its Extended Life Priority Order. The new order-type attribute would provide priority to orders in the execution queue that rest in the order book for a minimum of a second over other displayed orders in the same order book. Nasdaq would then disseminate orders tagged with the new attribute via the exchange’s proprietary TotalView ITCH data feed.
A month later, The Chicago Stock Exchange file a request with the SEC to implement its Liquidity Taking Access Delay. The proposed feature would delay new incoming orders that come in during the exchange’s Open Trading State and could immediately execute against one or more resting orders in the order book for 350 microseconds before releasing the order to its matching engine. However, outbound messages or market data would not be subject to the delay, according to the CHX’s filing.
Under NYSE’s proposal, the exchange operator would have a 350-microsecond delay upon order entry as well as for proprietary data feeds and outbound routing.
“While we’re flattered by the imitation, investor protection is a philosophy, not a single product or order type,” said an IEX spokesperson. “NYSE could improve the markets by consolidating their venues and superfluous order types, and eliminating maker-taker rebates and excessive data & co-location fees – but to do so would hurt their bottom line.”
Even if the SEC approves the rule change requests from all of the exchange operators, Repetto doubts that it would move the needle in terms of market share.
“I’m not expecting any dramatic changes here on how market share will be split across exchanges,” he said. “This will allow the other exchanges to compete with that feature of the exchange model now that it has been approved by the regulators.”
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