10.12.2016

Yet Another Stock Market Speed Bump Divides Some Top Traders

(this article first appeared on Bloomberg)

The latest proposal to slow down the U.S. stock market has divided some of the fastest traders.

The Chicago Stock Exchange wants to delay certain kinds of trading, arguing it would make the market fairer by blunting advantages of some speedy traders. Hudson River Trading LLC urged regulators to reject the plan, saying in a letter dated Thursday that it would unfairly boost a subset of traders.

“CHX is proposing to implement a feature that allows it to pick winners and losers,” Adam Nunes, head of business development at New York-based Hudson River, wrote in the letter. “It has no reasonable justification for why it is attempting to discriminate among its market participants, and CHX’s commercial interests should not allow it to unfairly discriminate among its members or to put an undue burden on competition among competing exchanges or among its members.”

In opposing the speed bump, Hudson River split from competitor Virtu Financial Inc., an early cheerleader for CHX’s proposal. The divergence has echoes of a recent controversy over IEX Group Inc., which just opened the Investors Exchange that features a 350-microsecond speed bump on orders. IEX’s approval process generated huge amounts of scorn from critics and praise from supporters. Hudson River opposed IEX applying a speed bump to its exchange, while Virtu said the delay had “no impact” on its own trading strategies.

There’s a crucial difference in the Chicago market’s plan to delay its own market: while IEX slows down all traders, the CHX delay will only apply to traders that “take” liquidity — in other words, only traders attempting to buy or sell against a quote posted on the market.

That selective trait is a problem, Hudson River argued, because it favors trading firms that want to post quotes on the venue. Meanwhile, the firm said, it would make it harder for traders to understand the fair prices of securities, and get in the way of efficient pricing of exchange-traded funds and futures.

Virtu was the first to publicly endorse CHX’s idea, saying that it would encourage market players to post larger orders at better prices on the exchange, because it would scupper “speed arbitrageurs” that race from East Coast exchanges to Chicago to “pick off” quotes.

The Chicago Stock Exchange is one of the smallest U.S. stock exchanges, handling less than 1 percent of nationwide volume, according to data compiled by Bloomberg. It’s also a takeover target. Chongqing Casin Enterprise Group, a China-based firm, is trying to buy it.

 

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