In case you missed it, Investors’ Exchange LLC (IEX), which the SEC approved last June as the first new national stock exchange since 2010, began operations on September 2, 2016 according to its website. This is newsworthy because IEX is the first national securities exchange to employ a “speed bump” that actually slows the processing of orders in an effort to even the playing field for investors lacking access to high speed trading technology.
The SEC also issued an updated interpretation of Regulation NMS, which generally prohibits trading centers from executing trades at inferior prices. The updated interpretation now requires trading centers to honor automated securities prices that are subject to a de minimis delay, or speed bump, when being accessed. The staff guidance states that delays of less than one millisecond (one thousandth of a second) are deemed to be de minimis.
The IEX speed bump slows orders by 350-millionths of a second, which seems de minimis indeed. IEX says its delay is designed to be just long enough to protect investors from high-speed traders that front-run the orders of slower investors. It accomplishes this delay by employing a 38-mile coil of optical fiber placed in front of its trading engine, which adds a round-trip delay of 0.0007 seconds. As a result, individual IEX members with faster technology do not have a speed advantage over other members in accessing stock quotes and executing trades.
IEX’s application for national securities exchange status was not without opposition. Various competitors and high-speed traders argued that any delays in order processing would result in stale prices and the potential for manipulation. The SEC was not persuaded, however, as evidenced by this quote from SEC Chair Mary Jo White:
“Today’s actions promote competition and innovation, which our equity markets depend on to continue to deliver robust, efficient service to both retail and institutional investors. A critical role of the Commission’s regulatory framework is to facilitate the ability of market participants to craft appropriate market-based initiatives, consistent with our mission to protect investors, maintain market integrity, and promote capital formation.”
At the moment, IEX processes a tiny percentage of all market trades, and it will be interesting to see if its market share shoots up over time in response to investor concerns over the supposed unfair advantages of high-speed trading. It will also be interesting to see whether high-speed traders simply find another way around speed bumps through the use of new technology or otherwise. In addition, various other national securities exchanges, including NYSE and Nasdaq, are now exploring the use of speed bumps, which may well become standard practice before long. The SEC also is curious, having promised to conduct a study within two years as to “the effects of any intentional access delays on market quality, including asset pricing….”
It’s rare that such a hyper-technical development has the potential to significantly change how the securities markets operate. Stay tuned.