By Nick Baker February 13, 2019, 3:11 PM CST Updated on February 13, 2019, 4:03 PM CST Intercontinental Exchange Inc.’s futures market wants to join the battle against the fastest traders. The Atlanta-based exchange plans a 3-millisecond trading delay, or speed bump, for its gold and silver futures contracts, according to a regulatory filing. The U.S. Commodity Futures Trading Commission on Wednesday asked for public comment on the proposal. popularized the idea of using speed bumps to curb the light-speed pace of modern financial markets and prevent alleged abuses of so-called high-frequency traders. Lewis’s protagonists, the founders of IEX Group Inc., introduced a delay on their stock exchange in 2016, and a tiny equities market ICE owns, NYSE American, also has one. But this latest move would bring a speed bump to derivatives markets. The delay would be introduced “initially” for gold and silver, areas where ICE currently does very little business. An ICE spokesman declined to say whether it would later be applied to other markets. ICE is a leader in other products such as oil futures. Three milliseconds, or 0.003 seconds, is about four times longer than a baseball stays in contact with a bat when hit. It’s a long time in this computer-driven era of trading, almost 10 times longer than the speed bumps used by IEX and NYSE American. Time stamps on trades are often given in nanoseconds, and there are a billion of those in a single second. The delay could prevent the fastest traders from picking off stale quotes in ICE’s order book. The exchange’s rival, Chicago-based CME Group Inc., dominates the metals market. When gold and silver prices move at CME, the ICE speed bump could protect its customers. “This short delay helps level the playing field by giving all traders who have placed a resting order additional time to react to price changes in related markets,” according to the exchange’s filing with the CFTC.
Matt (being a bona fide HFT person, FWIW) has been ranting about speed bumps for a while, but it's not always applicable. In this particular case, they are delaying aggressive orders only but the passive trader will not be notified of the incoming aggressive order. It's pretty clever, as they are allowing liquidity providers to react to external information (e.g. markets on other exchanges) yet the actual incoming aggressor is unknown to them.
So if liquidity providers can quickly withdraw liquidity when market conditions change, are we going to essentially have auction markets ... @ Limit up or limit down? So MMs will make money capturing spread in normal conditions but all the risk will be obsorbed by the investor/trader when things get wild? Nice. What is the point of having real time anything then ... Let's just all trade using MOOs and MOCs.
Dude, it simply prevents faster arbitrage players from aggressing on the slower passive players. If anything, the delay would reduce negative selection and should improve liquidity.
This actually is done to foster liquidity as providers assume they won't get picked off by HFT reading the private feed instead of the SIP in securities and the tape in futures. The IEX model.
Hm, I guess us - retail traders - will benefit greatly by 3 millisecond delay. This kind of speed bump is to allow firms who have enough money to co-locate and get fast market data (like members and MMs) to withdraw liquidity before they get run over by HFTs(who have superior technology). So guess who's gonna be left "providing" liquidity? Why don't we implement "last look" instead?
Retail would benefit a ton if more liquidity was lit and trading came back to the "lit" venues. Institutional would benefit even more. Liquidity providers don't withdraw liquidity - they just offer it in a "dark" environment. The "speed bump" is an attempt to bring liquidity and transparency back to a lit venue. HFT has been eating retails lunch for the last decade. HFT profitability appears to be declining as the industry figures it out, but it sucked billions out of user's pockets. ICE using a speed bump is a very interesting development. They recently bought the CHX which also had an approved SNAP auction and a speed bump proposal that was not yet approved. Be interesting to see if they use the CHX as a test bed for a speed bump. The speed bump isn't solely about time - it's about leveling the playing field for private feed and public quotes. 15 soon to 16 options exchanges and how many stock venues? Any of them losing money? Hopefully, the new form 606 when it comes out midyear will shed some additional light and the MEMX will have some impact.
Maybe I'm not understanding this correctly, but the only reason to introduce asymmetric delay is to allow liquidity providers to cancel (fade) their "stale" orders, right? So why don't we really level the playing field ... measure round trip time from exchange to half way around the globe and set the delay based on that? This way, it's fair for EVERY market participant, not just the select few. Introducing speed bumps is equivalent to making pot holes to level the field for the Amish.
It's a long answer, but it's not solely about pulling quotes. It's about making markets for end-users who will come back. In the U.S. it has become lather, rinse, repeat. Almost 40% of U.S. stock volume is dark - how does that help liquidity and transparency. End users can't access lit liquidity so they go to dark venues. So providers put more liquidity dark or just keep it upstairs. Or potentially worse end -users just bypass the lit venues and trade everything dark. In options, three firms are about half the volume and they are HFT running an index correlated book. Much of their liquidity is hidden on a lit exchange Again a much more complicated answer, but if I'm making markets in XOM - I trade against my entire inventory of stock, options and a correlated index. I'm basically trading the Rsquared of the name and volatility. I don't care if its XOM, IBM, JNJ pick a name. What's wrong with all this - your aggregate trading friction is higher(you may be paying less overall - but you are paying more overall friction than you should), you get massive swings when all their machines decide and people and accounts die in those swings. Who benefits? The exchanges are coining money - that's our money. The small to medium liquidity providers are gone or for sale. The banks are limited by Dodd - they can still facilitate and they are the liquidity for many products, but that does little for retail except in ETFs. Then just like in 87 when Leland O'brien's model cracked and we killed the good part of a generation of investors - someone's model cracks and people die. 45 days later the markets is back where it started, but there are tons of casualties.