Link copied… MARKETS New ‘Speed Bump’ Planned for U.S. Stock Market Cboe considers briefly delaying orders to trade stocks on EDGA, its smallest stock exchange 7 COMMENTS By Alexander Osipovich Aug. 31, 2018 7:02 a.m. ET Cboe Global Markets Inc. CBOE 0.16% is seeking to introduce a brief delay on one of its markets, becoming the latest U.S. stock-exchange group to attempt to hit the brakes on high-frequency traders, people familiar with the situation said. The plan shows how “speed bumps” have proliferated among U.S. exchanges in recent years, even at market operators that initially opposed them. IEX Group Inc., the upstart exchange featured in Michael Lewis’s book “Flash Boys,” kicked off the trend and has since been followed by the New York Stock Exchange and others. Speed bumps work by imposing a delay on orders to trade stocks, typically a fraction of a second. Proponents say that can foil high-tech traders that make money by forecasting tiny market moves and quickly buying or selling shares before others realize that prices are shifting. Cboe hopes to add a speed bump to EDGA, the smallest of its four equities exchanges, people familiar with the situation said. The company has presented its plans to major trading firms in recent months, these people said. “We discuss a range of innovative and flexible trading solutions with our customers on an ongoing basis,” a Cboe spokeswoman said. Turn Up the VolumeCboe Global Markets is seeking to add a speedbump to one of its exchanges.Share of U.S. equities trading volume inAugust*Source: Tabb Group*Through Wednesday NYSENasdaqCboeIEXOff-exchange0%10203040 The plan would require approval from the Securities and Exchange Commission. Cboe has yet to file its proposal with the agency, and the company could still drop its plan. Chicago-based Cboe is the third-largest U.S. stock-exchange operator after the NYSE and Nasdaq Inc., as measured by market share. It has handled 17.4% of equities volume so far this month, of which EDGA was 1.2%, according to research firm Tabb Group LLC. Cboe had the No. 2 spot earlier this year but slipped behind Nasdaq in June, Tabb data show. Cboe executives have previously criticized speed bumps. “It’s about having a market further complicated by delays,” Chris Concannon, who is now Cboe’s president and chief operating officer, told The Wall Street Journal in a 2016 interview about IEX’s plans to launch a speed-bump exchange. The speed bump under discussion at Cboe would differ in several ways from IEX’s, according to people briefed on the plan. IEX delays orders to trade stocks by 350 millionths of a second. Cboe’s speed bump would be around 10 times longer in duration, lasting three to four milliseconds, these people said. A millisecond is a thousandth of a second. Cboe President Chris Concannon had previously criticized speed bumps. PHOTO: BRENDAN MCDERMID/REUTERS The delay wouldn’t apply to all orders equally: Instead, it would affect only orders seeking to hit unexecuted buy or sell orders already posted on EDGA, the people said. Traders posting new orders to be displayed on EDGA wouldn’t be affected. Such a design would benefit market makers, the firms that facilitate trading by continuously quoting prices for stocks. Market makers would be able to cancel or adjust their quotes without having to wait several milliseconds. But the delay could hurt speedy traders that try to “pick off” slightly out-of-date quotes posted by slower-moving market makers—in other words, buying just as the price is about to tick up a penny or selling just before the price drops. Effectively, market makers would gain a shield against such ultrafast strategies. If approved, Cboe’s plan could undermine one of the biggest plays in high-frequency trading, which involves zipping between markets centered in Chicago and New York at nearly the speed of light. Ultrafast traders often monitor for price changes in stock-market futures listed on the Chicago Mercantile Exchange. If they detect a shift, they will fire off orders to buy or sell exchange-traded funds that track U.S. stocks, such as the popular SPDR S&P 500 ETF Trust. For the strategy to work, the speedy trader must send electronic messages as quickly as possible from CME’s data center in Aurora, Ill. to northern New Jersey, where all of the major U.S. stock exchanges locate their systems. Cboe is considering a three- to four-millisecond delay for some orders to trade stocks. It takes about four milliseconds to send such messages using one of the microwave networks favored by high-frequency traders. Sending a similar order by cheaper fiber-optic cable takes several milliseconds longer. Cboe is considering a delay of three to four milliseconds because that would eliminate the advantage of microwave over cable along the Illinois-to-New Jersey corridor, according to people briefed on the company’s plan. Cboe’s plan will likely be controversial. When the tiny Chicago Stock Exchange proposed a similar one-sided speed bump in 2016, critics said it would give market makers an unfair advantage. Some trading firms compared it with “last look”—a controversial practice from the foreign-exchange markets in which banks could pull out of trades at the last moment if prices moved against them. Supporters of the proposal said it would benefit investors, because it would let market makers tighten the difference between buying and selling prices. The Chicago exchange ultimately withdrew the proposal in July after being acquired by NYSE owner Intercontinental Exchange Inc. Under its speed-bump plan, Cboe wouldn’t seek to benefit from an SEC rule that generally helps small exchanges, people briefed on the plan said. The rule lets exchanges offer “protected quotes”—meaning brokers must route customer orders to an exchange if its quote represents the best price for a particular stock. But for quotes to be protected, they must be “immediately accessible,” the SEC has said. That requirement has tripped up other exchanges trying to implement speed bumps. Cboe wouldn’t seek protected-quote status for orders displayed on EDGA, the people said. Such a stance could help Cboe’s plan win SEC approval.