The U.S. Securities and Exchange Commission has rejected a controversial rule change that would have allowed Cboe Global Markets to put a split-second “speed bump” in the way of an ultrafast trading strategy known as “latency arbitrage.”
Cboe in June proposed delaying incoming executable orders on its EDGA exchange so market makers would have four milliseconds to cancel or modify their orders in response to market-moving information.
The proposal sought to address concerns over latency arbitrage, a strategy used by high-frequency traders to execute orders on slightly out-of-date quotes.
But amid opposition from asset managers and electronic trading giant Citadel Securities, the SEC issued an order Friday finding the proposal was unfairly discriminatory and Cboe had not demonstrated it was “sufficiently tailored to its stated purpose.”
“The Exchange has not demonstrated why a 4-millisecond delay is sufficient time to effectively protect a wide range of market participants from the latency arbitrage issue,” the commission said.
According to The Wall Street Journal, “the SEC has put the brakes — at least for now — on the proliferation of speed bumps on U.S. stock exchanges” since 2016, when the commission allowed startup IEX Group to become a full-fledged stock exchange.
“We are extremely disappointed that the SEC has disapproved our proposal to introduce Liquidity Provider Protection,” Cboe said in a statement, using its term for the proposed speed bump.
Where IEX imposed a brief delay on all orders to buy or sell shares, Cboe’s delay would only have applied to orders that come to EDGA seeking to be immediately executed. Supporters of the CBOE proposal said it would blunt the advantage of high-frequency traders that use costly technology such as cross-country microwave networks to execute trades as quickly as possible.
But the SEC said Cboe had failed to show that “liquidity takers use the latest microwave connections and EDGA liquidity providers use traditional fiber connections, and liquidity takers are able to use the resulting speed differential to effect latency arbitrage on the Exchange.”
Asset manager BlackRock argued the proposal would “introduce needless complexity and have a detrimental effect on U.S. equity markets.”
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