It is often said that imitation is the sincerest form of flattery. If that is the case, than the exchange world is enamored with the most exchange to join its ranks.
The Chicago Stock Exchange, Inc. (CHX) has proposed a rule change to adopt the CHX Liquidity Taking Access Delay, an order speed bump similar to what the Investors Exchange (IEX) — which has recently been approved as a stock exchange— has operated for two years.
According to CHX, “LTAD is designed to neutralize microsecond speed advantages exploited by low-latency market participants engaged in latency arbitrage strategies that diminish displayed liquidity and impair price discovery in national market system (NMS) securities.”
Both the New York Stock Exchange and Nasdaq Stock Market are looking at including a speed bump LTAD would require all new incoming single-sided orders received during the Open Trading State that could immediately execute against one or more resting orders on the CHX book, as well as certain related cancel messages, to be intentionally delayed for 350 microseconds (same delay as IEX) before such delayed messages would be processed by the Matching System, according to the CHX filing with the Securities and Exchange Commission (SEC).
All other messages, including orders that would not immediately execute against resting orders and cancel messages for resting orders, would be immediately processed without delay. LTAD will not delay any outbound messages or market data.
The filing states that LTAD is a response to recent declines in CHX volume and liquidity in the SPDR S&P 500 trust exchange-traded fund (SPY), which the Exchange attributes to latency arbitrage activity in SPY based on a review of unusual messaging patterns.
“The Exchange believes that SPY latency arbitrage has caused CHX liquidity providers to dramatically reduce displayed liquidity in SPY, which, given CHX’s significant contribution to overall volume and liquidity in SPY prior to the declines, materially decreased liquidity in SPY market wide,” CHX noted in its filing.
The filing went on to say, “By delaying liquidity taking orders, and not delaying liquidity providing orders and related adjustment messages, LTAD would give liquidity providers a small amount of additional time, the same length as the IEX, to cancel or adjust resting orders on the CHX book to comport to the most recent market data before latency arbitrageurs could take such orders at potentially “stale” prices.”
CHX distinguishes its delay from IEX’s by noting, “As the [SEC] noted in the IEX Approval Order, a symmetric delay that delays all inbound messages, such as the IEX Delay, would be ineffective in protecting resting limit orders from latency arbitrage. Thus, LTAD will enhance displayed liquidity and price discovery in NMS securities without adversely affecting the ability of virtually all market participants, other than latency arbitrageurs, to access liquidity.”
The filing claims that distinction allows CHX to protect investors and the public interest, while not imposing “any unnecessary or inappropriate burden on competition.”
The CHX delay would affect the following order types: 1) New incoming orders received during the Open Trading State27 that would take liquidity from the CHX book; 2) cancel and cancel/replace messages for delayed orders that have not yet been released from LTAD; and 3) The replace portion of a cancel/replace message where the cancel portion cancels a resting order and the replace portion would take liquidity from the CHX book.