America's stock market is slowing down
The Chicago Stock Exchange this week outlined plans to adopt what it calls a Liquidity Taking Access Delay (LATD), a 350-microsecond delay for those who trade against resting orders on the exchange.
The simple way to explain this is to think of a scenario where there are 13 different versions of eBay. Buyers and sellers are active across all 13 sites, and in theory a pair of sneakers on eBay1 should be the price as the same pair on eBay2.
Given the dynamic pricing, however, there are occasions where buyers get to an old price before the seller can change it, or vice-versa. That's kind of what is happening to the Chicago Stock Exchange.
Here's how the filing describes latency arbitrage:
"'Latency arbitrage' means the practice of exploiting disparities in the price of a security or related securities that are being traded in different markets by taking advantage of the time it takes to access and respond to market information."
The Chicago Stock Exchange said in the filing that the LTAD is designed to neutralize high-speed traders engaged in latency arbitrage. In plain English, it is trying to stop buyers taking advantage of out-of-date prices.
The filing explains:
"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."
The move is in response to a change in the trading of the SPDR S&P 500 trust exchange-traded fund. The exchange said it first noticed latency arbitrage activity in the SPDR in January, and that as a result of this market makers have "dramatically" reduced displayed liquidity. The filing said:
"The Exchange believes that the best way to minimize the effectiveness of latency arbitrage strategies on CHX with respect to resting limit orders is to implement an asymmetric delay, such as LTAD, to de-emphasize speed as a key to trading success."
Now, if all this sounds familiar, it is because it is.
The New York Stock Exchange and Nasdaq, two establishment exchanges that had fought against IEX's approval, have announced their own features.
NYSE has introduced what is called a discretionary pegged order, which IEX has said is a copy of an order type it created. Nasdaq in mid-August introduced what it calls an extended life order. Nasdaq CEO Bob Greifeld told Bloomberg TV that the feature is designed to reward investors willing to put in an order a minimum period of time.
"If you want to put an order in for a longer period of time, we will give you a reward. You're going to go to the front of the queue, so that means you'll get the earlier execution."