The Securities and Exchange Commission rejected a proposal from Cboe Global Markets to introduce a speed bump in the U.S. equities markets.
Cboe's proposal, filed in June, called for introducing a "liquidity provider protection" feature, known as LP2, on its Cboe EDGA Equities Exchange to enhance liquidity.
Under the proposal, once a liquidity-taking order reaches EDGA it would wait four milliseconds before trading with resting orders on the order book, enabling liquidity providers to take more risk and quote tighter spreads, with time to reprice resting orders before opportunistic traders can trade at stale prices, according to the Cboe proposal.
In a Feb. 21 order, the SEC said the proposal "is discriminatory" and Cboe "has not demonstrated that the proposal would not be unfair. The exchange has not demonstrated that the proposal is sufficiently tailored to its stated purpose, which is to improve displayed liquidity on the exchange by reducing the risk of adverse selection to liquidity providers, thereby potentially enabling liquidity providers to offer tighter quotes and greater size."
Cboe said in a statement that it's "extremely disappointed" the SEC rejected its proposal. "Cboe will remain committed to enhancing the U.S. equity markets for all participants, and will continue to work closely with our regulators and industry to develop innovative products that benefit the marketplace," the statement said.
In comment letters filed last year, asset managers including BlackRock Inc. and groups like the Investment Company Institute, Securities Traders Association and Securities Industry and Financial Markets Association expressed concerns with the Cboe proposal.
"We believe that the proposal's potential benefits solely would inure to a few low-latency liquidity providers," Dorothy Donohue, deputy general counsel for ICI, said in an October comment letter. "The direct harm to liquidity takers and slower liquidity providers as well as the disruptions and complexity that the proposal would introduce to the market greatly outweigh those potential benefits."