Cboe Global Markets' proposal to introduce a speed bump in the U.S. equities market to allow for order updates ahead of opportunistic traders is hitting some speed bumps of its own.
Cboe filed a June 7 proposal with the Securities and Exchange Commission to introduce a "liquidity provider protection" feature, known as LP2, on its Cboe EDGA Equities Exchange to enhance liquidity. The idea is that 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, it said.
That would make it the first-ever delay mechanism in the U.S. equities market that would be asymmetric to protect liquidity providers, Cboe said.
Some market watchers don't see it that way. In comments on the proposal submitted Wednesday to the SEC, Citadel Securities Managing Director and Global Head of Government & Regulatory Policy Stephen John Berger wrote that the speed bump would discriminate against other market participants in favor of "a small subset" of high-speed proprietary trading firms seeking market changes "at the expense of all other market participants including retail and institutional investors."
The proposal should be denied until the SEC can address the complex policy concerns it raises, wrote Healthy Markets Executive Director Tyler Gellasch, paraphrasing Cboe comments from an unrelated proposal that it would artificially determine winners and losers "in the never ending battle of informational time and place advantages."
Support for the idea came from London-based proprietary trading firm XTX Markets, whose comment letter said that "the race for speed in trading has reached an inflection point where the marginal cost of gaining an edge over other market participants, now measured in microseconds and nanoseconds, is harming investors." The proposed speed bump "will have the effect of enabling liquidity providers to narrow spreads and display larger size for the benefit of end investors while simultaneously reducing the barriers to entry for new liquidity providers who may have risk absorption appetite and unique pricing and time horizons," XTX Markets LLC Americas CEO Eric Swanson wrote.
Larry Tabb, founder and research chairman of market research firm TABB Group, wrote that while Cboe "does make some compelling arguments about the risk of liquidity providers being picked off... it overtly makes our market uneven." The speed bump idea might be appropriate if the SEC moves forward with its Transaction Fee Pilot "and significantly alters the rebate/fee scheme," he said.