IEX may prompt US mar­ket re­form

Viet Nam News - - Markets -

NEW YORK — US reg­u­la­tors may re­lax rules that re­quire the fastest pos­si­ble ex­e­cu­tion of se­cu­ri­ties trades, po­ten­tially help­ing up­start trad­ing venue IEX Group’s plans to be­come a full-fledged stock ex­change.

IEX, de­scribed in au­thor Michael Lewis ’ book “ Flash Boys: A Wall Street Re­volt” ear­lier this year as a place for in­vestors to place buy and sell or­ders with­out wor­ry­ing that they are be­ing “front-run” by other traders whose order trans­mis­sion speeds are faster than theirs.

IEX has put in place a “speed bump” – de­lay­ing in­com­ing or­ders by 350 mil­lionths of a sec­ond, or a thou­sandth of the time it takes to blink – on its trad­ing venue, let­ting it up­date prices faster than the fastest mar­ket par­tic­i­pants can cal­cu­late them, so that high-fre­quency trad­ing firms can­not use their speed ad­van­tage to front-run oth­ers.

The strat­egy has proved pop­u­lar with in­vestors, who have made IEX the 7th most used al­ter­na­tive trad­ing sys­tem in the US for the week of July 7, ac­cord­ing to data from the Fi­nan­cial In­dus­try Reg­u­la­tory Au­thor­ity. How­ever, in­sti­tut­ing any sort of trad­ing de­lay clashes with cur­rent mar­ket rules for ex­changes, which is even­tu­ally what IEX has said it wants to be.

The US Se­cu­ri­ties and Ex­change Com­mis­sion may de­cide to re­visit the rules, keep­ing with its stated goal of pro­tect­ing in­vestors, while al­low­ing IEX to keep its speed bump when it be­comes an ex­change, ac­cord­ing to a person fa­mil­iar with the SEC’s think­ing.

IEX was de­scribed ear­lier this year as a place for in­vestors to place buy and sell or­ders with­out wor­ry­ing that they are be­ing “front-run” by other traders whose order trans­mis­sion speeds are faster than theirs.

Though the com­mis­sion­ers will make a de­ci­sion only af­ter IEX ap­plies to be­come an ex­change, the SEC is likely take into con­sid­er­a­tion that the high-speed trad­ing phe­nom­e­non and the pro­lif­er­a­tion of such firms took hold only af­ter the rules were writ­ten in 2005, the person said.

IEX and the SEC de­clined to com­ment on the use of speed bumps and their le­gal­ity un­der the cur­rent ex­change rules, called Reg­u­la­tion Na­tional Mar­ket Sys­tem (Reg NMS).

Op­por­tu­nity and flex­i­bil­ity

The reg­u­la­tor’s will­ing­ness to con­sider al­ter­ing the rules un­der­scores grow­ing wor­ries about the po­ten­tially dis­rup­tive ef­fects of high-fre­quency trad­ing. High-speed com­put­er­ized trad­ing has been around since at least the late 1990s and has be­come a dom­i­nant force in the mar­kets since then, ac­count­ing for more than half of all trad­ing in US stock mar­kets. Sup­port­ers of high fre­quency trad­ing say these firms pro­vide es­sen­tial liq­uid­ity to stock mar­kets, as they al­ways stand ready to buy and sell stocks. They say the abil­ity of such firms to quickly spot and act on price dif­fer­ences across mar­kets and as­set classes cre­ates a more ef­fi­cient mar­ket.

But crit­ics say ul­tra-fast trad­ing leads to un­fair mar­kets. In his book, Lewis said that it cre­ates a two-tiered sys­tem, where the fast- est firms can ef­fec­tively front-run slower traders. IEX’s speed bump was fea­tured in the book as a way to coun­ter­act po­ten­tially harm­ful speed ad­van­tages.

Sev­eral reg­u­la­tors have said they have ac­tive in­ves­ti­ga­tions into high-speed and au­to­mated trad­ing, in­clud­ing the SEC, the New York State At­tor­ney Gen­eral, the Com­mod­ity Fu­tures Trad­ing Com­mis­sion, and the Fed­eral Bureau of In­ves­ti­ga­tion.

In a June 5 speech, SEC Chair Mary Jo White ques­tioned whether the pur­suit of speed in the mar­kets has gone be­yond the point of ben­e­fit­ing in­vestors and whether cur­rent rules are get­ting in the way of trad­ing venues de­sign­ing sys­tems to level the play­ing field.

“A key ques­tion is whether trad­ing venues have suf­fi­cient op­por­tu­nity and flex­i­bil­ity to in­no­vate suc­cess­fully with ini­tia­tives that seek to deem­pha­size speed as a key to trad­ing suc­cess in order to fur­ther serve the in­ter­ests of in­vestors,” White said. “If not, we must re­con­sider the SEC rules and mar­ket prac­tices that stand in the way.”

In a state­ment to Reuters, IEX Chief Op­er­at­ing Of­fi­cer John Sch­wall said, “We en­dorse SEC Chair White’s re­cent state­ment that ‘se­condary mar­kets ex­ist for in­vestors and pub­lic com­pa­nies, and their in­ter­ests must be paramount,’ and con­tinue to make that the fo­cus of what we build at IEX.”

Since launch­ing in Oc­to­ber, IEX has said it aims to cre­ate what it sees as a fairer, less com­plex mar­ket, while op­er­at­ing within the cur­rent set of mar­ket rules.

The rule in ques­tion is a sec­tion of Reg NMS about au­to­matic quo­ta­tions. It says ex­changes must give trad­ing firms the op­tion of im­me­di­ately can­cel­ing or­ders that are not im­me­di­ately filled. The term “im­me­di­ately,” it says, “pre­cludes any cod­ing of au­to­mated sys­tems or other type of in­ten­tional de­vice that would de­lay the ac­tion taken with re­spect to a quo­ta­tion.”

Fur­ther, the rule says that to qual­ify as “au­to­matic”, “no hu­man dis­cre­tion in de­ter­min­ing any ac­tion taken with re­spect to an order may be ex­er­cised af­ter the time an order is re­ceived” and “a trad­ing cen­ter’s sys­tems should pro­vide the fastest re­sponse pos­si­ble with­out any pro­grammed de­lay.”

About five years ago, Nas­daq OMX Group ran up against the same rule when it sought to in­clude a speed bump in one of its trad­ing venues, called PSX, ac­cord­ing to a for­mer Nas­daq em­ployee who was in­volved in those dis­cus­sions.

Nas­daq nixed the idea af­ter a pre­sen­ta­tion to the SEC, where the reg­u­la­tor di­rected the ex­change op­er­a­tor’s ex­ec­u­tives to the rule, which ap­peared to con­flict with an ex­change us­ing such a de­vice, this person said. Nas­daq de­clined to com­ment. The source fa­mil­iar with the SEC’s think­ing on the mat­ter said PSX may have been ahead of its time. The reg­u­la­tor now will likely look at the IEX case with the per­spec­tive that Reg NMS was writ­ten some 10 years ago, the source said. —

Newspapers in English

Newspapers from Viet Nam

© PressReader. All rights reserved.