SEC Approves Discriminatory CHX Speed Bump
On Friday the SEC approved the Chicago Stock Exchange proposed speedbump as a 2 year pilot program, where CHX would be required to collect and report various statistics. It had received twenty comment letters on the CHX’s proposal, including several from market structure thought leader, R.T. Leuchtkafer. We’ll get to RTL in a few moments…
As a quick refresher, CHX initially proposed a Liquidity Taking Access Delay (LTAD), which was withdrawn, and replaced with a proposal for a Liquidity Enhancing Access Delay (LEAD):
- LTAD proposed subjecting incoming takers to a 350ms software delay, effectively discriminating via speedbump against takers of liquidity in favor of makers of liquidity.
- LEAD proposed subjecting all participants, except certain “lead market makers” who register and pay for colocation on the exchange, to a 350ms software delay.
This CHX speedbump, while similar to IEX’s in length, is very different for two reasons:
- IEX’s bump is hardware based, and much more predictable and robust, than the CHX’s software bump.
- IEX’s bump is non-discriminatory; it applies to all participants. CHX’s is discriminatory and asymmetrical.
In exchange for giving some folks on CHX an advantage and an ability to “Charlie Brown Lucy Football Yank”, the CHX speedbump requires those LEAD market makers to maintain a monthly average 10% quoting percentage, execute at least 2% of transactions on its system, and requires that 80% of LEAD market maker trades result from resting orders, with only 20% allowed from aggressive taking.
There is more inside baseball involved with the CHX plan, such as how its speedbump could worsen under load, and a discussion of sequential and relative time integrity. We encourage you to take the deep-dive, although we won’t in this note.
Allow us now to return to the objections and comment letters of R.T. Leuchtkafer (RTL). RTL has been forefront in market structure discussions for nearly ten years. He has amassed a bibliography on all studies/works HFT, which we again provide you with. He believes markets need to be geared towards investors and not intermediaries.
We believe his excellent IEX Exchange Approval comment letters were key in the SEC’s reasoning to approve IEX, as the SEC cited his letters heavily in the IEX official approval.
RTL also made it clear to the SEC that when they were debating throwing in the towel, and making all stock exchange delays of 1 millisecond or less allowable and “de minimis”, that such thinking was deeply flawed and harmful to markets.
He wrote five comment letters! He listed three reasons to disapprove the CHX speedbump:
- The SEC should reject speed bumps implemented in software because of the indeterminacies inherent in software-imposed speed bumps.
- The SEC should reject speed bumps explicitly or implicitly favoring any particular class of participants.
- The SEC should reject speed bumps left to an exchange’s discretion to implement or withdraw on a security-by-security basis.
How, after heavily citing from RTL’s comment letters in its approval of IEX, can the same Commission turn completely around and approve a discriminatory CHX speedbump proposal?
This is a real head-scratcher folks. This tees up a new regulatory subsidy for high speed prop traders that they will use to play Charlie Brown Lucy Football Yank games. This approval undermines Reg NMS by reintroducing time advantages to formal market makers – something the SEC frowned upon back when NYSE specialists got to see the limit order book, and all your orders, before everyone else. This approval threatens market reforms of the last twenty years.
Oh… there is one more thing you should understand about the SEC’s CHX approval:
The door is now open for any exchange to introduce asymmetrical speedbumps, with advantages for only a subset of participants.
Fasten your seatbelts.