碰撞与竞争:IEX新speed bump机制如何影响美国金融市场

大家好,我是Lucy@FinTech 社区。

今天这篇文章总结了:high frequency trading的一项新的市场机制,叫做speed bump,这项机制的前世今生,如何影响美国金融市场机制以及一些未来的展望。


 

1. Exchange Speed Bumps and Similar Policies


 

The only US stock exchanges which have proposed a speed bump or similar policy are:

1. Investors Exchange (IEX) – Speed Bump – June 2016 

2. NYSE American – Speed Bump – May 2017 

3.Chicago (CHX) – Liquidity Enhancing Access Delay (LEAD) – October 2017 pending approval, will not be implemented 4.Nasdaq Stock Exchanges – Extended Life Order – July 2017

 

IEX

 

• Most exchanges use the “price/time priority” method to decide when to execute incoming orders. 

• This first in-first out method clearly benefits HFT traders, who can trade ahead of traditional traders by reaping the benefits of co-location and order anticipation.

• IEX and the speed bump were a reaction to that advantage, specifically to prevent predatory traders from “picking off outdated quotes by a liquidity provider before she can adjust them (quote sniping).” 

• IEX’s speed bump is a 350-microsecond (350 millionths of a second) delay in trade execution. 

• IEX touts itself as being a “fair, simple, and transparent stock exchange on a mission to build fairer markets.”

 

NYSE American
 

• The SEC approved NYSE’s proposal for its own speed bump, but only on NYSE American, previously known as NYSE Mkt, a small market that lists around 370 small and mid-cap companies. 

• NYSE American’s model is similar to IEX’s model in instituting the same 350-microsecond trade delay.  

• NYSE American then innovates by providing a $0.0045 per share rebate to designated electronic market makers to ease the trading of NYSE American-listed stocks and to boost market liquidity. 

• NYSE American also charges less for trades: IEX charges 9 cents per 100 shares; NYSE American charges 2 cents per 100 shares. This charge accounts for the cost to place standing orders for other traders to execute against or to do the executing against the standing orders. 

• Comparing this fee with the per share rebate for electronic market makers, NYSE pays for a $0.0043 difference on every trade for NYSE American-listed securities. 

• NYSE President Tom Farley asserted that the NYSE American model improves on IEX’s model by reducing cost, appealing to institutional investors who must satisfy fiduciary obligations, and by attracting “lit liquidity,” contrasting with IEX’s “dark trading,” where resting orders are not publicly visible. 

• NYSE’s model thus poses competitive risk to IEX, as market makers would likely choose to trade on an exchange that offers incentives (NYSE) over one that does not (IEX), when both offer the same speed bump. 

• NYSE American’s advantage stems from the package of pricing and rebate benefits surrounding the speed bump.

 

CHX LEAD

 

• Echoing HFT critics, CHX noted how generating profits from market making has become more difficult in recent years as a result of HFT. 

• The CHX Liquidity Enhancing Access Delay (LEAD), a proposed two-year pilot program, would delay orders coming into the exchange by 350 microseconds.  

• LEAD comes with a discriminatory exception: market makers who register as “LEAD Market Makers” (LMMs) would be exempt from LEAD—that is, some traders could bypass the speed bump. 

• With that time advantage, LEAD-exempt traders could update their prices or cancel their orders in response to changes in the market, just like HFT firms do. 

• To register as an LMM, a trading firm would have to be approved as a registered market maker and would have to agree to trade and quote a specific amount on CHX. 

• Assuming the new LMM category of market makers exempted does not include HFT firms, the LEAD program could promote competition between HFT firms and traditional traders. 

• CHX created the LEAD LMM feature to contribute to price discovery to make trades more transparent. This transparency, combined with the resulting increase in competitiveness of traditional traders against HFT traders, could dampen market volatility and help to quell HFT critics’ concerns. 

• Specifically referencing latency arbitrage, CHX notes how other exchanges that have adopted speed bumps have attracted trade volume despite aggressive competition between exchanges because customers value protecting undisplayed orders (trades that are reported on the “tape” as having already occurred) from the negative effects of latency arbitrage. What sets LEAD apart, CHX asserts, is its protection of undisplayed orders and displayed orders (displayed, firm exchange quotes) from the negative effects of latency arbitrage, making LEAD “a more complete solution.” 

• LEAD has not taken effect as the SEC stayed its original approval in October 2017 and as it’s only a two-year pilot program CHX has reported it will not implement LEAD In summary, CHX LEAD builds on the IEX and NYSE American speed bump models by using its market maker exemption to target only HFT across displayed and undisplayed orders.

 

NASDAQ Extended Life Order
 

• Nasdaq deviates from the 350-microsecond structure, offering the option of a one second delay in exchange for the promise of trade execution before competing orders at the same price. 

• An “extended life” order type meant to “improve the ecosystem” of financial markets. 

• Approved by the SEC in July 2017, Nasdaq’s proposal would allow investors to place extended life orders that could not be canceled for at least one second, but in return those orders would be executed before competing orders at the same price. 

• If a trader is last in line to buy or sell a particular stock, it is a warning sign that the price is about to move against them. Nasdaq’s extended life orders would let traders jump to front of the queue, but only if they are willing to risk letting their order stay live for a full second. 

• Nasdaq provides an option that traders can choose to use or not use each time they place an order. At first, the extended life designation would apply only to orders generated by retail investors, who tend to be less informed and therefore likely the targets of professional traders. With time, though, Nasdaq’s extended life plan would expand to let all market players participate, particularly long-term investors (i.e., not HFT traders, who rarely hold stocks day to day). 

• Nasdaq extended life designation could lead to “stickier” prices that are less likely to change as HFT traders adjust or cancel orders. 


 

2. Speed Bump Exemptions


 

1. IEX – Nobody is exempted from the speed bump. 

2. NYSE American – Nobody is exempted from the speed bump, but DMMs are offered rebates to incentivize market making. 

3. Chicago (CHX) – LEAD Market Makers are exempted from the speed bump, this could promote competition between HFT firms and traditional traders to “promote tighter, deeper displayed liquidity for the benefit of institutional and retail customers.” 

4. Nasdaq Stock Exchanges – Initially open to retail investors, eventually all market participants, must opt-in, could lead to “stickier” prices that are less likely to change as HFT traders adjust or cancel orders.


 

Implementation Issues


 

• HFT firms have asked the SEC to deny speed bump proposals on coordination grounds, stressing that assorted time lags across thirteen exchanges would make it difficult to know the true price of a particular security at a particular time.

• Some criticize speed bumps for being too discriminatory or asymmetric. The theory here is that some exchanges allow liquidity providers to pay to avoid the delay; in doing so, those traders can evaluate recent trades on other exchanges and decide whether to trade or cancel their liquidity without suffering the delay of the speed bump.

• The speed bump might affect the co-location side market. The commonly stated goal of forcing HFT traders to slow down is promoting a more equal playing field between HFT traders and traditional traders. The delay also means that HFT traders might not reap as great a reward from investing in co-location, and demand for co-location could fall.


 

Investor Reception


 

• IEX application received strong support from big asset managers. 

• Speed bump is expected to be most attractive to pension funds, mutual funds, and other institutional investors, as they are less sensitive to small price variations and can withstand delays if their orders are placed in long queues. 

• In the matter of speed bump competition, Healthy Markets, an investor-focused nonprofit organization, also pushed back against NYSE’s speed bump proposal: Given the relatively tiny market share occupied by the presumed competitor (IEX), it's more than a bit puzzling why another exchange would be rushing into compete with it. Taken along with the extreme brevity of the NYSE Mkt Proposal (it's only a few pages), and the vagueness of its justification, it appears as though the proposal may be being sought as a placeholder, to be further adjusted and potentially used in the future. The SEC should view such a vague proposal with a healthy skepticism.


 

Speed Bump Pros


 

• A market response to HFT that focuses more on reducing speed could serve the desired purposes behind regulation without regulation’s more sprawling effects. Increasing competitiveness with traditional traders by slowing down trading to a more measured pace could decrease HFT’s dominance, thus decreasing the likelihood of major market swings caused by the cascading effect of HFT algorithms. 

• As Ted Kaufman, former US Senator and member of the SEC Equity Market Structure Advisory Committee, suggested, “By slowing trading down to give long-term investors equal footing with HFTs, a market disruptor such as IEX could move us at least one step closer to preventing the next flash crash.” 

• The cornerstone of IEX’s SEC application was the speed bump, which IEX argued would protect investors from the potentially harmful effects of front-running in trading (e.g., HFT) .

• SEC Chair Mary Jo White commented that the implementation of IEX’s business model “promote[s] competition and innovation, which our equity markets depend on to continue to deliver robust, efficient service to both retail and institutional investors.” 

• “Speed bumps will now be a competitive tool for exchanges, but each exchange can build its speed bump to target a different audience.” 

• IEX perceived a problem in the financial markets: that HFT traders were using speed to gain an unfair advantage over traditional traders. IEX aimed to solve or to help assuage the problem of HFT with the speed bump in order to secure a public (greater fairness and competition in the markets) or private (greater market share for IEX) benefit.


 

Speed Bump Cons


 

• In 2016, NYSE strongly opposed IEX’s application to become an exchange, arguing that the IEX model would result in investors receiving stale and misleading quote information. 

• Bob Greifeld of Nasdaq maintained that allowing sub-millisecond delays could open the door to many new order types and implied that he could sue the SEC for violating its own regulations.

• IEX noted that NYSE could “improve the markets by consolidating their venues and superfluous order types, and eliminating maker-taker rebates and excessive data & colocation fees—but to do so would hurt their bottom line.” Further, IEX Chief Executive Officer Brad Katsuyama opined that the rebates other exchanges offer to attract trading volume are “kickbacks” that distort where brokers send trades.

• Whether speed bumps have diminished the negative effects of HFT is a topic of current debate. Some argue that speed bump implementation will instigate more bad HFT software design. To avoid the speed bump, HFT traders will devise new algorithms to attempt to hide trades occurring within less time than the speed bump’s prescribed time interval or to attempt to execute just after the speed bump’s prescribed time interval. Other critics might point to the February 2018 flash crash—if the speed bump were effective at curbing HFT activity, why did the market plummet despite the speed bump’s presence? Maybe the speed bump is too new or too isolated in its use. 

• Citadel criticized IEX for offering “stale” prices, CHX’s LEAD for unfairly discriminating between market participants, and Nasdaq’s Extended Life order type for discouraging liquidity provision and impeding market efficiency. 

• On the other hand, some say speed bumps are not discriminatory enough. The Aequitas NEO Exchange, a Canadian exchange that devised another version of the speed bump similar to CHX’s LEAD soon after IEX launched, questioned whether symmetrical delays like the 350-microsecond ones imposed by IEX and NYSE American create any benefit for displayed orders. That is, if an exchange slows everyone down by the same time interval, traders with a speed advantage will still have that same speed advantage.


 

Exchange Market Share


 

• Before the SEC approved IEX’s application for exchange status in June 2016, together NYSE American, CHX, and Nasdaq accounted for 14.71 percent of trading volume in the United States; individually, NYSE American held 0.25 percent, CHX held 0.34 percent, and Nasdaq held 14.12 percent. 

• As Forbes reported in 2017, NYSE had been losing market share before rolling out its speed bump, while IEX had almost doubled its market share in the same time frame.

• As of April 2, 2018, IEX held 2.22 percent market share NYSE American held 0.34 percent market share, CHX held 0.51 percent market share, and Nasdaq held 15.77 percent market share. To be clear, that is a change of +0.09 percent for NYSE American, +0.17 percent for CHX, and +1.65 percent for Nasdaq, all while IEX has risen to 2.22 percent market share. 

• While such changes could reflect the impact of the general speed bump concept, each exchange has also seen an uptick in market share since devising their own speed bumps. 

• NYSE American has seen a 0.18 percent market share increase since the approval of its speed bump in May 2017. 

• Nasdaq has seen a 0.19 percent market share increase since the approval of the Extended Life order type in July 2017. 

• CHX has not seen an increase in market share since its proposal of LEAD in October 2017 because the SEC stayed its approval less than one week later—ergo, CHX’s speed bump has not been implemented yet. Therefore, the increase in CHX’s market share is less telling than the increases in market share at NYSE American and Nasdaq; CHX’s increase could be attributed to the general impact of the speed bump concept in the market or to some other source entirely. 

• Such an upswing in market share of exchanges that have implemented speed bumps is minimal. Correlation is not causation, and the trends seen here could be attributed to other factors. More research is needed to pinpoint the exact changes in market share IEX and the speed bump have caused. Thus, while the increase in market share at these exchanges during the time in which they implemented speed bump schemes could point to a positive, albeit modest, effect speed bumps have had in attracting traders to these exchanges, the hard data is inconclusive.


 

Conclusion


 

• In my opinion it is too early to tell if the speed bump is a good policy or not, there wasn’t really any information in the paper regarding market quality before and after the implementation of a speed bump. 

• As the speed bump and other related policies are self initiated and being copied in the industry, and that IEX has gained a 2% market share, there appears to be some demand from investors for their service. 

• In theory the speed bump looks to address some of the main concerns with HFT (front-running, flash crashes), but in practice not so clear.

• Perhaps the speed bump is just covering up and not solving the heart of the problem, it seems as though some of the existing market structure issues may be the result of government intervention (Reg NMS)?