NYSE Explores Next Move to Compete With Speed Bumps
June 30 2016 - 10:40PM
Dow Jones News
The New York Stock Exchange and its sister markets are exploring
the introduction of speed bumps to slow some orders in a bid to
compete with IEX Group Inc., the upstart that won regulatory
approval in mid-June for its plan to slow the speed of trading,
according to the Big Board's president.
"We will talk with customers and are talking to customers to
understand what there is demand for," NYSE Group President Thomas
Farley said in an interview. "We're not foreclosing any
avenues."
The prospect of multiple exchanges instituting customized delays
to respond to IEX threatens to make the fragmented U.S.
stock-market landscape, which now has 13 exchanges, even more
complex, according to analysts. Companies such as NYSE-owner
Intercontinental Exchange Inc. and Nasdaq Inc. that operate
multiple venues could introduce speed bumps on their smallest
markets. Market makers such as Citadel LLC say those minuscule time
gaps could be manipulated by the same speedy traders that IEX wants
to thwart.
Started in 2013 as a private trading venue, known as a dark
pool, IEX shot to fame with the Michael Lewis book "Flash Boys,"
which cast its founders as heroes trying to restore balance to the
stock market. The book argued the market was rigged by other stock
exchanges that sold preferential treatment to high-frequency
traders.
IEX says its delay of 350 microseconds, or millionths of a
second, is long enough to protect investors from trading at stale
prices with rapid-fire traders who can react to price moves more
quickly than other market participants. NYSE and Nasdaq in recent
months urged the Securities and Exchange Commission to reject IEX's
model. The regulator approved the new venue on June 17.
In a letter sent Wednesday to companies that list on the New
York Stock Exchange, Mr. Farley again denounced IEX's strategy,
saying it relies too much on dark trading, or hidden orders that
aren't visible until they are filled. Stock exchanges typically
compete to attract a critical mass of publicly visible orders,
which attract more trading and help to build confidence in prices.
IEX's approach "isn't good for your stocks," Mr. Farley wrote.
John Ramsay, IEX's chief market policy officer, said NYSE and
other incumbent exchanges pioneered many of the practices,
including complex pricing models and "extortionate pricing of
market data," that made it harder to navigate the market. "IEX in
fact is taking a big step in the other direction by rejecting all
of those features of the current market structure," Mr. Ramsay
said.
In an interview, Mr. Farley said other speed bumps would
"exacerbate" market complexity, but added that was a risk taken by
approving IEX. "The horse is out of the barn," he said. "We will
have to do what is best for our customers and for our
shareholders."
Other exchange operators have said they might develop speed
bumps or functions that delay how orders are processed. Speaking at
a conference in April, Nasdaq Chief Executive Robert Greifeld said
IEX's speed bump could lead competitors to introduce thousands of
new functions that imitate or try to overcome intentional order
delays.
NYSE Arca, a fully electronic exchange operated by NYSE Group,
has already won SEC approval to copy one IEX function, which seeks
to improve the price that investors get when they use certain
hidden orders. Mr. Farley said the New York Stock Exchange has
eliminated some complex order-handling functions, which had the
result of simplifying how trading works.
The SEC would have to approve any new speed bump proposed by
NYSE or other exchanges. In a report issued Thursday, brokerage
Weeden & Co. said it wouldn't take long for NYSE or other
exchanges to implement their own delays if IEX wins market share.
Weeden said it expected IEX to gain, at most, 5% of U.S. trading
volume, compared with NYSE's exchanges, which have captured around
25% of trading.
Bradley Hope contributed to this article.
Write to Dave Michaels at dave.michaels@wsj.com
(END) Dow Jones Newswires
June 30, 2016 22:25 ET (02:25 GMT)
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