From LTAD to LEAD: Why We’re Changing Our Speed Bump Proposal
As you may have seen on Twitter, we recently amended our speed bump proposal — formerly called Liquidity Taking Access Delay (LTAD), now entitled Liquidity Enhancing Access Delay (LEAD). You can view the full rule filing here, and you can read the comment letter we sent to the SEC here.
The exchange received a great deal of informative feedback on our original proposal, both in terms of market structure aspects that people liked and aspects that were of concern. While we believe many of those concerns were overblown or driven by conflicted self interest, we appreciate the conversation and this process, and we want to be responsive to those comments. In doing so, we’re confident we’ve iterated to an even better solution that will combat latency arbitrage in a fair and equitable manner.
[In our filing, “latency arbitrage” is defined as “the practice of exploiting disparities in the price of a security or related securities that are being traded in different markets by taking advantage of the time it takes to access and respond to symmetric public information.”]
So, what is different about LEAD? Here are the highlights:
- Instead of applying to only liquidity-taking orders, our 350 microsecond speed bump will apply to all orders, except liquidity providing orders submitted by LEAD Market Makers, a new class of market maker subject to heightened quoting and trading obligations on a security-by-security basis. (The requirements to be a LEAD MM can be found on pg. 155 of our rule filing.)
- This is discriminatory, but we believe it qualifies as “permissible discrimination,” which the SEC has approved in numerous instances. (See pg. 141 in the rule filing for examples.) This discrimination is justified, and in fact necessary to combat latency arbitrage, which harms the investing public.
- This quid pro quo with market makers is permissible because market makers provide a service that benefits the entire market. NYSE, for example, subjects its market makers to heightened quoting and trading obligations, but in return they receive financial incentives and execution parity benefits. This is all done with the goal of protecting displayed liquidity, which is the objective of LEAD.
We originally created the LTAD rule filing to protect investors from the latency arbitrage we had seen at the exchange. And with the thoughtful amendments made to the filing, we are confident the SEC will see the inherent benefits of the initiative.
One other point we wanted to address: some commenters have suggested that LTAD would have encouraged order senders to submit flickering quotes to take advantage of the CHX Market Data Revenue Rebates Program without subjecting the quote to execution risk. However, only quotes that remain on the CHX book for at least one second at the National Best Bid or Offer would be credited towards such rebates. In other words, under LEAD, an order sender that submits a quote and cancels it 349 microseconds later, so as to avoid an execution, would not receive credit for that quote, and may even be subject to an Order Cancellation Fee (which CHX assesses for excessive cancellation activity) or disciplinary action by CHX, if such activity resulted in the LEAD MM not meeting its heightened quoting obligations. (This is more thoroughly explained in our LTAD comment letter from October, pp 10–11.)
If you’re interested in learning more, please read the full LEAD rule filing, which goes into much greater detail than this post. We believe that if LEAD is approved and implemented, the result will be more trading on regulated and transparent exchanges, along with deeper and tighter markets for the investing public.
Thank you for reading, and feel free to leave any comments or questions below.