No sooner had we covered the battle of high frequency traders physically moving infrastructure and microwave towers to gain nanosecond advantages, that we learned that Intercontinental Exchange (ICE) has planned on launching the first ever "speed bump" for the US futures market that would negate some of these advantages. Despite two of the CFTC's five commissioners disagreeing with the decision, the exchange still looks set to impose a split second delay on some trades, according to the Wall Street Journal.
Those not in favor of the decision claim that the "speed bump" would unfairly punish firms that rely on their speed advantage. Those in favor, say that it's about time someone did something to stop the HFTs from frontrunning everyone in the futures market. Which is also why some of the largest high frequency trading firms are vocally opposed to the plan.
As part of the proposed speed bump, the ICE is looking to introduce a 3 millisecond pause before executing some trades in its gold and silver futures contracts. Trading in those contracts is relatively tiny, as most gold and silver futures trades take place at the CME Group. However, traders have been watching this decision because of the precedent it could set.
The CFTC had a chance to block the proposal within 90 days, but that period ended on Tuesday. Now, ICE is free to do as it pleases. The CFTC's Division of Market Oversight said it’s going to watch carefully to analyze the impact of the new "speed bump" saying it "does not view the certification of the ICE Rule as establishing a precedent with respect to the legal and policy merits of speed bump functionalities generally.”
Other attempts to create similar "speed bumps" at other exchanges will be assessed on individual merits, according to the Division. Both a Democratic and Republican commissioner issued objections to the decision. The Republican cited Kurt Vonnegut’s short story “Harrison Bergeron”, where the government forces handicaps on talented people to create a level playing field, in his dissent.
Republican Brian Quintenz said: “Those that invent, and invest in, faster information transmission technologies to capitalize on market dislocations reap the profits of their advantage. That process enhances market efficiency.”
ICE hasn't given a timeline for when they are going to implement the "speed bump". The exchange commented: "We are very pleased with the CFTC’s decision to allow our rule amendment for passive order protection—or what is commonly referred to as a speed bump—in futures markets to become effective."
HFT giants like Citadel Securities LLC and DRW Holdings LLC, which make the bulk of their revenue from frontrunning slower retail and "dumb money whale" orders, were opposed to the idea, along with trade group Managed Funds Association, which represents hedge funds. Stephen Berger, global head of government and regulatory policy for Citadel Securities said: “We appreciate the commission’s confirmation that today’s rule change is limited in scope to two specific contracts and that any future expansion will require a new rule filing and legal analysis.”
The best hot take on the speed bump belonged to Tom McClellan, who said that "high-frequency algo traders spent all that money, locating their offices closer to ICE server farms and buying high-speed fiber connections to get an edge on trading, and now ICE is introducing a 3-millisecond delay trying to level the playing field."
High-frequency algo traders spent all that money, locating their offices closer to ICE server farms and buying high-speed fiber connections to get an edge on trading, and now ICE is introducing a 3-millisecond delay trying to level the playing field. https://t.co/Ik9ysJSXhi— Tom McClellan (@McClellanOsc) May 17, 2019
Which also explains why they are all so furious.
Several smaller firms welcomed the idea, however, claiming it would allow greater competition. HFT firms now have to spend significant amounts of capital to shave millionths of a second off their trades. Large firms have built out microwave infrastructure and have jostled to get close to exchanges to find minuscule advantages, as we have profiled in the past.
The "bump" is set to apply to incoming orders seeking to hit unexecuted buy or sell orders already posted on ICE, while traders posting new orders to be displayed on the exchange won't be affected. Eric Swanson, head of the Americas unit of XTX Markets said: “By negating costly HFT speed advantages at millisecond time frames, ICE’s speed bump will reduce the indirect operational tax on end users.”
Still, some critics claim that the delay could actually cause more volatility in periods of market turmoil.
DRW founder and Chief Executive Donald Wilson Jr. said: "During episodes of volatility, there would be essentially fake liquidity on the screen. I think that’s a very dangerous thing."