Imitation game: what to make of the speed bump trend

They say imitation is the highest form of flattery, but that isn’t the thought that comes to mind when considering the recent uptake of speed bump technology by U.S.-based stock exchanges. Flash Boys launched speed bumps into mainstream media with a positive reputation for protecting investors, but speed bumps do not automatically improve trading conditions. Regulators need to carefully assess the impact of each new application – because certain speed bumps can actually be detrimental to long-term investors.

While Nasdaq and CHX have both filed with the U.S. Securities and Exchange Commission to implement a form of speed bump technology, earlier this month it was the New York Stock Exchange that received official approval to implement a speed bump on one of its platforms. Two years ago, NEO was the first operating stock exchange to implement a solution of this kind, just shortly after IEX launched its dark pool with a speed bump.  Let me be very clear… NEO’s speed bump is very different than the kinds of speed bumps we are seeing today.

Are all speed bumps created equal?

No. Existing speed bumps in the Canadian and U.S. capital markets, along with the CHX and Nasdaq applications, are all uniquely different with varying levels of success and detriment. Many are however marketed in the same way, but the packaging does not always match the content.

We designed the NEO speed bump for the purpose of protecting long-term investors from predatory trading practices. As a result of our unique structure, long-term investors trading on NEO are reaping the benefits of a more level playing field. On our market, quote fading is virtually non-existent, as evidenced by our high fill rates, and unnecessary intermediation has been reduced – with a majority of trades taking place between long-term investors.

But not every speed bump application carries this same virtuous intent.

The TSX Alpha speed bump actually enables predatory high-frequency trading practices. We have clear views on that topic so no need to repeat them here.

The NYSE speed bump is almost identical to the speed bump on IEX, where all orders from all market participants are slowed down equally. Interestingly enough, NYSE actually opposed this concept, but have now done a one-eighty and are essentially copying IEX. Regardless of the stated intent, we question if these types of symmetrical speed bumps have any benefit for displayed orders at all (IEX original implementation for their dark pool is a different story). If everyone is slowed down the same way, those with a speed advantage will still have a speed advantage. Our speed bump is different; it applies only to liquidity-taking (active) orders from HFTs. The purpose is to protect liquidity providers only from predatory trading strategies, but leave the quotes immediately accessible for long-term investors.

In the proposal process, NYSE’s speed bump wasn’t positioned as a safeguard against predatory trading practices but rather as another way to offer customers choice. If they had referenced the added protection for long-term investors, it would have subtly implied that long-term investors trading on other NYSE markets are vulnerable, lacking the protection of speed bump technology. That would not have been good for their main board business.

Shouldn’t we be excited by the speed bump trend?

We’re all for marketplace innovation, as long as it’s done with the right intent and as long as the benefit it provides does not negatively impact the market overall.

If more speed bumps do get approved, especially those that worsen some of the existing problems of speed advantages, quote fading, etc., then the only thing you end up with is a more complex market structure. And, unless the speed bump is evidently protecting long-term investors, the only ones that benefit from a more complex market are the most sophisticated trading firms as they typically understand – and leverage – the nuances better than others.

Speed bumps are a viable tool to protect long-term investors and can level the playing field, but only if employed correctly. They all have subtle but important differences, benefitting different types of participants (and not always long-term investors). For that reason, it is very important that the regulators have a proper framework in place to assess each and every proposal on its own merit and not simply approve them because they appear to be the same.