Does a millisecond matter?

Maybe not, the U.S. Securities and Exchange Commission is saying. If a stock exchange intentionally delays orders by just one-thousandth of a second, it would be acceptable under an SEC proposal. The New York Stock Exchange and others oppose the change, saying a millisecond is anything but trivial.

The fight over a tiny fraction of a second is tangled up in IEX Group Inc.’s attempt to convert its private market into a full-fledged public stock exchange. IEX wants to impose a speed bump on its exchange of just over one-third of a millisecond, to make trading more fair for slower-moving investors. But critics and fans of IEX’s application alike are arguing that regulators are veering into dangerous territory.

“There’s a lot of fear that we’re going to open a Pandora’s box,” said James Angel, a finance professor at Georgetown University in Washington. “It’s a legitimate fear.”

Key Benefit

At issue is a key advantage official stock exchanges enjoy in the U.S., a group that includes the NYSE, Nasdaq and four markets run by Bats Global Markets Inc. When an exchange has the best price quote for a stock, orders for that stock are supposed to be shipped its way (though brokers can also match or beat the price on private venues). IEX could win the advantage -- which can help add to market share -- by converting its dark pool into an exchange.

But there’s a catch: to be eligible, an exchange must have a system considered automatic and its price quotes must be immediately accessible. Back when this rule was created more than a decade ago, regulators didn’t set a specific time standard for what’s considered “immediate.” Instead, it said exchanges should just provide the fastest possible response without a programmed delay.

On March 18, the SEC proposed a fresh interpretation that would let exchanges delay their response times by a millisecond and still enjoy this benefit. What organizations like the Healthy Markets Association -- a group of asset managers that praised aspects of IEX’s business model -- are worried about is the blanket declaration that any delay of up to a millisecond is acceptable.

Different Path

“We hope the SEC realizes that it doesn’t have to go down this road to approve IEX,” said Tyler Gellasch, the executive director of Healthy Markets and a former SEC official. “I think most folks in the markets immediately recognized that the SEC’s proposal to approve all speed bumps under one millisecond would make the markets a lot more complex and potentially a lot less fair.”