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.”
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.
“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.”