American regulators approve a controversial new stock exchange
|New York
IT IS a ruse familiar to officials the world over: if you have embarrassing or controversial news, release it on a Friday, the later the better. The decision on June 17th, a Friday, by the Securities and Exchange Commission (SEC), Wall Street’s main regulator, to approve a new stock exchange sounds mundane. But the fact that the briefing explaining the agency’s reasoning was scheduled for 8pm gives a sense of the awkwardness of the topic.
IEX, the newly approved exchange, has one distinctive feature. Whereas most share-trading venues pride themselves on the speed with which trades can be executed, IEX promises to slow down transactions deliberately, with a “speed bump” of 350 millionths of a second. This idea has been controversial for two reasons. First, it is hard to reconcile with rules that oblige an exchange to execute a trade immediately, at the best available price, even if that means sending it to a rival market. Second, by attempting to slow things down, IEX is taking aim at a system it believes is rigged to favour ultra-fast high-frequency traders (HFTs) at the expense of the investors and companies that stockmarkets are supposed to nurture.
At the moment share-trading orders bounce between 13 exchanges (at which bids and offers are made public), more than 40 dark pools (where they are not) and an indeterminate number of brokers. Big asset managers suspect this sprawling, fragmented system allows HFTs to nip in ahead of them and take advantage of their orders—an idea that was given credence in a 2014 book by Michael Lewis called “Flash Boys”, which cast IEX in the role of hero.
By slowing down HFTs along with everyone else, IEX’s speed bump is supposed to protect less nimble investors. Its application received lots of support from big asset managers, at any rate. But the SEC was hesitant, asking IEX to modify its application five times and deferring a decision on it twice. In the end, at the same time as it approved IEX’s application, the SEC issued an “updated” interpretation of its best-price rule, allowing for delays in execution of up to a thousandth of a second. Critics fear even more fragmentation; backers hope for a fairer system. The SEC has promised to study the effects of the speed bump, and revise its rules again if necessary. Keep your Friday evenings free.
This article appeared in the Finance & economics section of the print edition under the headline "Speed bumps in the night"
