‘Flash Boys’ Speed Bump for Futures Gets Regulator Go-Ahead
(Bloomberg) -- Intercontinental Exchange Inc.’s plan to slow down lightning-fast traders in the futures market has gotten the green light from regulators.
The go-ahead from the U.S. Commodity Futures Trading Commission, announced Wednesday, comes after ICE announced in February that it planned to impose a 3-millisecond trading delay on gold and silver contracts. The pause would be the first-ever speed bump for futures, showing that an idea popularized in Michael Lewis’s 2014 book “Flash Boys” to rein in high-frequency traders is gaining more adherents.
Stock exchanges, including one run by IEX Group Inc. and the tiny NYSE American, are already using speed bumps. Advocates for the trading pauses argue they can help prevent abuses that enable high-speed traders to take advantage of slower traders. ICE’s delay would specifically apply to incoming orders on its Gold Daily and Silver Daily futures contracts, which currently have extremely low trading volumes.
The CFTC said Wednesday that its staff had studied speed bumps in other markets, analyzed legal and policy implications, as well as met with market participants before deciding to allow ICE to move ahead with its plan. The regulator had put the plan on hold as it sought public comment.
The agency’s "staff believes that speed bump functionalities have the potential to significantly impact futures markets’ function and quality, both negatively and positively, in a number of ways," the CFTC said in a statement.
The agency said the implementation of a speed bump like the one ICE is planning may raise issues around fair competition between market participants and exchanges. However, the CFTC also said the delay could promote more trading in ICE’s gold and silver markets through "slowing down high-speed traders engaged in latency arbitrage."
ICE has said the delay would be introduced “initially” for gold and silver, areas where it currently does very little business. The CFTC said extending the delays to additional products would require separate certifications or approvals.
To put the speed bump in place, ICE self-certified that its changes complied with the agency’s rules. In a Wednesday statement, the company said it was "pleased" that the CFTC let its plan go forward. "We believe this functionality is consistent with the core principles of the Commodity Exchange Act," said ICE, referring to the law that gives the CFTC authority to regulate derivatives.
While two of the CFTC’s five commissioners opposed the plan, it wasn’t enough to block the speed bump.
Republican Commissioner Brian Quintenz said that the speed bump was problematic because it will deter innovation.
"Those that invent, and invest in, faster information transmission technologies to capitalize on market dislocations reap the profits of their advantage,” he said in a statement. “That process enhances market efficiency."
Dan Berkovitz, a Democrat on the commission, said in a statement that so-called asymmetric speed bumps like ICE’s are "discriminatory, anti-competitive, and facially inconsistent with the fundamental objectives" of the law underpinning U.S. derivatives rules.
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