Nasdaq is asking regulators to approve a new order type in the latest example of how the dynamics of speed are changing in the world’s largest equity market.
In a letter to the Securities and Exchange Commission, the US exchanges operator proposed a so-called extended life priority order attribute, which would give priority to retail orders seen by the whole market when traders agree not to cancel them for at least one second.
IEX, the protagonists of the Michael Lewis book Flash Boys, launched as an exchange earlier this year with a delay of 350 microseconds meant to level the playing field in what it believes is a market structure that favours high-speed traders over long-term investors.
Nasdaq believes that promoting displayed orders with longer time horizons will enhance the market so that it works for a wider array of market participants
Its attempt was fiercely opposed by some rival exchanges, but now the industry is mobilising to compete with different iterations of speed bumps. It marks a departure for the US equities market, which has for the past decade been in an arms race to become ever faster.
“Nasdaq believes that promoting displayed orders with longer time horizons will enhance the market so that it works for a wider array of market participants, and will benefit publicly traded companies by promoting long-term investment in corporate securities, whether listed on Nasdaq or other exchanges,” the exchange said in a letter.
The Chicago Stock Exchange, the smallest of the designated US exchanges, wants to introduce a 350 microsecond delay, but unlike IEX, it is just on orders that would be able to execute on resting orders, or in market parlance “take liquidity”. Liquidity providing orders, or those that would not immediately trade with resting orders, or cancel messages for resting orders, would not face delays.
Like IEX, CSE has faced both opposition and support.
Nasdaq said the order type would benefit long-term investors who may not be monitoring minute changes in market prices. Typically the first “displayed” order at a price has priority over the next order. Over time as speed and fragmentation has increased in the market the time priority has led to competitive trading strategies that promote smaller orders and more cancellations of orders. As such, long-term investors may not be able to immediately access bids and offers that are farther down in the order book queue, but would fill their longer-standing orders.
The proposal comes after consultation with market participants including investors, market makers, investment banks, retail broker dealers and its listed companies, Nasdaq said. It opted for incentives to reduce order adjustments and cancellations rather than, in a nod to IEX and CSE, impose “artificial latency mechanisms that may distort or have unintended consequences on market quality”.
