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Are Speed-Bumps, Market Structure’s “Back to the Future”? (and is the CHX Biff Tannen?)
Traders Magazine Online News, March 20, 2017
In the popular movie series "Back to the Future" the villain is a school bully named Biff Tannen. At the end of the first movie, he gets punched in the face by Marty McFly’s father to enable the timeline to be restored. In the second movie, Biff goes back in time, and, with a sports almanac, uses it to bet his way to wealth and power. In the end, he is stopped by Marty, but not before sobering views of a future changed by Biff’s actions.
In the ongoing saga of market structure debates over speed-bumps, I see a parallel between the CHX’s attempt to introduce a speed-bump (to provide advantages to its market makers) and Biff. Their first proposal, for an asymmetric delay, was met by the equivalent of a punch in the face by commenters who argued that it would distort the markets. Unfortunately, their second proposal, which would provide a symmetrical delay, but one that excludes their best market makers, is arguably worse. This new proposal is a step backwards in time and is reminiscent of the structural advantages held by specialists on the old NYSE[1] or Nasdaq market makers on the old “Selectnet” system[2].
David Weisberger
On the surface, the CHX proposal makes sense. It could turn out that incentivizing "obligated" market makers to quote more will improve liquidity and price discovery, but, then again, it might not. From the CHX perspective, becoming the first modern exchange to re-introduce structural advantages for market makers, could boost their market share and attract incremental activity. Unfortunately, due to a couple of outdated regulations (Rule 605 and the Order Protection Rule in Reg NMS), this proposal would be quite problematic. In addition, if it succeeds, we should expect the other exchanges to introduce similar models, magnifying the extent of the problems it could create.
The specific CHX proposal is to provide lead market makers (who have obligations to maintain defined statistical levels of two way quotes in all securities they are designated in) the ability to place liquidity providing orders as well as to cancel orders without restriction, while the CHX will uniformly apply a 350-micro-second delay to all other order placement and cancellation actions on the exchange.
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