The International Securities Exchange plans to cut the duration of its auctions to half a second, from a full second, in order to reduce its members’ exposure to adverse price moves and increase the number of auctions it runs.
According to a document filed with the Securities and Exchange Commission, the ISE will reduce the response times in its three block trading mechanisms and its Price Improvement Mechanism (PIM) for small orders in half, from 1 second to 500 milliseconds.
Because traders initiating auctions in the four mechanisms face the risk of losing money while they wait for the auction to conclude, the ISE told the SEC a speedier auction will reduce that risk.
Often, the trader initiating the auction has guaranteed his customer a certain price, so if the market moves, he may lose money, according to the ISE.
A survey taken by the ISE indicated that 20 of the 21 firms that use the mechanisms would be able to adjust their systems to respond to auctions in less than 500 milliseconds.
Actually, over 90 percent of all auctions are already completed in less than 500 milliseconds, the ISE told the SEC in the filing. Besides the PIM, the ISE operates a Block Mechanism and a Facilitation Mechanism for orders of at least 50 contracts, and a Solicited Order Mechanism for orders of at least 500 contracts.
In addition to the risk mitigation benefits, the ISE in the filing notes the change will make it possible to run more auctions. ISE rules prevent simultaneous auctions in the same series from occurring. Faster auctions should translate into more auctions in the same series, the ISE told the SEC, benefitting end customers.
