Securities Regulation Daily CFTC approves ICE Futures “speed bump” that delays “aggressive” orders
Wednesday, May 15, 2019

CFTC approves ICE Futures “speed bump” that delays “aggressive” orders

By Lene Powell, J.D.

The exchange believes the speed bump will boost liquidity and level the playing field for all traders, but two CFTC commissioners and some traders are concerned about effects on competition and innovation.

In the first time a designated contract market (DCM) has self-certified a rule to implement a “speed bump,” the CFTC has allowed a new ICE Futures U.S. rule to take effect, permitting the futures exchange to implement a new functionality called Passive Order Protection (POP). The speed bump creates a delay in the processing of incoming “aggressive” orders that would otherwise execute against “resting” or “passive” orders, but does not delay the processing of passive orders or their cancellations or modifications. The asymmetric delay, which will be initially set at three milliseconds and implemented for ICE's Gold Daily and Silver Daily futures markets, is designed to reduce the impact of latency or speed advantages of higher speed traders.

Passive Order Protection (POP). According to ICE's rule submission, which amends IFUS Rule 4.26, POP functionality creates a several millisecond delay for incoming orders that would otherwise transact immediately opposite resting or “passive” orders. When the exchange receives an incoming order that would immediately match with a passive order that is resting in the central limit order book (CLOB), the POP will delay execution of the incoming order for several milliseconds. The trader who submitted the resting order will not be notified that there is an incoming order waiting to take liquidity, but the POP will give the trader that submitted the resting order time to react to external market conditions (e.g. a price change in the related market). During the delay window, participants can modify their resting passive orders.

Two commissioners strongly opposed. Two commissioners issued statements in opposition to the new POP functionality. Commissioner Dan Berkovitz urged the CFTC to gather more information before allowing the “discriminatory, anti-competitive” delay.

“In my view, the promotion of liquidity does not justify the imposition of a material anti-competitive discriminatory burden on a particular segment of the market. The Commission should not ignore a fundamental purpose of the CEA—to promote fair competition—in a speculative attempt to generate liquidity,” said Berkovitz.

According to Commissioner Quintenz, the speed bump harms innovation by penalizing advantages in order to equalize at the lowest level. Describing past evolutions in market efficiency, Quintenz asked where the markets would be today if the stock markets had implemented a two-day speed bump in the 1830's to protect slower signal systems from the new telegraph network. It's impossible to know how much it would have delayed improvements in countrywide communications, he said, because no amount of data can prove a negative.

“The evolution of market efficiency elevates the status quo. It ‘equalizes up.’ Shame on us if we advantage the opposite,” said Quintenz.

Commissioner Dawn Stump said she “strongly supports” the rule self-certification process that ICE used, but noted the expectation that if ICE seeks to implement a speed bump in any other market or on any other terms, it will need to go through a separate self-certification process.

Industry comments. According to an ICE comment letter, the POP functionality will likely foster more open, competitive, and efficient markets in certain specified products where price discovery takes place in a related market rather than, or in addition to, the exchange's futures contract. ICE believes that by reducing the importance of latency advantages—only available to a small subset of the fastest firms engaged in arbitrage—the exchange will attract additional participants and liquidity to the screen in such markets, without compromising any meaningful market function.

However, the FIA Principal Traders Group, an association of firms that trade their own capital, countered that speed bumps pose a “tremendous threat” to the function, fairness, and stability of markets. According to FIA PTG, the POP functionality could harm market quality and make markets more fragile, adding unnecessary complexity and giving a misleading impression of what firm quotes are available in the market and create fleeting or potential illusory liquidity. The speed bump could also facilitate market manipulation schemes—including spoofing— by allowing bad actors to display quotes that they do not intend to execute and by creating mechanisms to easily pull quotes out of the way of incoming orders. In addition, the speed bump could present discrimination issues between different types of market participants and create an unlevel competitive playing field.

New speed bumps would require separate submissions. Division of Market Oversight (DMO) staff will coordinate with the Commission's Office of the Chief Economist and Office of Data and Technology to monitor and analyze the impact of the POP functionality in ICE's Gold Daily and Silver Daily futures markets in light of applicable statutory and regulatory requirements.

Regarding future speed bump proposals, DMO does not see this certification as setting a precedent for speed bump functionalities in general, and will consider any future proposed speed bumps on their own merits. Staff said that if ICE wants to make changes to the POP functionality, including implementing for any ICE contract other than the Gold Daily and Silver Daily contracts or change the three millisecond delay period, ICE would to file a new rule submission in accordance with CEA Section 5c(c) and part 40 of the Commission's regulations.

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