SEC Draws NYSE's Fury With Idea a Millisecond Doesn't Matter

  • Fans, critics of exchange application fight a new proposal
  • If adopted, delays under 1 millisecond would be called trivial

Does a millisecond matter?

Maybe not, the U.S. Securities and Exchange Commission is saying. If a stock exchange intentionally delays orders by just one-thousandth of a second, it would be acceptable under an SEC proposal. The New York Stock Exchange and others oppose the change, saying a millisecond is anything but trivial.

The fight over a tiny fraction of a second is tangled up in IEX Group Inc.’s attempt to convert its private market into a full-fledged public stock exchange. IEX wants to impose a speed bump on its exchange of just over one-third of a millisecond, to make trading more fair for slower-moving investors. But critics and fans of IEX’s application alike are arguing that regulators are veering into dangerous territory.

“There’s a lot of fear that we’re going to open a Pandora’s box,” said James Angel, a finance professor at Georgetown University in Washington. “It’s a legitimate fear.”

Key Benefit

At issue is a key advantage official stock exchanges enjoy in the U.S., a group that includes the NYSE, Nasdaq and four markets run by Bats Global Markets Inc. When an exchange has the best price quote for a stock, orders for that stock are supposed to be shipped its way (though brokers can also match or beat the price on private venues). IEX could win the advantage -- which can help add to market share -- by converting its dark pool into an exchange.

But there’s a catch: to be eligible, an exchange must have a system considered automatic and its price quotes must be immediately accessible. Back when this rule was created more than a decade ago, regulators didn’t set a specific time standard for what’s considered “immediate.” Instead, it said exchanges should just provide the fastest possible response without a programmed delay.

On March 18, the SEC proposed a fresh interpretation that would let exchanges delay their response times by a millisecond and still enjoy this benefit. What organizations like the Healthy Markets Association -- a group of asset managers that praised aspects of IEX’s business model -- are worried about is the blanket declaration that any delay of up to a millisecond is acceptable.

Different Path

“We hope the SEC realizes that it doesn’t have to go down this road to approve IEX,” said Tyler Gellasch, the executive director of Healthy Markets and a former SEC official. “I think most folks in the markets immediately recognized that the SEC’s proposal to approve all speed bumps under one millisecond would make the markets a lot more complex and potentially a lot less fair.”

The SEC has suggested it wants to simultaneously rule on whether to approve IEX’s exchange application and the millisecond threshold, according to people familiar with the matter who asked not to be named because the matter is private. The regulator released its proposal for the millisecond threshold on the same Friday afternoon in March that it pushed back its decision deadline for IEX’s exchange application. The SEC now has until June 18 to choose whether IEX can become an exchange.

“We believe that IEX’s application stands apart from this interpretation and we should be evaluated on our own merits,” Brad Katsuyama, the chief executive officer of IEX, said in an e-mailed statement. Kevin Callahan, a spokesman for the SEC, declined to comment.

IEX pushed this point in its own comment letter on the SEC’s millisecond threshold idea, posted to the regulator’s site on Monday. Trying to untangle its own fate from the proposal, IEX said the SEC should provide more clarity on the idea and consider any future exchange delays individually. IEX also underlined that it should enjoy all the privileges of a full-fledged exchange -- something its critics have called into question.

“Markets cannot self-correct or evolve in ways that respond to the needs of investors if regulation is used as a discriminatory barrier to prevent them from doing so,” IEX said in its letter.

‘De Minimis’

The New York Stock Exchange, Hudson River Trading LLC and Franklin Templeton Investments have all warned the SEC that dubbing delays of a millisecond or less “de minimis” would introduce problems.

“We are concerned that the SEC’s proposal would likely introduce significant unnecessary market complexities and create significant risks for investors,” William Stephenson, global head of trading at Franklin Templeton, wrote in a comment letter to the SEC as he encouraged the SEC to approve IEX’s application as soon as possible.

The proposal could also enable market manipulation, Citadel LLC and Healthy Markets said in their own comment letters. A trading firm could influence a stock’s closing price, Citadel said, by sending out an order timed precisely so that no other participant could get to it through the delay by the time markets close.

In the computer-dominated stock market, a lot happens in the space of a millisecond, Hudson River stressed, pointing to SEC data. More than 13 percent of orders to buy or sell large stocks on public exchanges were canceled within one millisecond, according to SEC data from the fourth quarter. More than 9 percent of trades in those stocks were completed in the same period of time. Those figures don’t mesh with the notion that one millisecond is a trivial threshold, Hudson River said.

Slow Humans

“One millisecond is not de minimis in any context except from the perspective of a human trader,” Hudson River’s head of business development Adam Nunes wrote.

The new boundary would give exchanges unprecedented freedom to experiment with time delays as long as they fall under one millisecond, a potential headache for the entire trading community, NYSE said.

“We hope the Commission is considerate in moving forward with it,” said Brendon Weiss, co-head of government affairs at Intercontinental Exchange Inc., NYSE’s parent company, in an e-mailed statement. “There are some major issues that could come from this proposal that may not be to the greatest benefit to investors and public companies.”

Nasdaq CEO Robert Greifeld invoked a similar theme, speaking at an industry conference last week.

“If a millisecond is de minimis, you bring a new dimension to order types which is not available to us now,” Greifeld said at a Securities Industry and Financial Markets Association conference in New York.

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