Speed Bumps Are the Hot New Thing for Exchanges

Everyone knows the story of IEX by now, but let's tell it again anyway. Some investors were sad. They were sad because they wanted to buy some stock, and their computers told them that there were 5,000 shares of the stock available on different exchanges at a price of $20 each, but when they sent an order to buy those 5,000 shares, they only got like 100. The rest instantly, magically, flickeringly disappeared, only to reappear priced at, like, $20.05, or $20.20, or $21. The investors were being front-run! High-frequency trading firms saw their order execute on one exchange, and immediately raced ahead of them to raise the prices on all the other exchanges. Those 5,000 shares at $20 were a mirage, just "phantom liquidity."

So IEX built a new kind of trading venue that fixed this. The way it fixed it is with a "speed bump." Communications to and from IEX are slowed down by a tiny little bit: When you send an order to IEX, or when you get a confirmation back that your order has executed, IEX delays the message by 350 microseconds. If you give IEX an order to buy 5,000 shares, and there are 500 shares available on IEX at $20.00 and 4,500 available elsewhere at $20.00, IEX will sell you the 500 shares at $20.00 and route the rest of your order to the other exchanges. But! The people who sold you the 500 shares on IEX won't find out for 350 microseconds, so they won't be able to race ahead of you to the other exchanges to jack up the price. You will get real liquidity, not the bogus phantom liquidity offered elsewhere.