CME CME Group Inc

By Alexander Osipovich 

A futures exchange is set to blunt the advantages of ultrafast traders by imposing a split-second delay on some trades.

Intercontinental Exchange Inc., known as ICE, can launch the first "speed bump" in U.S. futures markets after the Commodity Futures Trading Commission didn't block the proposal.

Some of the world's largest high-frequency trading firms had opposed the plan, under which ICE would introduce a three-millisecond pause before it executes certain trades in its Gold Daily and Silver Daily futures contracts.

Trading volumes in the two contracts are tiny, with most activity in gold and silver futures taking place at rival exchange CME Group Inc. But traders had been closely watching the CFTC's decision because of the precedent it could set.

Under CFTC rules, the agency had the ability to block the proposal within a 90-day period that ended Tuesday. It had taken no action by midnight, meaning ICE is free to introduce its speed bump. A CFTC spokeswoman declined to comment.

"We are very pleased with the CFTC's decision to allow our rule amendment for passive order protection -- or what is commonly referred to as a speed bump -- in futures markets to become effective," an ICE spokesman said.

Trading giants such as Citadel Securities LLC and DRW Holdings LLC had attacked ICE's plan, saying it would harm markets and discriminate in favor of some market players over others. But a few smaller electronic trading firms welcomed the proposed speed bump, saying it would allow greater competition in the high-speed trading business.

Currently, high-frequency traders must keep investing in costly technology to shave millionths or billionths of a second off the time it takes to execute trades, or else risk falling behind their rivals. The biggest trading firms have spent years building ultrafast systems, such as microwave networks and direct connections to exchanges' data centers. That gives them an edge over newcomers without such infrastructure.

ICE's speed bump would give slower-trading firms a buffer against quicker rivals. The planned delay would apply only to incoming orders seeking to hit unexecuted buy or sell orders already posted on ICE. Traders posting new orders to be displayed on the exchange wouldn't be affected.

Such a design would give a trading firm posting a price quote a brief window to cancel or adjust its quote if market conditions shifted and its price went out of date. Right now, such quotes can be "picked off" by speedy traders, who zip in with lightning-fast technology and execute against the stale quotes before slower players can react.

ICE's speed bump would be different from the "symmetric" speed bumps that have cropped up on some U.S. stock exchanges in recent years. IEX Group Inc., the upstart exchange featured in Michael Lewis's book "Flash Boys," applies a brief delay to all orders.

Opponents of ICE's plan said it was effectively a form of "last look" -- a controversial practice from the foreign-exchange markets in which banks could pull out of trades at the last moment if prices moved against them. ICE has rejected the comparison.

Some critics warned that if asymmetric speed bumps spread to other, more significant futures markets, it could exacerbate volatility during periods of market turmoil.

During episodes of volatility, there would be "essentially fake liquidity on the screen," DRW founder and Chief Executive Donald Wilson Jr. said at a futures-industry conference in March. "I think that's a very dangerous thing."

--Gabriel T. Rubin contributed to this article.

Write to Alexander Osipovich at alexander.osipovich@dowjones.com

(END) Dow Jones Newswires

May 15, 2019 09:08 ET (13:08 GMT)

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