Wall Street braces for rough ride as exchanges seek more speed

NEW YORK (REUTERS) - US stock exchanges that spent decades speeding up markets with cutting-edge technology are now rushing to slow them down.

The New York Stock Exchange, Chicago Stock Exchange and Nasdaq Inc are all awaiting decisions by the US Securities and Exchange Commission on whether they can delay trades through so-called "speed bumps" and new order types.

The SEC is expected to approve or reject their proposals in the coming weeks.

The about-face comes after advances in technology made it possible to complete trades almost at the speed of light, prompting concerns by some market participants that sophisticated high-frequency traders were eating the lunch of ordinary investors.

Exchanges have profited from selling specialized services to high-frequency traders, which make up more than half of US trading volume. But now they are looking at ways to attract a wider range of investors, at least to certain of their trading venues, or are making sure they are keeping up with each other.

The SEC approved the market's first speed bump last year, but rules around intentionally slowing down trades are vague and it is difficult to predict which, if any, of the proposals will pass. SEC staff are scrutinizing how each exchange justifies its plans, said a person familiar with the matter.

"Whenever you have something that applies to one group and not others, it's discriminatory in some sense," said the person, who asked for anonymity as they are not authorized to speak to the media. "The question is, can you justify the discrimination?" The proposals follow the launch of IEX Group, which burst onto the scene last August with the market's inaugural speed bump and other features they said would level the playing field and protect small investors from high-speed trading chicanery.

Other exchanges were some of IEX's fiercest opponents and there is still a heated debate about whether the upstart is as altruistic as it was portrayed in Michael Lewis's best-selling book "Flash Boys: A Wall Street Revolt." However, its new way of doing business ultimately forced rivals to rethink their own strategies. Exchanges' reputations hinge on their ability to execute orders quickly and seamlessly for brokers, which are required to get customers the best market prices.

Mr Lewis's book scandalized Wall Street with its claim that exchanges were rigging the market by allowing high-frequency traders to use their speed to effectively jump the queue of orders from ordinary investors, known in the industry as"latency arbitrage." Many on Wall Street dispute that such a thing exists.

Nevertheless, high-frequency trading firms pay exchanges huge sums for near light-speed market access and data to drive their algorithms, and have become an increasingly large player in the stock market over the past decade.

IEX ran counter to the trend by establishing an exchange that does not make speed the primary factor and does not sell things like access to microwave and laser data feeds that give ultra-fast traders an edge. The approach appealed to many customers, including several institutional investors, and the exchange now has 2 per cent of the US stock-trading market.

Most traditional exchanges initially opposed IEX's speed-bump proposal, but have since had a change of heart, since it has become clear that some investors want to see such change. "The SEC, by approving IEX's exchange application, has opened up the marketplace for the potential for innovation around market structure that really has not been available to us for the last almost 10 years," said Nasdaq Chief Executive Adena Friedman.