Larry Tabb On “EDGA, The Hot Tub Time Machine Of Stock Trading” Re CBOE And Speed Bumps

According to TABB Group founder and research chair, the Cboe reportedly is looking to implement a 3- to 4-millisecond speed bump for liquidity-taking orders on its EDGA equity exchange. While the delay may attract new market makers, the asymmetric speed bump effectively will give liquidity providers a time machine that will provide them with much greater clairvoyance into who they do business with and at what price, transferring risk from the liquidity provider to the liquidity taker.avb

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The Wall Street Journal recently reported that Cboe is working on adding a speed bump to its smallest exchange (EDGA) (“New ‘Speed Bump’ Planned for U.S. Stock Market”). EDGA was one of the four US equity exchanges Cboe obtained when it acquired BATS, which obtained EDGA when it acquired DirectEdge in 2014.

The Journal reported that Cboe has been discussing the addition of an asymmetrical 3- to 4-millisecond speed bump for liquidity-taking orders, so marketable orders (those that take displayed liquidity) would be delayed for 3 to 4 milliseconds before they reach the resting limit orders in its trading book. The article also mentioned that Cboe would preclude this market from being covered by Reg NMS Rule 611, more commonly known as the “Order Protection Rule.” This means that EDGA would not be subject to order routing requirements that force all stock exchanges to honor other exchanges’ most aggressive quotes. The elimination of order protection for this market would allow other exchanges to bypass EDGA’s displayed limit orders.

"While most people reading this piece understand the words above, I am not sure everyone will grasp what this actually means to US equity market structure."

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