The Chicago Stock Exchange this week outlined plans to adopt what it calls a Liquidity Taking Access Delay, a 350-microsecond delay for those who trade against resting orders on the exchange.
The simple way to explain this is to think of a scenario in which there are 13 different versions of eBay. Buyers and sellers are active across all 13 sites, and in theory a pair of sneakers on eBay1 should be the price as the same pair on eBay2.
Given the dynamic pricing, however, there are occasions in which buyers get to an old price before the seller can change it, or vice versa. That’s kind of what is happening to the Chicago Stock Exchange.
Here’s how the filing describes latency arbitrage:
“‘Latency arbitrage’ means the practice of exploiting disparities in the price of a security or related securities that are being traded in different markets by taking advantage of the time it takes to access and respond to market information.”
The Chicago Stock Exchange said in the filing that the LTAD was designed to neutralize high-speed traders engaged in latency arbitrage. In plain English, it is trying to stop buyers from taking advantage of out-of-date prices.
The filing says:
“LTAD is designed to neutralize microsecond speed advantages exploited by low-latency market participants engaged in latency arbitrage strategies that diminish displayed liquidity and impair price discovery in national market system (“NMS”) securities.”
The move is in response to a change in the trading of the SPDR S&P 500 trust exchange-traded fund. The exchange said it first noticed latency-arbitrage activity in the SPDR in January and as a result of this market makers had “dramatically” reduced displayed liquidity. The filing said:
“The Exchange believes that the best way to minimize the effectiveness of latency arbitrage strategies on CHX with respect to resting limit orders is to implement an asymmetric delay, such as LTAD, to de-emphasize speed as a key to trading success.”