Interesting story in the FT today about IEX and its application to become a fully-fledged exchange. At issue is IEX’s so-called ’speed bump’ that will slow down the HFT ‘boy racers’ and so make markets safer again. Naysayers claim that the inclusion of a speed bump is contrary to the rule that investors should have “immediate” access to the best liquidity. The SEC counters that anything that is sub-millisecond (such as in this case) is, in effect, “immediate”. It seems, however, that such a distinction would not stand up in the black and white interpretation of the law that a judge would be forced to apply.
The real point, though, is that if IEX were to have its licence approved, then all that would happen is that everyone else would introduce their own speed bumps, speed traps, traffic lights and other mechanisms to better serve one set of traders over another. On top of this, the market would introduce a plethora of ever more complicated order types to allow different, yet all legitimate, participants to navigate their way around or through the available liquidity in the way that they wish. And so we would be spectacularly back to square one (only in an even more complicated way).
It seems to me that it’s a little disingenuous for traditional investment managers to claim that markets should exist only to serve their business models. HFT is just different, that’s all, and if we don’t want it around then the only way to achieve this is to mandate that all liquidity venues install exactly the same type of speed bump.