The CFTC approved a new functionality proposed by ICE Futures U.S., Inc. ("ICE") called "Passive Order Protection" ("POP"), which is designed to reduce the impact of a speed advantage among higher-speed traders by implementing an asymmetric delay. The delay, or "speed bump," will affect "aggressive" orders that normally would be executed against "resting" or "passive" orders. The POP functionality will be applied to ICE's Gold Daily and Silver Daily futures markets, at first, for a three-millisecond delay.
CFTC Commissioner Dan Berkovitz disagreed with the action, saying that asymmetric "speed bumps" that disadvantage any particular trading activity are "discriminatory, anti-competitive, and facially inconsistent with the fundamental objectives of the Commodity Exchange Act." Additionally, Mr. Berkovitz argued that ICE does not sufficiently support its claim that POP's speed bump (i) is necessary, (ii) will reduce latency arbitrage or (iii) will encourage additional participants and liquidity. Mr. Berkovitz stated that because this is the first proposed asymmetric speed bump before the CFTC, there is not enough available data to support its adoption.
CFTC Commissioner Brian Quintenz criticized the proposal for attempting to "equalize downward" by punishing innovation. Mr. Quintenz stated that punishing technological developments also stops the market from becoming more efficient, which is not the role of any regulator.
CFTC Commissioner Dawn Stump stated that, while she strongly supports the self-certification process by which exchanges can adopt new rules, she is unable to determine that the proposal is inconsistent with CEA or CFTC rules due to the lack of data or empirical analysis.
Commentary / Bob Zwirb
While opinion is divided on whether speed bumps are beneficial - indeed, a strong case can be made that they are not, given that the raison d'etre for exchanges is to provide "a forum that allows customer orders to be executed with minimum delay" and that "[t]his immediacy is extremely important for purchasers and sellers" (Daniel R. Fischel, "Organized Exchanges and the Regulation of Dual Class Common Stock," 54 U. Chi. L. Rev. 119, 122 (1987)) - it is not clear that regulatory intervention is necessary here.
For the issue isn't really whether allowing this practice to go forward will "equalize [trading] at the lowest level," as Commissioner Quintenz contends, or whether it will "disadvantage particular trading entities, strategies, or technologies" in a "discriminatory, anti-competitive" manner, as Commissioner Berkovitz maintains. Nor frankly is it whether the rule is consistent with the CEA "based upon the specific facts and circumstances," as Commissioner Stump frames it. No one at this time really knows, and that is the point. In the end, we are dealing with a rule proposed by an exchange, which believes that introducing such a pause will benefit its users and attract business to that exchange.
Given that ICE is not a monopoly, but in active competition with other derivative exchanges worldwide for product listings, and given that many users are institutional investors, it is not clear that CFTC intervention is necessary to protect investors here. As an exchange, ICE has "strong incentives to provide transactional and ancillary services that are in the best interests of [its] investors." Id. at 123. Moreover, as Professor Fischel explains, "it is not in the best interest of the exchange to allow exploitation of investors." Id. at 129. Rather, "the profit-maximizing strategy for an exchange is to promulgate rules that maximize, not minimize, investors' welfare." Id. at 130.
Preventing ICE from offering a different type of trade execution policy than that offered by other exchanges may be anti-competitive. That is because there is no reason to believe that one type of trading practice is optimal for all investors. Rightly or wrongly, there are investors out there who may want to slow down the very fastest traders. Perhaps that desire is misguided, but it does not follow that all exchanges should be forced by the CFTC to offer the same trading policy, as Commissioners Quintenz and Berkovitz maintain.
If this experiment works out, ICE's investors will benefit. If not, investors will lose confidence in ICE and quickly flee to other exchanges, and ICE will change its policy. Let the market decide.
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