Speed Bumps
A ‘speed bump’ is a mechanism for slowing down fast traders in order to give slower traders a fairer chance at the market. By implementing a timed delay (usually milliseconds) between the receipt of an order and the execution of its instructions, speed bumps are intended to mitigate the effects of asymmetric information by reducing the speed advantage of fast, sophisticated traders - such as predatory high-frequency traders (IIROC, 2018). However, critics of the mechanism (including many electronic trading firms) attest that speed bumps may make markets unnecessarily complex and unfairly favor certain market participants (Osipovich, 2019). Despite these concerns, nearly a dozen exchanges have proposed or implemented speed bumps. While the design of speed bumps differs across exchanges, all speed bumps in operation (except for IEX, which employs a “symmetrical” speed bump across all but pegged orders) are random and asymmetric, meaning that only liquidity-taking order types are delayed (Aoyagi, 2020).
References
- Aoygi, J. (2020, July 30). The Optimal Speed to Go over Speed Bumps in Financial Markets. Retrieved on August 31, 2020 from https://www.researchgate.net/publication/330132515_The_Dark_Side_of_Regulating_Fast_Informed_Trading
- Investment Industry Regulatory Organization of Canada (IIROC). (2018, January 28). Speed Segmentation on exchanges: competition for slow flow. Retrieved on August 21, 2020 from https://www.iiroc.ca/Documents/2018/25d5b306-3420-43cc-b260-a1527b82bfc3_en.pdf
- Osipovich, A. (2019, July 29). More Exchanges Add ‘Speed Bumps,’ Defying High-Frequency Traders. The Wall Street Journal. Retrieved on August 31, 2020 from https://www.wsj.com/articles/more-exchanges-add-speed-bumps-defying-high-frequency-traders-11564401611
Video: Slowing Down the Predatory High Speed Traders
BBC Newsnight
Video: Slowing Down A Stock Exchange With 38 Miles Of Cable
Tom Scott
While some exchanges have readily adopted speed bumps and other speed-control measures, the question remains - are slower markets better? As you read through the following articles, consider whether you feel that exchanges should have a role in controlling the speed of their trading participants.
Recommended Readings
Physics in finance: Trading at the speed of light. Buchanan, M. (2015, February 11). Retrieved on August 29, 2020 from https://www.nature.com/news/physics-in-finance-trading-at-the-speed-of-light-1.16872
Virtual speed bump for lightning-fast markets proposed. University of British Columbia - Sauder School of Business. (2019, October 29). Retrieved August 31, 2020 from www.sciencedaily.com/releases/2019/10/191029140714.htm
Asymmetric speed bumps: A market design response to high-frequency trading. Baldauf, M. & Mollner, J. (2019, October 31). Retrieved on August 21, 2020 from https://voxeu.org/article/asymmetric-speed-bumps-response-high-frequency-trading
Check Your Understanding
Do you think that speed bumps are an effective form of regulation? Why or why not? Consider whether or not you think that HFTs could bypass them.