The CFTC requested public comment on an exchange rule proposal by ICE Futures U.S., Inc. ("IFUS"), a designated contract market ("DCM").

The proposed amendment to IFUS Rule 4.26 would create a three-millisecond delay, or "speed bump," for incoming orders that otherwise would transact immediately opposite resting or "passive" orders. Under this procedure, the exchange would disable stop orders to allow market participants to modify their orders in response to price change in related markets.

The new functionality, which initially will be implemented in the "Gold Daily" and "Silver Daily" futures markets, is intended to lessen "latency advantages between traders engaged in arbitrage strategies against related markets." According to IFUS, the "short delay helps level the playing field by giving all traders who have placed a resting order additional time to react to price changes in related markets."

The CFTC Division of Market Oversight extended the review period for an additional 90 days until May 14, 2019.

Commentary / Bob Zwirb

Since the advent of high frequency and algorithmic trading, there has been a steady stream of criticism regarding its impact on financial markets, with calls for regulators and even enforcement authorities to take action to slow it down. These calls have ranged from former CFTC Commissioner Bart Chilton's proposal to require "kill switches" to prevent such trading from "go[ing] feral," to one scholar's suggestion to use "randomizing temporal buffers" to slightly slow the pace of trading in order to "reduce the likelihood of chaotic feedback instabilities in automated trading markets."

What's different here is that the action is being initiated not by regulators, but by an exchange to assist market participants engaged in arbitrage (though a similar speed bump was introduced in 2016 by the IEX Group, a securities exchange). But given the basic definition of High Frequency Trading (HFT), as enunciated by former SEC and CFTC Chief Economist Jim Overdahl, that it involves "[t]he use of information technology to quickly receive and analyze market data in order to identify and act upon profitable trading opportunities" including trading strategies such as "1) market making; and 2) arbitrage across related products" (emphasis added), it's not clear at first blush why allowing arbitrageurs "a very short window to modify their Exchange orders where there is a price change in a related market" is desirable.

Caution may be in order here, and the CFTC is wise to seek public comment before acting given that, in general, speed bumps, as the FIA Principal Traders Group argues, "c[an] harm overall market quality, add complexity and provide a mechanism for potential trade practice abuse."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.