The SEC Office of the Investor Advocate ("OIA") recommended that the SEC disapprove a Cboe EDGA Exchange, Inc. ("EDGA") rule proposal to introduce a Liquidity Provider Protection Delay Mechanism. The OIA argued that it would have a "detrimental" impact on investors.

As proposed, the rule would:

  • delay EDGA's incoming executable orders for up to four milliseconds while allowing resting orders on EDGA's book to be canceled or revised without the delay; and
  • permit liquidity providers on EDGA to modify resting quotations in accordance with other market data prior to the quotes being otherwise executed against other incoming orders.

The OIA criticized the proposal for favoring market participants who submit a certain set of orders to EDGA which would appear inconsistent with investor protection. In addition to being "discriminatory on its face," the OIA argued that the proposal "is insufficiently designed to enhance market quality."


Bob Zwirb

The recommendation by the OIA illustrates why the preferences of such advocates do not always coincide with those of their constituency. Arguing that the purported benefits of the proposed speed bump are "too speculative" in nature to accept at face value, the OIA opposes the proposal because it "is insufficiently designed to enhance market quality." In so holding, the OIA's analysis appears to be no less speculative than that of the exchange, whose defense of speedbumps it finds fault with, and, indeed, no less speculative than that of the SEC itself when it adopted market-wide speed bumps and trading halts in the aftermath of the 1987 crash.

At a time when more exchanges are adding speed bumps to deal with turbulence - real or perceived - arising from modern financial technology-based trading, and when such proposals are receiving increased support in academic circles, does it make sense for regulators to intervene on the basis of "unfairness" and prevent exchanges from experimenting by offering an array of trade execution policies and letting the market decide what really works?

Moreover, given that certain segments of the investing public have expressed a desire for protection from hyper-rapid trading, and given that it is in the interest of profit-maximizing exchanges like the Cboe "to promulgate rules that maximize, not minimize, investors' welfare" Daniel R. Fischel, "Organized Exchanges and the Regulation of Dual Class Common Stock," 54 U. Chi. L. Rev. 119, 129, 130 (1987) (arguing that exchanges have incentives "strong incentives to adopt rules . . . that allay investors' concerns"), does it really advance the public interest for the SEC to accept the assumptions of its in-house investor advocate over those of the exchange, which is offering this solution "on a purely voluntary basis" to meet the needs of such investors, and has much to lose if its assumptions turn out to be wrong?

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