Bumping Up the Competition: The Influence of IEX's Speed Bump in US Financial Markets

Abstract

In recent news, algorithmic trading, and more specifically high frequency trading (HFT), has generated controversy in financial markets. Especially in the wake of recent “flash crashes” and other unexpected events, regulators and private actors have debated the positive and negative externalities of HFT, calling into question the current market structure. With a history of increasing competition among US stock exchanges and an assortment of regulations that have addressed only some of HFT critics’ concerns regarding fairness and volatility, some exchanges have introduced a private solution — the “speed bump.” Devised by IEX, the hero of Michael Lewis’s 'Flash Boys: A Wall Street Revolt,' the speed bump is a delay imposed on trade execution to slow down HFT. This paper provides one of the first studies of the speed bump landscape since IEX’s application for exchange status was approved in June 2016. In the wake of IEX, other exchanges have implemented their own forms of the speed bump, namely the NYSE American Stock Exchange speed bump, the Chicago Stock Exchange LEAD program, and the Nasdaq Extended Life order designation, in order to compete in the new “race for delayed access.” Such exchanges’ innovations on IEX’s speed bump mark a large shift in their perspective on speed bumps and demonstrate the effects of a market-based approach in an industry that knows itself best. The speed bump provides a potential way forward for markets to mitigate some of the risks HFT imposes while leaving open questions for regulators to address.