NEW YORK (Reuters) – A group of North American pension plans with more than $3.3 trillion in assets has backed a proposal by stock exchange operator IEX Group to use artificial intelligence to counter the technology that some high speed traders use to gain trading advantage.
New technologies and regulations have made the US stock market more efficient. But they also created advantages of speed when executing stock orders, said the group, led by the Ontario and Quebec pension plans, as well as the city comptroller of New York, in a letter to the United States Securities and Exchange Commission.
“These speed advantages have tipped the balance in favor of firms specializing in ‘latency arbitrage,’ reducing the willingness of long-term investors and market makers to post quotes,” said the group, which also includes pension plans in California, Wyoming, and Arizona, the Feb. 24 letter said.
In latency arbitrage, when a stock’s price changes on one of 13 U.S. exchanges, a company uses advanced technology to electronically rush to the other exchanges microseconds before the price update to buy or sell at an advantageous level.
IEX asked the SEC in December to allow it to use machine-learning-based software to monitor data feeds from all U.S. stock exchanges to identify when stock quotes are likely to change, and then update it. ‘send a “signal” which temporarily prevents the execution of the orders on shares displayed concerned. IEX currently uses the signal for undisplayed orders, which price is based on displayed orders.
The signal is activated for 0.02% of the trading day, and during this time 24% of IEX’s displayed stock orders are currently filled. This indicates that sophisticated traders take advantage of tiny windows of time when prices change, the exchange said.
The SEC said Feb. 12 that it needed more time to assess IEX’s proposal after trade groups representing auto-trading firms and broker-dealers, as well as individual firms Hudson River Trading and IMC, complained. said quotes on IEX would be unreliable if they go ahead.
IMC called IEX’s proposal a “perilous trick that creates a safe zone for illusory commands”.
Investment and trading firms that have asked the SEC to approve IEX’s proposal include Raymond James, Jefferies JEF.NT. Rowe Price TROW.OBaird, AGF, Clearpool and market makers XTX and Virtu Financial VIRT.O.
“We believe that the IEX proposal is a highly innovative, market-based solution that will mitigate the negative effects of certain predatory trading behaviors that have been spawned by the latency arbitrage that exists in fast-paced markets. lightning today,” Virtu said.
(This story corrects 6th paragraph to say 0.02%, not 0.2%)
Reporting by John McCrank; Editing by Dan Grebler