A key differentiator between the newly approved IEX and other national securities exchanges such as the New York Stock Exchange, Nasdaq Stock Market and Bats BZX Exchange was blessed by the SEC in its revised interpretation of the order protection rule
. The commission said it would "require trading centers to honor automated securities prices that are subject to a small delay or speed bump when being accessed." IEX's so-called speed bump of 350 microseconds is within the 1 millisecond now allowed by the SEC.
Specifically, we use data from US equity markets in 2008 to investigate the US Securities and Exchange Commission's (SEC) "Flickering Quote Exception" to the Regulation National Market System (Reg NMS) Order Protection Rule that defines the benchmark price for evaluation of trade throughs and provides a one second look back exception.
Section I provides an overview of the SEC Reg NMS Order Protection Rule and the Benchmark Quote Exception and describes the quote-arbitrage trading strategy.
Reg NMS Order Protection Rule and Flickering Quote Exception
To better integrate the various exchanges trading equities and to encourage the display of liquidity, the SEC adopted the Order Protection Rule, Rule 611, in 2005.
The Order Protection Rule and the Benchmark Quote Exception establish the regulatory environment that forms the basis of our analysis.
One potential cause of our current and proceeding results is that the Order Protection Rule is simply ignored by the exchanges.
The SEC's Benchmark Quote Exception to the Order Protection Rule allows trades on an exchange to occur at prices inferior to the best contemporaneous prices on other exchanges as long as the trade occurs at a price equal to or better than the Benchmark Quote.