By John McCrank
NEW YORK (Reuters) - The U.S. Securities and Exchange Commission has put on hold a decision by its staff to allow the Chicago Stock Exchange to give certain trading firms faster access if they agree to strict trading obligations aimed at making it easier for others to buy and sell stocks.
It is the second time in recent months that the SEC has stayed a decision regarding the exchange, known as CHX, regulatory filings show. The regulator in August put a hold on a decision by its staff approving the politically sensitive sale of CHX to a consortium led by Chinese investors.
SEC commissioners will vote at a later date on whether to let the decision stand. The move is not unusual, particularly if the product or deal under scrutiny is controversial or high-profile.
CHX is a niche player with a market share of around 0.5 percent, which it said is due to a lack of liquidity. Its Liquidity Enhancing Access Delay (LEAD) proposal was pitched as a way to help it grow.
Market participants were split on whether the proposal, which would be a two-year pilot program, would benefit or harm the market.
The LEAD is a sort of speed bump that would delay orders coming into the exchange by 350 microseconds. But under CHX's proposal, some trading firms could bypass the speed bump, giving them a time advantage that would allow them to update their prices or cancel resting orders in response to market movements.
To get the advantage, the firms, known as market makers, would have to agree to trade and quote a specific amount on the exchange.
Market makers, such as Virtu Financial (O:VIRT) and Global Trading Systems, use their own capital to buy and sell stocks or other financial products to ensure orderly trading, and aim to profit off of the spread between the bid and the offer. It has become increasingly difficult in recent years for companies to make money from market making, as tighter spreads and low trading volumes have squeezed margins.
CHX said that problem was amplified by some traders who use sophisticated high-speed technology to detect market moves and then race ahead of other market participants to pick off quotes at prices that have effectively become stale.
The 350-microsecond speed advantage would give CHX's market makers a "risk management tool" and encourage them to display more larger orders at aggressive prices, the exchange said.