Washington, DC — The Commodity Futures Trading Commission’s (Commission) Division of Market Oversight (DMO) today issued the following statement.
On February 1, 2019, ICE Futures U.S., Inc. (ICE or Exchange) self-certified an amendment to ICE Rule 4.26 (Order Execution) (ICE Rule) that would allow ICE to implement a new functionality, named Passive Order Protection (“POP functionality” or “functionality”) (Submission). The POP functionality creates a delay or “speed bump” in the processing of incoming “aggressive” orders that would otherwise execute against “resting” or “passive” orders, but does not delay the processing of passive orders or their cancellations or modifications. The POP functionality is designed to reduce the impact of latency (or speed) advantages among a segment of higher speed traders through the asymmetric delay as described above. The Submission (but not ICE Rule 4.26) provides that the POP functionality will initially be implemented for ICE’s Gold Daily and Silver Daily futures markets, and the delay period will be set at three milliseconds. ICE Rule 4.26 states that “Passive Order Protection may be activated for those Exchange Futures Contracts and contract months as determined by the Exchange from time to time in its discretion.”
On February 13, 2019, pursuant to delegated authority, DMO issued a stay of the Submission for a 90-day review period. The Commission requested public comments on the Submission and received letters both supporting and opposing the ICE Rule. The 90-day review period expired on May 14, 2019, without further Commission action with regard to the certification of the Submission. Under the Commodity Exchange Act (CEA or Act) and the Commission’s regulations, a new rule or rule amendment subject to a stay will become effective at the expiration of the 90-day review period unless prior to that time the Commission withdraws the stay or notifies the certifying entity it objects to the rule or rule amendment on the grounds that it is inconsistent with the Act or the Commission’s regulations. Accordingly, the Submission became effective with the expiration of the review period.
During the 90-day review period, DMO staff conducted an analysis of the legal and policy implications of the ICE Rule, met with several market participants, and studied speed bumps in other markets. As part of its analysis, DMO staff considered public comments on the Submission. DMO staff emphasizes that its analysis of the ICE Rule was based on the entirety of the information provided by ICE, including ICE’s statements that the POP functionality will be implemented in the Gold Daily and Silver Daily futures markets and with a three millisecond delay period. Based on its analysis, DMO staff recommended that the Commission not object to the certification of the ICE Rule.
The Submission is the first time a designated contract market (DCM) has certified a rule that would implement speed bump functionality and currently, there is limited data and empirical analysis on the impact of speed bumps generally. Furthermore, without such data and analysis it is difficult to determine the effects the POP functionality may have on market functions in markets where there will potentially be multiple market participants with different strategies and speed capabilities interacting with each other. In light of the novel nature of speed bump functionalities in the futures markets, DMO staff is issuing this statement to clarify DMO staff’s views on a number of points with respect to the ICE Rule and the implementation of speed bump functionalities generally in the futures markets.
DMO staff believes that speed bump functionalities have the potential to significantly impact futures markets’ function and quality, both negatively and positively, in a number of ways. For example, the implementation of speed bump functionalities, in particular an asymmetric speed bump like the POP functionality, raises concerns regarding the potential impact on fairness and competition between market participants and exchanges. Additionally, market participants have commented that liquidity providers are being given an extended ability to cancel or modify their resting orders and therefore liquidity displayed in the market data feed may be inaccessible. On the other hand, ICE’s Gold Daily and Silver Daily futures markets currently have little or no order book trading. Moreover, these markets are not primary price discovery markets. Thus, the speed bump functionality may foster liquidity and trading volume in these markets by certain liquidity providers by slowing down high-speed traders engaged in latency arbitrage.
In light of these factors, DMO staff believes the application of the POP functionality to ICE’s Gold Daily and Silver Daily futures contracts may be useful to evaluate the impact of speed bump functionality on, among other things, futures market liquidity, price discovery, competition, and the potential for manipulation and abusive trading practices. Accordingly, DMO staff intends to monitor and analyze the impact of the POP functionality on an ongoing basis in light of the applicable statutory and regulatory requirements. DMO intends to coordinate with the Commission’s Office of the Chief Economist and Office of Data and Technology in this regard. The impact of the POP functionality in ICE’s Gold Daily and Silver Daily futures markets may serve to inform the Commission’s analysis of other speed bump functionality proposals.
DMO staff does not view the certification of the ICE Rule as establishing a precedent with respect to the legal and policy merits of speed bump functionalities generally. Rather, DMO staff will consider any proposed speed bump functionality on its own merits based on all of the relevant facts under applicable statutory and regulatory requirements.
Furthermore, DMO staff emphasizes that the implementation of speed bump functionality for any product, or a change to a speed bump’s functionality, for example, an adjustment to a time delay period, requires a separate rule submission with the Commission. Section 40.1(i) of the Commission’s regulations broadly defines the term “rule.” Thus, the application of a speed bump to any product, regardless of prior certification of the functionality by the same DCM with respect to another product, or adjustments to a speed bump’s functionality, would constitute a “rule” and require separate certifications or approvals under CEA Section 5c(c) and part 40 of the Commission’s regulations. Therefore, notwithstanding the broad language of the ICE Rule, the future implementation of the POP functionality for any ICE contract other than the Gold Daily and Silver Daily contracts, or a change to the three millisecond delay period, among other changes to the POP functionality, would require ICE to file a new rule submission in accordance with CEA Section 5c(c) and part 40 of the Commission’s regulations.