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The LEAD℠ Advantage1

CHX’s innovative Liquidity Enhancing Access Delay℠ (LEAD) was designed to promote tighter, deeper displayed liquidity for the benefit of institutional and retail customers.

Information about latency arbitrage is available from various sources. This trading strategy is based on exploiting disparities in the price of a security or related securities that are being traded in different markets by taking advantage of the time it takes to access and respond to market information.

Latency arbitrage rose to fame and ensuing critical discussion in the securities industry with the publication of the best-selling book Flash Boys. This book highlighted how latency arbitrage works to the benefit of stock market professionals equipped with extremely fast (low latency) systems and networks which enable them to profit at the expense of others. Such “others” include retail customers, institutional customers, and liquidity providers who post displayed or undisplayed orders to buy and sell on stock exchanges.

Speed Bumps: The First Step

In response to the burdens of latency arbitrage on retail customers, institutional customers, and liquidity providers, other exchanges have adopted speed bumps. They have focused their efforts on protecting undisplayed orders arising in the form of undisplayed midpoint pegged orders. Their success in attracting orderflow in a highly competitive environment documents the value seen by customers in this effort to protect undisplayed orders from the adverse effects of latency arbitrage.

Price discovery in the secondary market for listed securities is, and should always be, among the highest priorities of any exchange. Price discovery comes in two forms:

  • Trades that are reported on the “tape” which indicate the number of shares and price of each executed trade. These reported trades evidence history what has already happened in the marketplace.
  • Displayed, firm exchange quotes that everyone in the marketplace relies on for price discovery. These quotes evidence what is currently occurring bids and offers to buy and sell securities.

What these exchanges have brought to the marketplace is reflected in the first form of price discovery – the trades which they report largely reflect interaction between two undisplayed orders. They have attracted relatively few displayed orders because their 350-microsecond intentional delay is applied identically to all inbound order and cancellation messages. Their implementation affords the exchange 350 microseconds to automatically reprice undisplayed pegged orders. However, it does not affect latency arbitrage attacks against displayed orders.

CHX: A More Complete Solution

CHX’s Liquidity Enhancing Access Delay (LEAD) was designed to afford significant protection from the adverse effects of latency arbitrage to both undisplayed pegged orders (as other exchanges’ speed bumps do) as well as liquidity-providing orders submitted by registered LEAD Market Makers (LMMs). The latter feature was designed to incentivize LMMs to contribute to the second form of price discovery – displayed, firm exchange quotes – by providing limited protection against the adverse effects of latency arbitrage. The latter feature is what makes LEAD a more complete solution.

Like the other exchanges' intentional delay, LEAD incorporates a 350-microsecond intentional LEAD delay. The LEAD delay is applied to all inbound messages except for certain qualified messages.

A qualified message is a message sent by an LMM in a security to which the order sender is assigned and acting as an LMM. The only qualified messages which are exempt from the LEAD intentional delay are:

  • New liquidity-providing orders.
  • Requests to cancel a resting order.
  • Requests to cancel and replace a resting order with a new liquidity-providing order.

These three exceptions afford LMMs the ability to adjust their quotes without delay.

LMMs must meet a heightened market-making performance standards to be afforded the privilege of being allowed to send qualified, undelayed messages.

For more information, contact:

Mark O’Connor
Director of Sales


Steven I. Givot
Senior Vice President - Strategy and Product Management

1. The information presented on this website is for promotional purposes only.  Please read all applicable CHX Rules and official information prior to using this product.