(Bloomberg) — Citadel Securities lost its bid to block IEX Group Inc. from launching a new type of options exchange that intentionally slows orders, after a federal appeals court on Friday rejected the market maker’s challenge.
The ruling by a three-judge panel clears the way for IEX, the exchange operator made famous by Michael Lewis’s Flash Boys, to launch the venue later this year. The court said the Securities and Exchange Commission acted properly in approving the platform, rejecting Citadel Securities’ claim that latency arbitrage — the trading tactic IEX says its delay is meant to blunt — isn’t a real problem.
“Substantial evidence supports the Commission’s finding that latency arbitrage poses a problem in options trading and disincentivizes many market makers from providing liquidity,” Judge Robin S. Rosenbaum wrote in the decision.
The new exchange will deliberately slow options orders using a so-called speed bump, extending a mechanism IEX has used in equities to counter the advantage of high-speed traders. It will also be able to delay, cancel and reprice orders on behalf of market makers, a feature IEX says is designed to blunt latency arbitrage and reduce operational costs in the options market.
Citadel Securities previously raised concerns with the SEC over IEX’s plans, saying the ability to cancel quotes would harm investors and benefit only its shareholders and select market makers. It later sued the regulator over its approval of the venue.
IEX in a statement said it appreciated the court’s decision and is now turning its focus toward launching the exchange. A representative for Citadel Securities didn’t respond to requests for comment, while the SEC declined to comment beyond its own court filings.
In the decision, the court cited comment letters to the SEC from smaller Citadel Securities rivals that said latency arbitrage harms the options market.
Options trading has surged in recent years, due in part to a boom in contracts that expire within 24 hours. IEX’s options venue would be the 19th such exchange in the US.
–With assistance from Nicola M White.
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