Speed Bumps And Randomised Delays

A market maker posting a quote faces a specific risk: if the price of the underlying moves on another venue a fraction of a second before the market maker can cancel its now-stale quote, a faster trader can pick that stale quote off before it's updated. The market maker loses money on every such pick-off, and the threat of it forces market makers to quote wider spreads as compensation. A speed bump is a deliberate delay an exchange inserts into its own order processing, aimed specifically at reducing this risk without simply making the whole exchange slower for everyone.

The best-known example is IEX's roughly 350-microsecond delay, implemented as a coil of fiber optic cable that every order and cancellation physically has to travel through before reaching the matching engine. Crucially, the delay applies symmetrically to both incoming marketable orders and to the exchange's own market data updates — a market maker's cancel message and an aggressive taker's marketable order both get delayed by the same amount, so the relative race between "quote getting cancelled" and "quote getting hit" isn't tilted toward the faster party the way it would be if only one side were delayed.

Some venues use a randomised delay rather than a fixed one specifically to prevent a further arms race: if the delay were a perfectly predictable fixed length, sophisticated traders could time their actions around it precisely, effectively re-creating a speed advantage on top of the speed bump itself. Randomising the delay within a narrow range removes that predictability.

Worked example. A market maker on a speed-bump venue is quoting a stock and sees the price move on a faster reference market. It sends a cancel instruction, which enters the 350-microsecond delay. Simultaneously, a fast trading firm sends a marketable order trying to hit the stale quote before it updates; that order is also subject to the same 350-microsecond delay. Both messages emerge from the delay and are processed by the matching engine in the order they were received, so the fast firm gains no advantage from being able to react to the price move a few microseconds sooner — the delay evens out the race rather than eliminating speed differences entirely.