Background
Investors Exchange LLC proposed a new options platform called IEX Options to combat latency arbitrage, a practice where high-frequency traders exploit split-second price delays to profit at the expense of other investors. The Securities and Exchange Commission approved the proposal, finding it consistent with the Exchange Act and necessary to protect market integrity. Citadel Securities LLC, a major high-frequency trader, petitioned for review, challenging the Commission’s factual findings and legal conclusions regarding the platform’s impact on competition and liquidity.
The court’s reasoning
The court applied the arbitrary and capricious standard of review under the Administrative Procedure Act. It concluded that substantial evidence supported the Commission’s findings that latency arbitrage is a significant problem in options markets and that the Options Risk Parameter effectively targets such activity without unduly burdening ordinary trading. The court held that the Commission reasonably relied on market participant comments and its own technical expertise, and that the Exchange Act does not require agencies to produce gold-standard quantitative data for every rulemaking. The court also determined that quotes subject to the Options Risk Parameter qualify as protected quotations under the Options Plan.
What it means going forward
The decision affirms the SEC’s authority to approve exchange rules designed to mitigate latency arbitrage in options markets without requiring exhaustive empirical data. It validates the use of speed-bump technology to level the playing field for market makers who lack high-frequency trading infrastructure.
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