[Photo: Mike Mozart / Flickr]

Tiny Chicago Stock Exchange (CHX), which handles a sliver of U.S. stock-trading volume, has giants of electronic trading split over a proposed speed bump that borrows elements of IEX Group model. CHX says it wants to lower costs for investors and thwart aggressive high-frequency trading strategies by slowing down trading for some orders but not others. Supporters such as Virtu Financial say the plan will improve market quality. Critics including Citadel Securities say it won’t do any good.

Like IEX, the upstart exchange, the Chicago market plans to introduce a delay of 350 microseconds on incoming trades. But unlike IEX’s speed bump, CHX’s delay would affect only trades that attempt to hit standing buy or sell orders posted to the exchange.  Other types of trades wouldn’t be affected - meaning that market makers could cancel or adjust their quotes without waiting 350 microseconds.

The idea is to prevent market makers from getting “picked off,” when a fast trader buys shares from a market maker just before the value of the stock jumps, or alternatively, when that trader sells shares to the market maker immediately before the stock drops. In either scenario, the speedy trader captures a tiny profit.

Split over CHX’s proposal.  It may reflect different strategies used by electronic traders. While some firms style themselves as pure market makers, others engage in a mix of market-making and trading patterns that involve hitting the buy and sell orders posted on exchanges. The mix of strategies tends to be a secret, making it difficult to assess how different players would be affected.

Giving market makers a 350-microsecond head start would encourage them to post more buy and sell orders on Chicago’s exchange and offer narrower bid-ask spreads, CHX says. A bid-ask spread is the difference between the lowest price at which a stock can be bought and the highest price at which it can be sold. Tighter bid-ask spreads benefit investors.

If the SEC approves the plan – which can be as soon as 11/6/16, it would be a win for the struggling 134-year-old CHX, whose share of U.S. stock-trading volume currently stands at less than 0.5%. The exchange is currently seeking approval to sell itself to a group led by Chinese investors.