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Mar 01, 2016

‘Flash Boys’ exchange: IR should join the fight

An interview with John Ramsay, chief market policy officer, IEX Group

IEX, the dark pool founded by the heroes of the Michael Lewis book Flash Boys, is applying to become a stock exchange. The SEC is supposed to decide by March 21. While a number of asset managers have been vocal in their support, the New York Stock Exchange, Nasdaq and some high-speed trading firms are hotly contesting IEX’s application. 

In these segments of the video series ‘ON Message with Neil Stewart’, produced by Bloomberg and IR Magazine, John Ramsay, chief market policy officer at IEX Group, says the corporate community should join the discussion and support IEX because it would be a better market for long-term, institutional investors.   

Part 2: NYSE, Nasdaq and Citadel turn up the heat
The incumbent exchanges, along with some intermediaries involved in high-speed trading (HFT), have publicly opposed IEX’s application to become in exchange in multiple comment letters. ‘The reason for that is the existing exchanges no longer make much of their money from actually matching trades,’ says Ramsay. ‘We’re proposing a model that doesn’t sell preferred access, doesn’t rely on the sale of market data. That’s very threatening to the exchanges.’ 

Part 3: Why companies would want a new place to list
The decision over where to list has blurred since Reg NMS, with stocks now trading across dozens of exchanges and dark pools. Why do companies need IEX as a new choice of where to list?

‘Part of it is brand image,’ says Ramsay, alluding to IEX’s tagline, ‘a fair, simple, transparent market’. ‘Also, how the market actually takes care of institutional investors affects the volatility on the market – that’s of importance to corporate issuers; and how the market goes after fraudulent or manipulative activity.’

Ramsay adds that the auction mechanism that opens trading on a company’s home exchange makes a big difference in volatility early in the day. ‘We’re working on ways to try to smooth out that volatility and create a more predictable environment for corporate issuers. So a lot of reasons for them to care, and to think about listing on a different market.’ 

Part 4: An ex-regulator looking to make a difference
The August 24, 2015 ‘flash crash’ showed once again that the market can break down without much warning, ‘in ways that really discourage investment because it makes people worried they might be stepping on a landmine,’ Ramsay says. ‘At the core of what [IEX is] about is trying to get exchanges back to the business of serving investors and serving the public interest.’ 

Ramsay came to IEX after leaving the SEC, where he was head of trading and markets: ‘This was the one group within the public sector that seemed to make a constructive change in terms of the equity market structure, in ways that frankly I felt a little frustrated as a regulator as to how much progress you could make through changing the regulations… So yeah, I feel good about what I do every day I come to work, and that’s why I joined.’