IEX proposal sparks debate

Nov 18, 2015
<p>New trading venue and critics argue over merits of 'speed bump' system</p>

IEX, the new trading venue that features in Michael Lewis’ book Flash Boys, has engaged in fierce debate with critics and competitors over its plan to become a full stock exchange. 

The SEC has received comment letters from a mix of supporters and detractors since IEX filed its application to become an exchange in September. Asset managers with $1 tn under management have written to the regulator to back IEX, while critics include competitors the NYSE, NASDAQ and BATS Global Markets, and investment firm Citadel.

A key area of contention is IEX’s plan impose a speed bump of 350 microseconds to allow it to update prices before traders can take advantage of stale data. Other exchanges offer different levels of service and encourage investors to pay for the fastest access, IEX argues.

The start-up venue, which currently handles roughly 1.5 percent of US equity trading volume, hit back against critics in a letter to the SEC last week, which the regulator released on Monday. 

The letter, specifically a response to criticism from BATS, Citadel and FIA Principal Traders Group, states that IEX’s speed bump ‘is a simple, fair and transparent means of providing access to the exchange that is narrowly tailored to protect investors from systemic inefficiencies.’

Written by IEX general counsel Sophia Lee, it also argues that IEX’s quotations should ‘qualify as automated within both the letter and spirit of Regulation NMS’ and the venue’s routing function ‘is consistent with that offered by other exchanges and will not unfairly discriminate against broker-dealers or customers.’ 

In its comment letter to the SEC, NYSE writes that IEX would become ‘unfair, complex and opaque’ if it is allowed to proceed in its plan to become a fully fledged exchange, and also omits many crucial details in its application.

The New York exchange calls on IEX to explain how it would deal with its so-called ‘magic shoebox’, or IEX point of presence (POP), which delays all orders by 350 microseconds, saying the mechanism could allow some traders an advantage over others. In addition, the NYSE says IEX quotations would not qualify as automated quotations because of the delay, and suggests the system could give IEX's affiliated broker-dealer an unfair advantage.

IEX plans to respond to the NYSE, as well as NASDAQ, in a separate letter. Donald Bollerman, head of markets and sales at IEX, noted the call for more transparency in an interview with Reuters earlier this month. ‘We are happy to answer NYSE's call to provide more information about the way our system works than they do about their own,’ he told the news service.

Along with services to investors, IEX is considering becoming a listing venue for public companies, which would place it in further competition with the NYSE and NASDAQ. The group included listing rules within its September application to give it flexibility but does not plan to offer listing sevices at launch.

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