IEX, the institution created by Michael Lewis’ “flash boys,” began life as an ATS. But as its name, a shortening of “Investors’ Exchange,” suggests, it has always aspired to be an exchange.
One of its core principles is its “speed bump,” a system of delaying the availability of market pricing data to all of its customers, in order to prevent the predatory behaviors that the founders associate with latency arbitrage. Specifically, IEX provides all access participants with 350 microseconds of latency between the IEX point-of-presence (POP) in Secaucus and its trading system in Weehawken.
The IEX certainly fulfills some market need: starting with an average daily trading volume of only a little better than 1 million shares in December 2013, the numbers at this venue have steadily improved to more than 108 million a day in December 2015. D0n Bollerman, the IEX’ head of markets and sales, has just penned an op-ed aimed at reminding the general public of the Big Picture at stake, above and beyond the details being thrashed out in the SEC’s regulatory process.
But Let’s Back Up
The Securities and Exchange Commission is now considering the IEX’s petition to become an exchange. Last fall, it received some critical comment letters: specifically, the comments from BATS Global Markets and Citadel.
BATS contended that certain language in the Reg NMS Adopting Release might preclude the speed bump, and that even if it doesn’t, the SEC should “articulate clear standards” about an “automated quotation.”
Citadel’s comment letter also spoke to the question of how the POP in Secaucus may disqualify IEX quotes as “automated quotations” under Reg NMS, because it is an “intentional device.”
In a response to those letters, dated November 13, IEX general counsel Sophia Lee made the case that the distinction between automated and non-automated for purposes of the NMS turns on whether an exchange is set up so as to allow for any human intervention after the time when an order is received to determine what action is taken with regard to that quote. The Secaucus POP does not enable any such human intervention.
The POP, then, should “no more be considered prohibited than existing access arrangements could be considered as designed to intentionally delay access to quotes by anyone who declines to pay for the privilege of the fastest access,” Ms. Lee wrote.
There has also been some dispute about the Discretionary Peg Order, a type of order offered by IEX that (in Ms. Lee’s words), “ rests at the near quote and can execute up to the midpoint based on available contra interest other than in situations in which the system detects a ‘crumbling quote.’” Citadel contends that this is analogous to a broker-dealer exercising discretion over its client’s order. Citadel also expressed concern that the IEX will be “shielded by the doctrine of regulatory immunity” if it is approved as an exchange and handles an order erroneously under this heading.
More recently, the august New York Stock Exchange has had its say. Elizabeth K. King, the NYSE’s general counsel, commented that IEX was selling the public something other than what it can actually offer. It calls itself a “fair, simple, transparent market” but its proposed Rule 11.190, prescribing its proposed “orders and modifiers,” runs to twenty pages of rule text, encompassing displayed orders, non-displayed orders, IEX Only orders, primary peg orders, midpoint peg orders, the aforementioned discretionary peg orders, minimum quantity orders, and intermarket sweep orders. This, plus a range of multipliers, does not sound to Ms. King like a model of simplicity.
Now the debate has moved up a notch, popping out of the comments-letters file on the SEC website.
Back to the Big Picture
Don Bollerman has posted an open letter to the public in response specifically to the NYSE.
He returns to the broad case in favor of the IEX’s approach, the case made so memorably by Lewis’ book. Bollerman’s statement explains that the established exchanges, such as NYSE, have “ invested huge sums of money creating two-tier markets – building and offering faster data and technology infrastructures at a price that only a small niche of traders can benefit from or afford, while at the same time continuing to offer slower products to everybody else.”
With IEX in the picture as an exchange, other exchanges will have to choose between losing market share or adopting similar investor-protection one-tier-only systems themselves. Either way, he writes, “the premium on pure speed goes down,” and that will hurt a number of players who have invested to get that premium.
“And who are those players?” runs his final shot. “The answer is easy –just read the IEX comment letters.”