IEX Opinions Mixed Amid Regulatory Review


As the deadline as to whether or not the Securities and Exchange Commission will decide the fate of Investors Exchange (IEX) rapidly approaches, comment letters have slowed to a trickle but remain mixed between those who want the upstart ATS to become a new exchange and those who do not.

The buy-side sponsored ATS that wants to become a public exchange, filed last September to join the ranks of the NYSE, Nasdaq and BATS Global Markets and others to help investors find liquidity in the stock market. With over 400 comment letters filed with the SEC, the stage is now set for the regulator to decide on whether or not to approve the dark pool’s petition or deny it. Just today, the Wall Street Journal reported that the regulator announced it was delaying a final approval date by three months so as to further weigh the merits another stock exchange would have on the investing public.

The SEC was originally set to make a decision on IEX’s application on March 21.

The comment letters filed range from the public exchanges, such as BATS, NYSE, Nasdaq, to high frequency trading firms like Hudson River Trading, academics from the Columbia School of Business in New York to large institutional investors such as the California State Teachers Retirement System and New York State Teachers’ Retirement System and still just regular individual investors.

Most of the hubbub surrounding IEX’s application and debate centered around the venue’s 350 microsecond “speed bump” which slows down incoming orders and outgoing orders – but originally did slow down outbound orders being sent to other exchanges. This, many in the industry argued, gave IEX an unfair speed advantage.

The public established exchanges – NYSE Group, Nasdaq and BATS Global have all written comment letters against IEX’s application being approved. Robert Greifeld, chief executive officer of Nasdaq, said recently rules pertaining to stock market as a whole, including RegNMS, should be reviewed before processing and approving the IEX petition.

Citadel, in a comment letter dated November 6 wrote that, “Approval of IEX’s proposed structure would be an important precedent…[and] start a race to the bottom as other exchanges would have strong incentives to implement these types of unhealthy mechanisms and could do so very quickly. In addition, the potential uses of selectively applied access delays, like those proposed by IEX, are extensive.”

And David Weisberger, who heads Markit’s Trading and Quantitative Services division, wrote on February 16th that it was against IEX’s application. At that time, Weisberger wrote:

“Recent information released by IEX itself highlights the significance of the potential advantage that IEX would obtain should its router not be subject to the same “speed bump” as unaffiliated routers and, at the same time, bolsters IEX’s claim that their speed bump, coupled with their innovative order handling, could serve a useful purpose in the U.S. equity market structure. We believe that IEX, as it is currently conceived, is not an appropriate venue for retail traders to send their market orders.”

In response to the speed bump brouhaha, IEX amended its application on February 29th to make all routable orders subject to the 350 microsecond delay when trading on its own venue. The intention was to allay fears it would have any advantage in exchanges’ order books and help gain favor amid the investing public and get the SEC to approve its application.

Still, comment letters were filed after the amendment. Citadel once again weighed in with John Nagel, the firm’s senior deputy general counsel, reiterating his published remarks to MarketsMedia that the firm still opposed IEX becoming an exchange and that the SEC should deny it.

Also against an IEX approval was Instinet.  John Comerford, Global Head of Trading Research wrote on March 2nd that the agency-broker was concerned that IEX, if approved as proposed, would become the quoting destination of choice for bad actors, and that the resulting longer duration quotes will have corresponding negative effects on other market participants’ trading strategies and liquidity pools.

“As we believe the cost of dealing with such quotes will be externalized to market participants, we ask the Commission to consider the potentially deleterious effects to the public market data stream that may occur should IEX’s application be approved as proposed. We welcome solutions that would empower IEX and other exchanges to remove predatory actors in a more timely fashion…”

But there are those who want to see IEX become an exchange, mainly because of the venue’s speed bump, which proponents said helped keep out HFTs and other types of traders who exploited their own hyper-fast speed advantages. These speed advantages, institutional investors CalSTRS and Teachers Retirement System of Texas (TRS) said reduced adverse price selection in their trades and disrupted their large block orders from being executed at the best available price.

The California State Teachers Retirement System (CalSTRS), which has a portfolio of $180 billion said in its comment letter dated March 10th wrote:

“In an era with increasing technological advancements, we believe IEX can provide a market alternative for investors who wish to utilize their trading platform. The addition of another exchange offers optionality and liquidity to the marketplace, which could potentially reduce trading costs, contribute to economic growth, and has the added benefit of furthering the SEC’s goal to increase market competition.”

Also, TRS, which manages $130 billion, Chief Investment Officer Britt Harris wrote that TRS’ support of IEX is primarily based on two factors.

“First, our direct experience with the IEX Alternative Trading System (ATS) has demonstrated that we receive larger and higher quality executions compared to most other venues. Second, we believe that there is a pressing need for the introduction of a national securities exchange that is solely focused on the efficient transfer of capital between buyers and sellers. TRS has found that we consistently receive higher quality executions in IEX compared to other ATS’s and exchanges. Our analysis has also shown that broker algorithms that route more to IEX tend to outperform broker algorithms that route less to IEX. On a notional basis, TRS executes multiple Billions of trades in U.S. equity markets on an annual basis, and the enhanced quality of executions we receive in IEX can equate to Millions in savings for our beneficiaries.”

And while there are those who have been clearly either pro or con IEX, Markit’s Weisberger told  MarketsMedia in a phone interview that he has reversed his opinion of February 16 and now supports IEX becoming an exchange but with certain provisos.

“We believe that the SEC should approve the IEX application with conditions,” Weisberger said. “While we agree that approving IEX’s application will allow the market to determine the value of their speed bump and pricing model, it is equally important to ensure that no regulatory advantage is provided to IEX or exchanges as a group. To accomplish this, we recommend that the SEC make the approval conditional upon IEX’s affiliated routing broker being subjected to the same delays as all other routing brokers. We further suggest that IEX be required to clearly disclose their execution quality statistics for individual client segments and types of orders as part of marketing materials.”

Featured image by hans_chr/Dollar Photo Club

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