IEX Builds Market Quality Framework


IEX, the newest U.S. equity exchange, has set up its market quality framework and hired staff to oversee market monitoring.

While IEX leverages the Financial Industry Regulatory Authority to do regulatory surveillance, company co-founder and COO John Schwall said it was also best to have its own in-house staff to watch what goes on inside the walls at IEX’s 4 World Trade Center headquarters.

This initiative, as told to Markets Media in an interview by Schwall, is meant to bolster trader confidence in its business model and help the bourse fulfill its new mandate as a Self-Regulatory Organization.

The exchange on August 19 will begin to migrate over a pilot security system and move the first two NMS securities. About a week later, IEX will move an additional 10 securities off its existing platform. On September 2, IEX expects to migrate over the remainder of its NMS securities to the exchange platform.

So with the pilot security system only a few weeks away, IEX has put into place an entire suite of resources designed to protect the equities market and promote a healthier trading experience. First, the exchange has hired Elaine Wah to oversee the venue’s budding in-house market quality effort. Wah is a recent Ph.D. graduate in Computer Science & Engineering from the University of Michigan. She reports to Schwall.

“IEX here is not only going to continue to leverage Finra to do both the IEX regulatory surveillance monitoring as well as cross-market regulatory surveillance monitoring but we’re also committed to investing in a team that will help us look for any manipulative strategies on our market,” Schwall told Markets Media. “We want to assure the market – brokers, investors, any of the issuers that decide to list their stocks here, we’re committed to put someone that has experience in a position with the right tools in our house.”

According to IEX, Wah’s research interests lie at the intersection of economics and artificial intelligence, specifically in applying agent-based modeling, simulation, and game theory to study algorithmic trading in financial markets. She has interned previously at Citigroup, Microsoft,  and the Division of Economic and Risk Analysis at the SEC. Prior to Michigan, she completed a BS in Electrical Engineering at the University of Illinois at Urbana-Champaign and an MS in Computer Science at UCLA.

Schwall told Markets Media that he’d first heard of Wah as she was studying to get her PhD at the University of Michigan where she was working on a research paper analyzing the likelihood or probability of usage of certain types of trading strategies given the inherent latency that existed between all of the various U.S. stock exchanges. The goal of the research was to uncover the potential economic opportunity lost or gained in using such strategies.

“We’re excited that she’s here,” Schwall said. “She’s got a lot of learning to do obviously, but she’s got her Ph.D. in computer science so we expect now she’ll be able to hit the ground running.”

Her charge, as Schwall sees it, is to use the exchange’s First Derivatives monitoringsystem, continue to improve upon and refine other reviews that IEX already performs. Chief Regulatory Officer Claudia Crowley is the liaison between the bourse and Finra to make sure that the surveillance the regulator undertakes on behalf of IEX are in order.

But IEX has put into place other rules and protections designed to help it regulate itself and protect its users.

First, the aforementioned use of both Finra for regulatory surveillance and First Derivatives for market quality reviews. Second, Schwall noted that IEX protects its clients by the adoption of the CME Group’s Anti Manipulative Trading Rule (Rule 10.110) and Bats Global Markets’s Accelerated Client Suspension Rule. The CME Rule as IEX defines it prohibits anyone from entering an order that entity doesn’t have an intent to actually execute.

The Bats rule is designed to assist an exchange by allowing for swifter disciplinary actions to taken against predatory or manipulative traders looking to ‘spoof’ or layer trades by the exchange itself without awaiting SEC action.

IEX also remains committed to not employing a “maker taker” pricing policy or payment of rebates and the usage of protective quotes.

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