IEX Thwarts Predatory Trading

Terry Flanagan

IEX Group has throttled back the speed of trades on its platform, but the organization isn’t trying to roll back technological advances, according to Ronan Ryan, IEX’s chief strategy officer.

The broker-neutral ATS aims to quash the advantages exploited by some of the highest-speed market participants, but there is no hidden agenda of trying to turn the clock back to the days of ticker-tape machines.

“Technology has made the markets way, way more efficient than they were ten years ago,” Ryan said at yesterday’s Zicklin-Capco conference at Baruch College in New York City. “We’re not advocating going back to the specialist system.”

IEX, which launched as an ATS a year ago, is deploying technology — in the form of a latency speed bump — to attract liquidity from high-speed traders without compromising its buy-side constituents.

“High-frequency trading firms are all registered broker-dealers,” said Ryan. “If you can get the high-frequency guys who are providing liquidity, which some do, that’s valuable liquidity for the buy side. We said we don’t want to be this buy-side only venue and become the greatest signal factory that predatory strategies have ever had, so what did we need to do with our architecture to not be picked off?”

With four of the major U.S. equity-exchange operators — Bats, Direct Edge, Nasdaq, and NYSE — housing their matching engines in data centers in New Jersey, the essence of high-frequency trading strategies is to co-locate in close proximity to those matching engines.

“The one thing that they absolutely have to have to run a predatory strategy is the ability to co-locate in the same room as the trading venue, and in single-digit microseconds see what just happened in that venue, and then either react back on that same venue, or route out to one of the other three buildings in New Jersey,” said Ryan.

To counteract the effect of co-location, IEX has located its matching engine at the Savvis NJ2X data center in Weehawken, N.J., but requires all orders to pass through the Equinix NY5 center in Secaucus. It’s created a 350 microsecond travel time between the two data centers by coiling miles of fiber at each end.

“We literally coiled 38.04 miles of fiber in a box and we had that in our data center,” Ryan said. “Every trade that comes into IEX comes in the front door, goes around this coiled cable, and into our matching engine.”

Even if a subscriber has an ultra low-latency market data feed, the 350 microseconds serves as a speed bump.

“What that means is, the earliest you’ll find out a trade occurred on our venue is a minimum of 350 microseconds after the trade occurred,” Ryan said. “As many high-frequency traders can trade on our platform as long as they come in through our coiled fiber. You can have fast traders, slow traders, both trading on the platform and come away with a positive experience.”

Featured image via iStock

Related articles

  1. Deutsche Borse-LSE Merger in Focus

    Instinet Fox River Quant Solution will initially be rolled out in the Americas.

  2. Algos, Post-Trade Top FCM Concerns

    Instinet's Anushree Laturkar says investing in research and analysis is key to improving client outcomes.

  3. The new platform launched via a partnership with BestEx Research.

  4. It is the first liquidity-seeking algorithm on Atlas, the equities trading platform introduced in 2019.

  5. Algorithms in Focus

    Strategy Studio allows brokers to create their own execution platforms.