SEC’s Hu Says IEX Helps Market Quality


Despite its detractors and inflated rhetoric surrounding it becoming an exchange, IEX has helped the equity market.

That’s the findings of a study by Edwin Hu, who works at the Division of Economic and Risk Analysis at the Securities and Exchange Commission. Hu writes that equity market quality improved after IEX became an exchange for securities with high historical IEX market share. Furthermore, the study reported price discovery improves overall, although IEX’s contribution to price discovery remains small. Intermarket Sweep Order activity decreases overall, coinciding with improvements in price discovery.

In a second observation, Hu noted where IEX’s ECN goes dark in 28 symbols there is no change in market quality or price discovery. He concluded that the findings in the study suggest that protected markets with symmetric speed bumps may be a feasible solution to deemphasize speed in lieu of regulatory intervention.

While Hu is with the U.S. Securities and Exchange Commission, the SEC disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This study expresses only Hu’s and his co-authors’ views and does not necessarily reflect those of the Commission, the Commissioners, or members of the staff.

For the complete study please click here

“I find that when IEX becomes an exchange and receives a protected quote, symbols where interactions with IEX’s speed bump are ex-ante most likely– e.g., symbols with the highest average daily market share by trading activity over Q2 of 2016–experience a net improvement in market quality as measured by quoted, effective, and realized spreads,” Hu wrote. “The efficiency of price discovery improves overall as measured by absolute return autocorrelations, variance ratios, and the speed at which information about the market is compounded into individual security returns. The reduction in trading costs (spreads) is broadly consistent with recent theories on how speed advantages may be used to exploit mechanical arbitrage opportunities. These theories suggest that market makers face adverse selection from fast traders even in the absence of traditional “fundamental” informed trading.”

Hu concluded that as a first step, this study provides empirical evidence that deemphasizing speed using intentional access may improve market quality and price discovery.

Ronan Ryan, IEX Group

Ronan Ryan, IEX Group

“In particular, the IEX market structure appears to work as a “slow market,” and although it does not contribute more to price discovery as an exchange than as an ATS, its dark pool features do not appear to harm pretrade transparency. Hence, the preliminary evidence suggests that market solutions to deemphasize speed may be a feasible alternative to regulatory intervention.”

IEX no doubt was pleased with the outcome of this research.

“As we come up on two years since our exchange approval, we’re encouraged to see this independent research by a financial economist at the SEC showing that IEX has had a positive impact in the market,” Ronan Ryan, Co-Founder and President at IEX told Traders Magazine via email. “The paper also serves to further contradict the doomsday predictions made by the incumbents during our exchange approval process – an important reminder to take their fearmongering about the transaction fee pilot with a healthy dose of skepticism.”

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