The Securities and Exchange Commission (SEC) today voted to allow Investor’s Exchange (IEX) to operate as a public stock exchange.
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Naturally, the villains of Lewis’s tale aren’t thrilled the SEC gave its blessing to IEX, short for the “investor’s exchange”, and in doing so rewrote a longstanding requirement that every exchange make trade information available immediately.
Yet the start-up’s application to become a stock exchange has been embroiled in controversy over a small but important issue: How much latitude do stock exchanges have to slow down trading? Even individual pensioners have weighed in, concerned that their retirement accounts are being fleeced by high-frequency traders.
The firm was thrown into the spotlight after being featured in Michael Lewis’s 2014 book “Flash Boys: A Wall Street Revolt”, which argued that the markets are rigged against mom-and-pop investors.
According to IEX, that delay – an eternity in a stock exchange universe in which computers can buy and sell stocks in billionths of a second – would protect investors from high-frequency traders who can pick up on trading signals and use their faster technology to electronically front-run slower investors. Though not IEX’s only distinguishing feature, it is the one that was most hard to square with existing regulation. SEC staff will conduct a study within the next two years regarding the effects of any intentional delays on market quality and asset pricing: ‘Based on the results of that study, or earlier as it determines, the commission will reassess whether further action is appropriate’.
IEX opponents, including the other stock exchanges, have argued that the structure of the new exchange will add unnecessary complexities to an already complex market and potentially hurt small investors.
IEX, which began trading in 2013, is now a private stock marketplace – a dark pool – that handles electronic buy and sell orders from brokers who subscribe to it.
Competing exchanges have also complained about IEX asking for discretion to send orders to other exchanges without a speed bump. In addition, IEX’s speed bump could dampen trading volumes, which would also drag on exchange revenue.
Commissioners determined the delays “wouldn’t prevent investors from accessing stock prices in a fair and efficient matter”.
Other exchanges and trading firms had urged the SEC to reject IEX’s application.
It slows trades down by 350 microseconds – is a considerable time lapse in the high-frequency trading world where trades are done in nanoseconds. With a speedbump on IEX-and possibly other exchanges if they follow suit-it would be impossible to know what prices truly are.
“Had IEX come in and said that we want to start another exchange without a speed bump, we would have embraced that”, said Citadel Securities executive Jamil Nazarali, the firm’s head of execution services.
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“We are grateful and humbled by the support we’ve received from the investor community, [and] without it, we may have faced a different result”, Chief Executive Brad Katsuyama said in a statement provided to The Post.
