After getting the green light last week from the Securities and Exchange Commission (SEC) to become the 13th national stock exchange, a company portrayed as the white knight of Wall Street plans to roll out its new equity operation in August.
Under the SEC’s decision, IEX Group Inc.
– identified as a white knight in the 2014 book “Flash Boys”
– will move forward with its transition to a public exchange. It will do so by using a controversial “speed bump” mechanism designed to slow down the trading system so that high-speed traders don’t have an automatic advantage over everyone else.
The actual “bump” delays by 350 microseconds the point at which IEX matches a buyer with a seller and the time the transaction can be seen by other traders. That’s about one-thousandth of the time it takes to blink an eye, but it’s enough time, the company maintains, to outmaneuver high-speed strategies used by sophisticated traders and level the playing field.
SEC Chairwoman Mary Jo White said that the vote in favor of IEX’s application would ensure competition and innovation in equity markets while promoting efficient service to both retail and institutional investors. Existing exchanges such as Nasdaq and the New York Stock Exchange (NYSE), however, campaigned against IEX’s upstart move.
Asked about the significance of IEX’s exchange application, IEX spokesman Gerald Lam told AMI Newswire, “The average investor should feel confident that their mutual fund and pension fund managers will soon be able to trade on an exchange designed to protect their interests.”
During IEX’s transition from a private alternative trading system – or what’s known as a “dark pool” – to a public exchange, Lam said the New York-based firm would add seven to 10 employees to its current staff of 70.
He said the IEX speed bump would help the company price an investor’s order as fairly as possible. The SEC seemed to agree with that position, stating in a press release that its updated interpretation of regulations determined that “a small delay will not prevent investors from accessing stock prices in a fair and efficient manner.”
Neither Nasdaq nor the NYSE responded to AMI Newswire’s request for comments Wednesday.
Propelling the company forward is the contention that the current system of exchanges is rigged against the average investor and beset by rising costs despite advances in technology.
In the book “Flash Boys,” author Michael Lewis described the motivations of those behind IEX in colorful terms: “Its goal was not to exterminate the hyenas and vultures but, more subtly, to eliminate the opportunity for the kill.”
Foes of the IEX blueprint, however, see the speed bump idea as leading to market disruptions because other exchanges will try to adopt their own versions of speed bumps.
Larry Tabb, chief executive officer of the Tabb Group, a financial research company, wrote in a research paper earlier this month, “We believe the idea of developing and incorporating speed bumps into markets will gain significant exposure and traction.”
Tabb predicts that different markets will promote different speed bump models aimed at deterring or encouraging specific behaviors, and critics such as NYSE contend other exchanges might copy the speed bump concept and create increasing complexity in the markets.
IEX Chief Executive Officer Brad Katsuyama disputes such arguments. In an interview with Bloomberg News, Katsuyama said that existing markets tend to earn their money more from selling speed and market data than from actual trading, so the addition of more and more slow-down techniques might not be likely.
In addition, he said, the SEC’s regulatory oversight would prevent such complexities from disrupting the markets.
Katsuyama stressed in a letter to the company’s partners and subscribers that IEX could serve as a change agent that would reduce costs that have been imposed by the current exchanges.
“IEX believes that technology and increased industry sophistication should have significantly lowered the costs that exchanges impose on our industry,” he wrote. “When considering the evolution of market data and technology fees levied by the incumbent exchanges, the opposite effect has occurred as the fixed-cost burden on industry players, especially brokers and market makers, continues to rise.”
The company’s transition to a full-fledged securities exchange will occur throughout the month of August, with several weeks of testing and the movement of securities now trading on IEX’s private system to the national exchange.
Within the next two years, the SEC staff will study possible effects
resulting from intentional access delays on market quality and asset
pricing. The SEC may then take any further action it finds appropriate.