Some of you have never seen this keyboard. This is sad, because this photo brings back a rush of fond memories for us. At Instinet, there is nothing we loved more than institutions matching together and trading blocks. In fact, as the above keyboard photo shows, we were so disappointed when a trade was not consummated that we had a specific key used for those very sad moments – the Sorry Key. It is also sad because it reinforces that we are, well, old.

As many of you may know, much of Themis’s DNA is traced back to the old Instinet of the 1990s; five of us have invested significant portions of our careers there, especially that era. We were there in the early days, through the Nasdaq market-maker collusion era, the I-Only key, the SEC’s adoption of Rule 11Ac1-4 (the quote rule and the display rule), the transition to decimalization, as well as more recent times. Instinet was an exciting place to work; as we often remark, the company was leveraging technology to bring buyers and sellers together directly. This is to be contrasted with the more recent technological innovations have that have managed to insert the maximum amount of intermediaries between buyers and sellers.

I-Only (Q-key) was a mechanism that allowed our institutional and brokerage clients to place larger orders on the system to attract larger contra sides. Orders were placed by institutions and brokers alike with the I-only attachment that would only allow them to be seen by only institutional investors. It was actually routine for institutions and brokers to place I-Only bids and offers on the system for 100,000 shares or more, as they were more confident that leakage and impact would be minimized. Even then we all recognized that there had to be away in the marketplace to allow for larger orders to interact in the marketplace. Even then we knew that a one-size-fits-all market structure couldn’t serve the needs of retail investors, retail day traders, institutions, and market makers.

In the wake of the NASDAQ market maker collusion scandal, and recognizing that the markets were becoming faster and more electronic, the SEC implemented Reg ATS. It forced Instinet to abandon the I-only key and publish its private quotes, in the name of equal and fair access. And so began the movement towards a one-size-fits-all approach to market structure. Since the implementation, markets became faster, and quote and trade sizes shrunk drastically.

There is too much history to recap here, and most of you know this stuff anyway, so let us fast forward to today – and the blossoming of IEX. Brad Katsuyama’s IEX is currently set up as a dark pool. Its subscribers vary from high frequency market makers like Virtu, to independent agency brokers like Themis, retail brokers, and even bulge broker dealers. It is trading about 1% of the volume in the markets, which is a remarkable feat given that there are a host of self-interested reasons that potentially deter IEX’s broker members from sending order flow there. IEX from day one has also indicated that it expects to transition from a dark pool to a full-fledged stock exchange – with public quotes. There is an in-between step in this transition, which involves IEX publishing a portion of its market (except for hidden orders – like the other stock exchanges).

As such, IEX has recently announced that it is adding functionality for displayed orders, to complement its hidden order functionality, with a target date of January 30^th, 2015. It is also adding a real-time top-of-book feed (TOPS) to all of its broker subscribers. The orders displayed have anti-lock-and-cross functionality, and are not protected by the SEC’s trade-through provisions. The “private” TOPS feed is free, and also optional. The same “magic shoe box” that limits latency arbitrage with IEX’s hidden orders likewise protects the “displayed” orders on the feed.

This announcement from IEX has drawn thoughtful criticisms from some industry participants – namely the folks at Bloomberg Tradebook, and you should read these criticisms.

Tradebook argues that what IEX is doing is akin to a Michael Jackson Moonwalk; “it is an elegant set of steps that moves the market and its structure backward.” Tradebook argues that:

–          It is unfair for dark pools to only quote to its subscribers, as it creates a two-tiered market.

–          A mechanism currently exists for IEX to display unprotected quotes in the marketplace – IEX can simply use the attributed quote mechanism on stock exchanges like NASDAQ, or send its quotes to the ADF for inclusion in the SIP.

–          Tradebook chooses to send its displayed quotes (BOOK) to NASDAQ.

Bloomberg makes a very interesting and thoughtful argument.

Here is the other side, however: unlike other ATS’s, IEX has filed and declared itself as “fair access”. The notion of two-tiers in the Tradebook note implies that some investors can’t access an IEX quote. This is not true. Any broker can connect to IEX, and anyone can subscribe to the free TOPS feed. The only investors that can’t get to IEX are those who use brokers who’ve made a choice not to connect, or those brokers that don’t send orders to IEX even once they’re connected, or even after they’ve received a request to do so from a client.

Some dark pools are rumored to provide information about certain segments of order flow directly to only certain limited participants. IEX chooses instead a transparent process where they will distribute it to all subscribers on a feed – for free.

And while one day IEX will possibly get exchange status, in which all of its displayed quotes will be accessible to everybody, this is an intermediate step that does not burden IEX with the high cost (for smaller venues) and technological problems of the ADF. And again, it distributes the information in a free feed to all subscribers.

We personally look back fondly on the I-Only key at Instinet. Through all the market structure changes we have witnessed in our long careers, we recognize that there is no perfect structure – there is no one solution that adequately satisfies all the needs in our diverse market place. The one thing we have always advocated for is that the needs of large long-term institutional investors have to be significantly represented in the debate. The pendulum had swung drastically to one extreme in recent years, and swinging it back some is warranted.

Please read Bloomberg Tradebook’s note, understand their points, and judge for yourselves where you each stand in this debate.