Regulatory Inaction and… a Free Market Solution: IEX


The dog days of summer are upon us. Traders are taking vacation days, volumes are light, and the pace of markets is moving nearly as slowly as the New York Yankees’ offense. Actually  the pace of market regulation has been operating at this low-frequency stall-speed pretty much since the implementation of Reg NMS back in 2007. While market participants have been educating themselves on the tactics and rules created for high frequency traders, and adjusting accordingly, regulators have not been particularly willing to help them in that quest.


Let’s look at fragmentation, “flash order types”, and dark pools. The SEC had proposed regulating the opaque operations of such pools back in 2009. In that proposal, the SEC  started exploring:


–          Forcing IOI’s, which act very much like a stock buy or sell quote, to be treated like orders.

–          Lowering ATS threshold for reporting requirements – from 5% to ¼ of 1%.

–          Forcing dark pools to identify their specific trades to the tape post trade.


FINRA has also been examining dark pools for several years, and most recently has indicated that they will like to see dark pools identify their trades to the tape, post trade.


Don’t get us started on Congressmen, who host “market structure roundtables” that year after year reach the same conclusions and yet inspire no action, save for an increase in industry campaign contributions.


Despite much regulatory talk, on a variety of modern market structure issues, the buy side has realized that if they want change, then they have to take an active role in forcing it. This is why we have all seen the buy side demand disclosure on where their orders trade, demand changes to certain order types, and demand ways to be able to control their orders and when and how they interact with other players in the markets – specifically high frequency players.  The buy side has witnessed dark pools being owned by exchanges, exchanges being owned by certain broker dealers, and even exchanges being owned by high frequency trading firms. They have realized that those who have the biggest say in how trading systems operate are the owners themselves.


Which brings us to IEX,  an upstart trading venue set to go live later this year. Much has been written about IEX’s ambitious plans, including this Scott Patterson article that was published late last night, titled Upstart Pitches Trading Sanctum. While IEX has much interest by large bulge bracket broker dealers like Goldman Sachs and JP Morgan, it also has even greater interest – and ownership – from buyside firms themselves, such as Capital Group and Brandeis Investment Partners.


IEX is a valiant attempt at a free-market solution for very real conflicts of interests and fairness issues in our equity markets. IEX is attempting to address latency arbitrage issues, as well as the conflicts of interest embedded in the maker-taker rebate model, which not only exists on public stock exchanges, but in dark pools now as well. IEX will not give rebates, yet will charge brokers less than the fees they are charged on exchanges.


Capital Group’s Global Head of Trading, Matt Lyons, is hopeful that the upstart will garnish enough liquidity to gain critical mass. While a low-volume market environment is not the ideal time to be launching a trading venue – specifically one not courting HFT players, IEX is banking on the fact that institutions want to help themselves, and are tired of the all-talk-little-action approach by the cops on the beat. We are hopeful as well.