IEX Calls Out The Exchanges On Their Conflicts of Interests


While some exchanges continue to tweak their fee schedules to make sure their highest volume customers don’t move their order flow and other exchanges continue to add new data feeds which aggregate existing data feeds for a fee, the newest player on the block continues to pave the way for more transparency.

Even though IEX is not quite yet a stock exchange, they continue to set a trail for the stock exchanges to follow.  Their latest attempt to clean up the industry comes in the form of a letter to the SEC which deals with the conflicts of interests that SRO’s face when disseminating their data.  The IEX letter directly addresses the problem that the fox is guarding the hen house when it comes to data distribution.  The operating committee that runs the SIP’s and is responsible for data distribution is made up of solely stock exchange representatives and a representative from FINRA.  They occasionally meet but these meetings are not public.  IEX calls them out for this in their letter:

“The self-regulatory organizations (“SROs”), which sit as the governing body of the NMS Plans managing the consolidated market data feeds provided by the SIPs, are also selling proprietary data feeds, some of which are similar in data level, such as best-price, or ‘top of book’ feeds, some which are more robust, such as full depth of book feeds, and some of which are explicitly sold as alternatives to compete with SIP feeds. Indeed, often the same exchange personnel, with access to participant data on the use of the SIP feeds, are engaged in marketing both consolidated and proprietary data.”

IEX lays out this conflict of interest very succinctly:

When taken together, we see these issues of integrity, performance, and process, along with pricing of SIP fees and exchange proprietary data feed fees, as being inextricably tied to conflicts of interest. These conflicts are particularly evident in the distribution of market data feeds. “

We agree and continue to believe that conflicts with proprietary exchange data feeds are a key source of our market structure problems.  Not only is it the speed of the data feeds an issue but the content of these feeds also leads to fairness issues.  Exchanges continue to sacrifice information on customer order flow for their own personal gain.  One example that we recently highlighted was the Retail Attribution Program.  This program pays enhanced rebates to retail firms that allow their customer limit orders to be identified with a special flag.  This is clearly a conflict of interest and we were astounded that the SEC had approved this practice.  We believe that too much information is being disseminated outside of the SIP and that investors should have the ability to opt out of these proprietary exchange data feeds.

IEX has a number of suggestions to increase transparency at the SRO level:

-Transparency of Proceedings and Economics.

-Expand Voting Representation to Include Other Stakeholders.

-Alternative/Competitive Models for Securities Information Processors.

-Addressing Conflicts of Interests 

We recommend reading their letter for more information on each one of these topics