Investors Exchange

IEX has grown in just two short years to trading 400 million shares, and fast approaching 2% market share – in the dark. They have done this in an environment when many brokers would not route to them (and when they finally did – not more than 100 shares at a time). They have done this in an environment where “the industry” criticized them in public for using the word “rigged”, and flat-out lied about them behind their backs. They have done this in an environment where the “market structure research” micro-industry routinely talked them down, while praising their often-fined ethically-challenged dark-pool competitors. They were ironically labeled by the status-quo as “the HFT dark pool” – ironic considering the fines being levied against their competitors for unfairly advantaging HFT.

We remember back in 2011/2012 when many of you – our clients – told us, “you and Joe really need to sit down with Brad Katsuyama… about the new exchange he wants to get off the ground.” We did; before their launch, they came in to our office with a fresh whiteboard marker, and we quickly asked for the documents we needed to sign. I remember looking at Joe and saying that that these guys were young, and that they had balls.

Amid all the industry pushback, they have grown remarkably. No matter how much anti-spin the status-quo spewed, the fact remains that the ultimate litmus test … the ultimate proof… their ultimate validation… is that their growth exploded upwards.

IEX officially filed for US stock exchange status. We sent you the SEC filing yesterday, but here it is again. And we are sure you have read Brad’s letter yesterday.

“IEX believes that the role of the exchange in the capital markets ecosystem is a critical one – helping companies raise capital and helping investors in those companies efficiently allocate capital by matching buyers and sellers on simple, fair, and transparent terms.  When we look at the state of today’s market, we do not see exchanges fulfilling this role effectively, but we do see an opportunity to honor key tenets within the Securities Exchange Act of 1934, mainly “the protection of investors and the maintenance of fair and orderly markets.”

Their filing includes their 350 microsecond speed-bump (magic shoe box), and listing standards for corporations (a $600 million business for NYSE and NASDAQ), but has their broker-priority feature removed (expected):

“While novel, Broker Priority did not have a statistically material effect on our business (trading less than 1% of IEX volume on a daily basis), so we decided to defer pursuing this feature and have removed it from our exchange filing.  We still plan to charge no fees when a broker trades with itself, pending filing of our fee schedule with the Commission, and we may consider refiling to request SEC approval to add Broker Priority in the future as we believe it would benefit the broader market and its participants.”

There are already some lining up in protest of IEX’s exchange intentions. They say:

“How can you allow their quote (IEX’s) to be protected by Reg NMS provisions, when they slow down access? How is that fair?”

We find that rich! How ironic is it that IEX is the one player who has intentionally slowed down access to their market – courageously – to be fair and friendly to all participants, in the middle of an arms race to zero speed, and those who benefit from high speed scalping on exchanges that sell speed to the highest bidder are complaining about IEX’s fairness!

Factually, IEX’s intentional slowdown (350 microseconds) makes it still faster than some other exchanges’ old creaky systems. And consider this. Even during the August 24^th volatility, with record volume and record quote-changes, the average quote change in SPY – the most liquid instrument – was about 2 milliseconds. IEX’s 350 microsecond speed bump is about 1/6^th of that. Stated differently, IEX’s “fairness speedbump” will not slow down trading.

There will be a comment period. We expect the number of comment letters to be large, especially those written by those that are threatened by IEX’s business model. We will comment. We implore you to comment as well, and to let the SEC know that they shall not stand in the way of one of the few firms catering to the needs and desires of investors.