Jane – You Ignorant S___

Boy, it ain’t easy being A Flash Boys hero… Ya try to become an exchange, and the entrenched business models – they attack.


IEX’s stock exchange application has received a fair amount of public SEC comment letters.


In one letter by RT Leuchtkafer, RTL uses sarcasm to mock how absurd our cookie-cutter exchange model is, which sells faster access to the highest bidder. You must read that letter, if for no other reason than you need to have a good LOL at the SEC’s expense.


In one letter, Larry Tabb shocks the world, and despite prior claims supportive of IEX, attacks IEX for having an obsolete POP, and he opines that their router is anticompetitive, because it isn’t designed as poorly as NASDAQ’s pre-2012 router was, and suggests that IEX’s Speed Bump Needs to Go Bye-Bye.


The SEC also received letters from BATS, Citadel, NASDAQ, and NYSE. IEX had already commented to address points made by BATS and Citadel, and just yesterday they commented again to address concerns raised by NASDAQ and NYSE, in a 31 page retort.


We already wrote a note summarizing NASDAQ’s and NYSE’s IEX comment letters (check your email box for the note dated November 16th, 2015, titled IEX’s Exchange Application Comment Letters).


Today we want to highlight IEX’s response to NASDAQ and NYSE. We do so in Point – Counterpoint fashion – kind of like how IEX’s comment letter reads.



IEX General Commentary


“The dominant exchanges have adopted a set of practices that unduly focus on the speed of quoting and trading, and unduly rely on ever-increasing fees for both access and market data that their members are effectively required to pay in order to trade for themselves and to seek best execution of their customers’ orders.”


“IEX has chosen to adopt a model which is different in certain important respects, and which we believe is better designed, to protect investors and to ensure that they can receive the best prices available. These two core principles are at the heart of every decision that we have made in constructing our market.”


IEX points out that the main source of contention is the IEX 350 microsecond speedbump POP… which IEX claims could be shortened or eliminated entirely, if the other exchanges:


  • Did not sell colocation.
  • Did not sell high speed data feeds.
  • Did not sell high speed technology to access their markets.
  • Did not sell “enhancements” that drive the need for speed.
  • Were located in the same facility.


IEX asks one driving question: Is there room in the national market system for an exchange to adopt any means, however narrowly drawn, to counteract the more pernicious aspects of speed-based trading?




The IEX is coiled cable is no different that the cable that the other exchanges coil to create a level playing field. However, IEX coils cable so that all participants have a level playing field, where NASDAQ and NYSE coil cable so that only those who pay for colocation have a level playing field. Per IEX’s comment letter:


“The POP provides an important choice for many market participants who cannot afford, or have no need, to pay for low-latency connectivity, technology, and market data sold directly by exchanges for millions of dollars per year.”


While Citadel, BATS, NASDAQ, and NYSE have taken issue with IEX’s “programmed delay” (which they say violates Reg NMS), IEX reminds the SEC that the POP is no more a “programmed delay” than is the delay that the exchanges are themselves creating for their colocation-paying customers.


Point – Counterpoint


Point: NYSE claims that while IEX’s POP allows IEX to keep its view of the NBBO accurate, it prevents other exchanges from obtaining an up-to-date view of the NBBO because of the delay in IEX’s quote.


Counterpoint: IEX responds that they will update the SIP immediately, without a POP delay. IEX finds it curious that NYSE doesn’t see that, as NYSE uses the SIP to view the NBBO! IEX also points out that even with its POP delay, turnaround time to travel to and from IEX is faster than it is on NYSE. In other words, IEX negates NYSE’s argument.


Point: NYSE claims that IEX is disingenuous when it claims it is a “simple, fair, and transparent” market, as IEX has many order types. They invoke the Seinfeld Yogurt Episode.


Counterpoint: IEX responds that they do indeed have similar functionality as the other leading exchanges, but they do not have the “dizzying array of specialized order types that cater to HFT firms – such as NYSE’s DAY ISO ALO, which offers ““the ability for a trader to get ahead of investor orders using fast price feeds and regulatory exemptions while receiving a rebate.” IEX never considered such order types because they detract from allowing investors to received best pricing – for example when… and they quote a leading exchange’s rule book: particularly, for example, when rules for such order types specify that they “will execute upon entry only in circumstances where economically beneficial to the party entering the Order.”


IEX point out that while other exchange order types were designed to help a high speed firm jump queue, or garnish information about resting order flow, or get a rebate, IEX’s much talked about D-Peg was designed with one single purpose:  to protect orders pegged to the NBBO from being “picked off”.


Point: NYSE claims that IEX’s treatment of pegged orders creates an unfair advantage for orders on IEX’s book and harms investors with orders on other markets.


Counterpoint: IEX responds again that they are quicker than NYSE, even with their delay, and that unlike IEX and other stock exchanges, NYSE is using the SIP to view the NBBO, and to price its pegged orders. IEX turns the table on NYSE, and questions how NYSE can in their right mind claim they are worried about investors when they are pegging orders to a slower quote than what they offer their high speed clients.


IEX also laughs while pointing out that NYSE just filed to place a new microwave dish atop Mahwah “to maximize the advantage that its fastest participants already have when trading against investor orders that are placed either on the NYSE itself or on other markets.”


The IEX Router


Point: NYSE claims “IEX’s Affiliated Routing Broker Has Access to Trade Execution Information that IEX is Withholding from Investors.” NYSE’s argument is that IEX operates just as LAVA operated a few years back, when LAVA was fined for having its router send orders to FLOW ECN, knowing that orders were residing in FLOW.


Counterpoint: IEX responds that its router does not make any execution decisions or receive any market data from IEX.


Point: NYSE, NASDAQ, and others claim that the IEX router has an advantage over any broker dealer, or other stock exchange router, because IEX’s router does not wait the 350 microseconds that other routers have to wait before it can and does send outbound ISOs to away markets.


Counterpoint: IEX acknowledges this. They do not wait because if they did, the away markets would fade, just like they do on most all suboptimal order routers. IEX goes on to cite how in 2012, NASDAQ realized how awful its router was – how it would “miss” away markets, and filed with the SEC to change it. IEX has taken steps to avoid that fro happening, just as NASDAQ took steps in 2012. Similarly, IEX understands that NYSE has a POP in White Plains, and NYSE’s router does not wait for executions to get back from Mahwah to White Plains before it sends out ISOs to away markets.


Finally, regarding the IEX router, IEX calls out the NASDAQ’s unfair router as well. Because of IEX’s 350ms POP:


“orders routed by IEXS or any other router will be protected from information leakage resulting from fills on IEX. In other words, when a broker routes to multiple markets, including IEX, it is far more difficult, if not impossible, for a fast trader to observe a fill on IEX and subsequently cancel or modify orders on other markets while the router’s orders are in flight. In contrast to the change to the Nasdaq router described previously, which benefited its own router to the exclusion of others, the POP works to provide comparable protection to all third party routers.”


Point: NASDAQ claims that IEX’s exchange application is vague, and does not provide enough information on how time priority is preserved.


Counterpoint: IEX scratches their head here, and reminds NASDAQ to read their Form ATS, and their public rule book, which lays out exactly how pricing and priority works on IEX – right down to the mathematical formula.



Feel free to read IEX’s response in its entirety. Today we only attempted to summarize the key “status quo” complaints about how IEX operates, and IEX’s response to those complaints.


Should the SEC approve IEX’s exchange application? We think so (of course you are welcome to agree or disagree). IEX has developed a business model that is succeeding, which benefits them (free market), while trying to solve some of the most serious issues and consequences arising out of an SEC-blessed system that caters to speed and war games. Their POP, their delay, their D-Peg, etc. – they are designed features designed to protect all of its participants from getting picked off hundreds of thousands of times a day. The other trading venues, lit and dark, have instead systems and features designed to advantage a few speedy participants, at the expense of other participants.


How can there not be room in the National Market System for designing protective features, instead of predatory features?


It is highly likely you have been receiving notes from other industry participants, some who even call themselves “agency brokers”, who are critical of what IEX is doing. Of course that is their right.


And it is also all of your right to ask yourselves about the motivations of all who are talking about IEX’s exchange application – including Themis. If one is opining for or against IEX, ask yourselves who their largest customers are. Ask yourselves if they have their own affiliated prop trading interacting with your flow in their pool. Ask if they receive payment for order flow. Ask who they sell technology to, or who they consult for, or who they take advertising dollars from.


And make up your own mind about what’s right for all investors.