SEC and IEX; Approve or Deny?


On Friday the SEC delayed ruling on IEX’s Exchange Application for three months – to June 18th 2016. Having read over 400 comment letters, they issued this notice, and request for more public comment. They state they did not have enough time to ponder IEX’s early March amendments to its application.

 The SEC is also asking for fresh comments on the amended IEX application – specifically with regard to its new router.

 They specifically ask for feedback as follows:

  1. Does IEX’s revised proposal place other routing brokers who are members of IEX on the same footing as IEX in a manner that would address the concerns under the Act and the rules thereunder?
  1. Are there material aspects of IEX’s proposed revised routing functionality that are not clearly presented in IEX’s revised rules and addressed by IEX’s Form 1, as amended?
  1. Do commenters have a view on whether the different delays in accessing the IEX matching engine experienced by routable orders versus non-routable orders present any concerns under the Act?

In addition the SEC is providing notice of the grounds for potential denial of the application. Specifically, the SEC will be viewing closely whether or not IEX’s rules:

  1. Are designed to permit unfair discrimination between customers, issuers, brokers, or dealers.
  1. Impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act of 1934.

Wait. That’s not all the SEC released Friday night.

You may recall that Themis Trading, upon IEX’s initial filing, declared that the IEX exchange application would be a referendum on market structure. We apparently were right.

The SEC issued a second notice on Friday evening.  This related notice proposes a new SEC interpretation of “automated quotations” under Reg NMS.

In the intense debate surrounding IEX’s Exchange Application, the SEC has received comments from:

  1. Citadel, the Exchanges, Modern Markets, Hudson River Trading, and even Larry Tabb each stating that IEX’s 350MS delay is a “programmed delay”, and therefore illegal as per Reg NMS.
  1. RT Leuchtkafer stating that Reg NMS was trying to deal with “manual quotations”, and that the group above is taking that “programmed delay” piece out of context from the intent of Reg NMS’s crafters, who were trying to make sure that manual markets did not receive special treatment
  1. IEX and others who have pointed out the various geographical delays between/among the existing dozen stock exchanges.

As such, the SEC believes that delays of less than 1 millisecond may be de minimis, and would not impair a market participant’s ability to access a quote. But they want your affirmation.

Accordingly, it is proposing to re-interpret “immediate” when determining whether a trading center maintains an “automated quotation” for purposes of Rule 611 of Regulation NMS to include response time delays at trading centers that are de minimis, whether intentional or not.

And the SEC is asking for public comments on their new interpretation:



What Does This All Mean? What Should Be Your Takeaway?

 1- RT Leuchtkafer’s SEC Comment Letters, which the SEC referenced, have forced the SEC to view Reg NMS in the context of the time period when it was written, and not solely by the letter of what they had written ten years ago. The SEC used language then designed to prevent potential manipulation of manual quotes in a hybrid system (floor-based and electronic). Holding the SEC to that language with regard to IEX is not in the spirit of Reg NMS, and what the Commissioners were trying to accomplish then. As such, the SEC is acknowledging that the discussion of “programmed” or “intentional” delays as a reason for disapproving IEX’s exchange application is silly.

 2 –The SEC is considering doing something in the present that they were certainly shying away from a decade ago: including specific time frames for a rule dealing with whether delays in accessing an exchange quote, whether intentional or not, are de minimis. They are proposing re-writing Reg NMS so that a delay of under 1 millisecond is acceptable with regard to protecting a quote.

 3- The SEC seems to be laying the groundwork for denying IEX’s exchange application. The language is referenced earlier in the note. Essentially, for the SEC to decide that IEX’s rules are

“Impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act of 1934.”

The SEC would have to come out and state that there is latency arbitrage. And that they created it.

4- We expect that firms which are anti-IEX  are sure to answer the call to comment.  This affects their short –term profits greatly. They most likely will say the speed bump is material and not de minimis. They will probably say it will harm market quality. Delays are not good if you want to play 3-tick-boogie, and delays are not good when you are selling speed.

Remember this, though! You own the markets. Your trillions of investor dollars are what is at stake. Not a few billion of highly leveraged HFT money. Not US stock exchange profits. The exchanges already make 90% of their money trading swaps and derivatives, and trading overseas. They already have one foot out the door.

So, Please comment. The SEC needs to hear from more of you. They have heard enough from retail, and they certainly have heard enough from proponents of the status quo. They want to know if you think it’s their job to police markets for manipulation. I know how we will answer that question.