NYSE Group President Thomas Farley said the exchange is looking at introducing speed bumps to slow some orders as it seeks to compete with upstart IEX
NYSE Group president Thomas Farley said in an interview; “We will talk with customers and are talking to customers to understand what there is demand for. We’re not foreclosing any avenues.”
The prospect of multiple exchanges instituting customised delays to respond to IEX threatens to make the fragmented US stock-market landscape, which now has 13 exchanges, even more complex, according to analysts. Companies such as NYSE-owner Intercontinental Exchange and Nasdaq that operate multiple venues could introduce speed bumps on their smallest markets. Market makers such as Citadel say those minuscule time gaps could be manipulated by the same speedy traders that IEX wants to thwart.
Started in 2013 as a private trading venue, known as a dark pool, IEX shot to fame with the Michael Lewis book Flash Boys, which cast its founders as heroes trying to restore balance to the stock market. The book argued the market was rigged by other stock exchanges that sold preferential treatment to high-frequency traders.
IEX says its delay of 350 microseconds, or millionths of a second, is long enough to protect investors from trading at stale prices against rapid-fire traders who can react to price moves more quickly than other market participants. NYSE and Nasdaq in recent months urged the Securities and Exchange Commission to reject IEX’s model. The regulator approved the new venue on June 17.
In a letter sent on June 29 to companies that list on the New York Stock Exchange, Farley again denounced IEX’s strategy, saying it relies too much on dark trading, or hidden orders that aren’t visible until they are filled. Stock exchanges typically compete to attract a critical mass of publicly visible orders, which attract more trading and help to build confidence in prices. IEX’s approach “isn’t good for your stocks,” he wrote.
John Ramsay, IEX’s chief market policy officer, said NYSE and other incumbent exchanges pioneered many of the practices, including complex pricing models and “extortionate pricing of market data”, that made it harder to navigate the market. “IEX in fact is taking a big step in the other direction by rejecting all of those features of the current market structure,” Ramsay said.
In the interview, Farley said other speed bumps would “exacerbate” market complexity, but added that was a risk taken by approving IEX. “The horse is out of the barn,” he said. “We will have to do what is best for our customers and for our shareholders.”
Other exchange operators have said they might develop speed bumps or functions that delay how orders are processed. Speaking at a conference in April, Nasdaq chief executive Robert Greifeld said IEX’s speed bump could lead competitors to introduce thousands of new functions that imitate or try to overcome intentional order delays.
NYSE Arca, a fully electronic exchange operated by NYSE Group, has already won SEC approval to copy one IEX function, which seeks to improve the price that investors get when they use certain hidden orders. Farley said the New York Stock Exchange has eliminated some complex order-handling functions, which had the result of simplifying how trading works.
The SEC would have to approve any new speed bump proposed by the NYSE or other exchanges before it could be implemented. In a report issued on June 30, brokerage Weeden & Co said it wouldn’t take long for NYSE or other exchanges to implement their own delays if IEX wins market share. Weeden said it expected IEX to gain, at most, 5% of US trading volume, compared with NYSE’s exchanges, which have captured around 25% of trading.
—Bradley Hope contributed to this article.
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