IEX Group is poised to win regulatory approval to launch a stock exchange that slows the pace of trading, according to people familiar with the matter, following a decade when government rules and Wall Street’s technology wizards fostered ever-greater speed.
The staff of the Securities and Exchange Commission has recommended that the agency approve IEX’s controversial bid, signalling likely endorsement when commissioners vote on June 17.
The move bolsters the upstart firm’s challenge to how 21st-century markets operate and could shift the balance of power a bit more toward mutual funds and other investors who have argued that the speed and complexity of modern equity markets favours rapid-fire traders.
An SEC spokeswoman declined to comment, as did an IEX spokesman.
The IEX application, kicked off with the publication of the 2014 best-selling book “Flash Boys” by Michael Lewis, sparked an unusually intense Washington fight over a seemingly obscure issue: how much freedom stock exchanges have to slow down trading.
The conflict has forced the SEC to weigh how much its own rules have encouraged the arms race that rewards exchanges for shaving microseconds off the time it takes orders to zip between suburban data centers where most trading happens. Traders that have prospered under those rules lobbied to block IEX’s model. The charge was led by Citadel founder Kenneth Griffin, who met personally June 3 with SEC chairman Mary Jo White to make a last-ditch case against IEX, according to notice in the thick file of comments and meetings accumulated at the agency over the application.
“This is going to put the question at the forefront – is speed the number driver of market structure?” said John Jacobs, a former senior executive at Nasdaq and now executive director of Georgetown University’s Center for Financial Markets and Policy. “It’s been in place for 11 years that fast markets go around slow markets, because they wanted investors to get the best price.”
SEC approval would make IEX – which stands for Investors’ Exchange – the first major new stock exchange in the US since the SEC approved several venues in 2010 that are now owned by Bats Global Markets. IEX would become the country’s 13th stock exchange, with license to compete with the three largest market owners: Bats, Nasdaq and Intercontinental Exchange, which owns the New York Stock Exchange.
IEX’s innovation was to create a 350-microsecond speed bump on orders, which would ensure that no trader has a faster view of the market than any other traders.
“This is primarily about money,” Brad Katsuyama, IEX’s founder and chief executive officer, said in an interview last week, “and exchanges being able to charge very high fees for data and technology, and the people who buy it and benefit the most.”
Critics have deluged the SEC with detailed comment letters that said IEX’s speed bump would plainly violate rules that require orders be “immediately accessible” to traders. An IEX quote that hasn’t updated because an incoming order is intentionally delayed is a stale price, Citadel and others say.
“It’s about having a market further complicated by delays,” Chris Concannon, the CEO of Bats, said in an interview last week. “That’s really what IEX is doing.”
The conflict has played out in meeting rooms inside the US Senate, during private briefings with inside-the-Beltway political operatives, and within the SEC.
Shortly after Lewis’s book was released, Katsuyama got a taste for how controversial his company would become when he traded accusations on CNBC with a competing exchange CEO, who berated Katsuyama’s ideas as “insane.” Soon Katsuyama, found his email flooded with messages from security firms, headhunters and lobbyists.
One message came from Peter Haller, a libertarian lawyer preparing to leave his job on Capitol Hill. Haller, who had clashed with the SEC over deregulatory measures he drafted as a Republican staff member, wrote IEX in April 2014, saying “your business model is one that I strongly support”.
Haller became IEX’s political shepherd, building a strategy that targeted allies in libertarian and conservative think tanks and tried to neutralise Republican hostility to a firm that some perceived was attacking Wall Street.
IEX opponents have also descended on Washington. The stakes are high in particular for the New York Stock Exchange and Nasdaq, which have lost significant volume in recent years as trading migrated away from exchanges to private, bank-owned trading venues known as dark pools. In May, Nasdaq warned that the agency could be sued if it approves IEX’s speed-bump design.
Dealing with the Washington battle has sometimes distracted IEX from the daily business of building a stock market, Katsuyama said. Instead of talking about “Flash Boys,” Katsuyama has sometimes compared his firm’s predicament to a different book: the novel “Atlas Shrugged,” in which the government and weak competitors try to block a steel magnate from selling a new metal he has invented.
While IEX may prevail in securing regulatory approval, the firm also has taken some hits in the process and was forced to make some big adjustments along the way.
In February, IEX agreed to overhaul a key aspect of its market – how it will route unfilled orders to other exchanges – after Citadel and others complained that gave it an unfair advantage over brokers that provide the same service.
But the SEC also has adjusted the way it interprets its rules to accommodate IEX. Responding to concerns about the legality of speed bumps, the agency has separately proposed that delays of less than one millisecond – or less than the time it takes to blink an eye – are consistent with its rules. Its staff recently revised that interpretation and plans to restrict the circumstances under which a speed bump would be allowed, the people said.
Some investor groups had warned that granting blanket permission for speed bumps of less than one millisecond could open the door to many varieties of time delays, making it harder for brokers and investors to navigate the market. The three-member SEC plans to vote Friday on that legal interpretation, which would harmonise the speed bump with its rules, according to the people.
This article was published by The Wall Street Journal