IEX – The Investors Exchange
IEX, also known as The Investors Exchange, was given final approval by the Securities and Exchange Commission in June of 2016 to become the thirteenth stock exchange in the United States. IEX was originally formed as an Alternative Trading System, or a dark pool, in October of 2013 and continues to utilize the same technology as an exchange to level the playing field for all traders. IEX is the first exchange to offer a transparent environment for day traders and high frequency traders (HFT’s) alike. Day traders have historically been at the mercy of HFTs, whose trading accounts for 50% of all market trades.
IEX eliminates the common practice of HFT’s front-running orders by seeing other buyers’ orders seconds before the SIP (Securities Information Processor) can process them. Front-running has been a common practice of many high frequency trading firms, and a major frustration for day traders attempting to place buy and sell orders, only to find the current available shares immediately unavailable seconds after placing the order. Predatory HFT firms accomplish this sneak peek into the future by installing high speed fiber optic data cables directly to the exchanges. This speed advantage, albeit milliseconds, allows HFTs to utilize predatory software with built in algorithms created for the specific purpose of snatching up other buyer’s orders before they can be processed. They use this surreptitious software to buy the stock and resell it to the original purchaser at a slightly higher price, changing the NBBO (National Best Bid and Offer) and making up to millions of dollars in profits, all unbeknownst to the investor.
IEX’s Time Delay – How it Works
The founders of IEX Exchange have found an innovative way around this long time cunning practice, by offering a 350-microsecond delay in the arrival and departure of orders. They have accomplished this by installing and sending their orders through a 38-mile fiber optic cable, and banning the practice of traders co-locating equipment adjacent to their servers, as other exchanges allow. While a 350-microsecond delay will be missed with the blink of an eye, it is long enough to throw off the predatory algorithms that are constantly scanning the markets searching for opportunities to take advantage of orders originated elsewhere.
This “speed bump” creates a level playing field for all traders. Predatory HFTs with execution models designed around exploiting speed advantages to gain market share may not enjoy this equitable treatment, although not all HFTs operate with those deceitful tactics. Many do trade on the IEX exchange, which is quickly gaining in popularity and market share. Day traders especially like IEX, as all traders can enjoy fairness across the board, without the frustration of the unforeseen predators lurking in the shadows. Even as a dark pool, traders have always had an affinity for IEX as it was desirable for larger orders. Due to the liquidity in the market, the slight time delay was enough to get multiple orders out to other venues before HFTs knew you were there. If you’re going to jump into a dark pool, wouldn’t it be nice to know the sharks couldn’t see you? Most traders agree, IEX’s speed bump gives just enough time to jump in and out without fear of an attack.
The Motivating Force for Founding IEX
IEX Stock Exchange was established by Brad Katsuyama, President and CEO, and Ronan Ryan, President. Both had worked together at RBC Capital Markets, and shared a vision to improve the market trading environment for all, especially those traders that were falling prey to HFTs, as that in turn ultimately protects the investor. Prior to founding IEX, Brad Katsuyama had over fifteen years of experience in the securities trading industry. He was the Global Head of Electronic Sales and Trading while at RBC, and was responsible for global electronic sales and trading, gaining vast experience with market strategy and algorithmic trading.
Brad’s co-founder, Ronan Ryan, had over 19 years of experience creating client-facing solutions in networking infrastructure as the Head of Electronic Trading while at RBC. Ronan also had over 11 years of experience in the financial services industry as Head of Financial Services Development at Switch and Data. He has served some of the most sizable trading firms in the financial sector.
The motivating force behind establishing IEX was a shared vision by both Brad and Ronan, one that remains today. First and foremost, they are dedicated to protecting the investor. According to Ronan Ryan in a November 2016 interview by Trading Venues, he states that “we have always said that we are not anti-HFT but we are against the creation of advantages for some to the detriment of others.” In the same interview, Brad Katsuyama states that “For us it’s about educating the end investor and rallying them together in a fair and totally transparent way that is aligned with their interests, so that they want to trade on IEX”. Brad and Ronan put into action ideals expressed by many in the trading industry, as recent activities have brought about awareness and concern for investors and traders alike.
The New York Times bestseller “Flash Boys”, by Michael Lewis, exposed questionable trading practices, and raised awareness to the predatory practices of some HFTs. The 2012 groundbreaking FBI investigation into front-running that resulted in a fine of $5 million to the New York Stock Exchange, shows accountability to Reg NMS, the regulations that require exchanges to provide trades and quotes to the SIP at the same rate as direct feeds. Traders were frustrated from competing with HFTs in a marginalized and unbalanced environment, Brad and Ronan leapt into action to do something about it. The goal of IEX is to be fair to, respect and protect all investors. The founders of IEX uphold their ethical values by enforcing the regulations of NBBO, to offer the best available price when buying and selling securities.
Opposition to IEX Approval
Prior to the SEC approval earlier this year, the founders faced opposition from some incumbent exchanges that mounted a campaign against granting SEC approval. Both Nasdaq and the NYSE wrote comment letters to the SEC, urging them not to approve the license for IEX, questioning the circumstances for the time delay, and claiming it to be against regulations. Most pioneers set out to change the world often create some tension along the way, and the founders of IEX are no exception. They were well aware of the challenges and opposition they would face, but held true to their principles from the beginning, and in the end gained the requested approval, along with recognition, and respect from others in the industry.
In light of the recent public awareness, not only are investors and traders paying attention – so are the regulators. Several HFT firms have been under scrutiny for violating Securities regulations, specifically the Reg NMS mentioned earlier, the requirement to provide data to all sources simultaneously. Even the Senators on Capital Hill are taking note, and demanding an end to payment for order flow, a common past practice by none other than Bernie Madoff. In spite of the opposition, it seems that public demands and adherence to ethical rules win out, and the stamp of approval was granted to IEX.
IEX is Growing in Size and Respect
The Investors Exchange and their novel approach to trading is changing the way that traders buy and sell, while alleviating a lot of headaches. IEX has enjoyed substantial growth in a very short period of time, trading approximately 2% of the total U.S. Stock Market volume. Some big players have given their endorsement such as Wall Street giant Goldman Sachs when it was disclosed that they felt the success of IEX would be good for markets, and they were in fact one of the largest players on the exchange.
Considering the millions of dollars that flow through the US Stock Exchanges on a daily basis, it seems quite unfair and a downright tragedy that only a select few stand in an advantageous position to skim thousands of dollars in profits off the trades of others, simply because they installed the best and finest cables. While investors, traders, regulators and the public are gaining awareness, IEX is gaining respect. With an unprecedented growth rate for a new up and coming stock exchange, IEX is here to stay and with much relief to day traders everywhere.
Great Point Capital, LLC offers buying power, access to Takion software platform with excellent IT support, and the benefits of working with an experienced team. We are pleased to currently trade approximately 10% of our volume on IEX, the Investors Exchange.