A general view of the New York Stock Exchange. IEX Group’s application to become a US stock exchange does not meet industry standards and regulators should not approve the upstart trading venue’s request, the NYSE has said.

Reuters
New York

IEX Group’s application to become a US stock exchange does not meet industry standards and regulators should not approve the upstart trading venue’s request, which lacks key details on how it’s so-called ‘speed bump’ would operate, the New York Stock Exchange has said of its rival.
IEX, which was featured in Michael Lewis’s controversial book “Flash Boys: A Wall Street Revolt,” began as an alternative trading system in October 2013, and applied to the US Securities and Exchange Commission in September to become The Investors’ Exchange. It aims to launch as such early next year, and would compete against the NYSE, Nasdaq and others.
“Flash Boys” ignited a furious debate as to whether the stock market was rigged in favour of high-frequency traders that use computer algorithms to trade and now makes up more than half of US stock volume. It chronicled the efforts of IEX chief Brad Katsuyama and his team to build an exchange that would eliminate any advantages high-speed traders have over other investors.
But IEX’s application falls short of the strict standards required to be registered as a national stock exchange, according to a letter sent by Elizabeth King, general counsel at Intercontinental Exchange’s NYSE, to the SEC dated November 12, which was posted on the SEC’s website.
“Like the ‘non-fat yogurt’ shop on Seinfeld, which actually serves tastier, full-fat yogurt to increase its sales, IEX advertises that it is ‘A Fair, Simple, Transparent Market,’ whereas it proposes rules that would make IEX an unfair, complex, and opaque exchange,” she wrote, referring to a well-known episode of the US television comedy.
The most contentious issue has been IEX’s use of a ‘speed bump’ that slows down orders to the trading platform by 350mnths-of-a-second. By doing so, IEX says it can update ever-changing prices before the quickest market participants can act on stale data, preventing any queue-jumping.
NYSE said IEX failed to adequately describe how the speed bump would work, and that it appears to create an unfair advantage for orders sent to IEX as compared to other marketplaces. It asked for more clarity and echoed an earlier letter by exchange operator BATS Global Markets.
IEX said it would soon provide more information to help clarify how its exchange would work.
“We are happy to answer NYSE’s call to provide more information about the way our system works than they do about their own,” Donald Bollerman, head of markets and sales at IEX, told Reuters. “We look forward to taking the lead in increasing transparency around exchange connectivity, latency and means of access.”
NYSE’s comment letter was one of 18 expressing various views on IEX’s application posted on the SEC website on Friday. Hedge fund and market making firm Citadel, which uses high-frequency trading (HFT) strategies, blasted IEX, saying elements of its plans were unfair and would harm market quality.
Market maker Virtu Financial, which also uses HFT strategies and is one of the most active traders on IEX, said it applauds “the improvements IEX has brought to the marketplace.”
Nasdaq Inc asked the SEC to look closely at the speed bump, noting that in 2012 the regulator denied Nasdaq’s plan to create its own speed bump on one of its markets.
“We will always welcome competition,” Nasdaq co-president Hans-Ole Jochumsen said in an interview. “The only thing we are looking for is to make sure that the competition all has the same rules so that we have a level playing field.”
From its conception, IEX has said its goal was to create a fairer market by reducing the emphasis trading centres place on speed.
If a firm has the right technology and algorithms, and can afford proprietary data feeds and server space inside exchanges to reduce execution times, they can beat others to the best prices. Some say this has created a two-tier market, and that exchanges reap the benefits.
Jeffrey Sprecher, chief executive of NYSE-owner ICE, had previously expressed his support of IEX and its CEO, Brad Katsuyama, in their efforts to address market issues.
“I look at it (IEX) and I admire what they’ve done and we’re behind at the New York Stock Exchange,” he said in June last year. “We need to get with the program and be doing the same kind of things that Brad is doing.”