The Securities and Exchange Commission has just approved an application by a startup called IEX (Investors Exchange) to become a full-fledged stock exchange. Since 2013, the IEX Group has been operating an alternative trading system that was introduced as a means of eliminating some of the industry's worst practices.
Canadian trader Brad Katsuyama, co-founder of the group, designed IEX to be a market devoid of traders who used ‘excessive’ speed to skim profits off the orders from ordinary citizens. As a trader of many years, Katsuyama dealt with this problem first hand. Whenever he placed a bid for a stock at a price he saw listed, he would find there were no shares available at that price. He and his team developed a way to block these actions in an astute way.
At a time when everyone was getting faster, IEX decided to move in the opposite direction by delaying each trade by 350 millionths of a second, a fraction of the time it takes to blink an eye. The move was undetectable by humans but it was enough to throw off systems that were trying to read and to outrun buyers. With this delay in place, when Katsuyama went to buy shares, he no longer found them purchased.
The IEX system was introduced for trading in October of 2013, and proved very popular, attracting much praise and business from big banks like J.P. Morgan and investors like Franklin Templeton. On an average day, 280 million shares are traded through IEX, making it the second-largest platform for trading stocks outside of the traditional exchanges. As long as it remained an alternative trading system, however, it was held back from becoming a full-fledged stock exchange. So, last year IEX put in an application to be recognized as a bona fide exchange.
Last Friday, the U.S. Securities and Exchange Commission approved the application and allowed IEX to achieve its goal as a full-fledged exchange.
By approving IEX, the SEC was giving its stamp of approval to a major challenge to the current Wall Street establishment. It was able to take this step under SEC’s recently revised interpretation of the so-called order protection rule under its Regulation NMS which permits the creation of a market structure that benefits some participants while costing other participants more than $400 million a year.
To keep everyone satisfied, the SEC included in its revised order protection rule a key differentiator between the newly approved IEX and other national securities exchanges such as the New York Stock Exchange, Nasdaq Stock Market and Bats BZX Exchange. The commission said it would “require trading centers to honor automated securities prices that are subject to a small delay or speed bump when being accessed.” IEX’s so-called speed bump of 350 microseconds is within the 1 millisecond now allowed by the SEC.