IEX Group

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IEX Group
Iex logo.png
Founded 2012
Headquarters New York City
Key People Brad Katsuyama, President & CEO
Twitter @IEXTrading
LinkedIn Profile
Website www.iextrading.com

IEX is a FINRA registered alternative trading system (ATS) operating an electronic order book trading all NMS U.S. equities.[1] IEX went live as a public stock exchange on August 19, 2016.[2] [3]

IEX is the first equities trading venue owned by the buy-side.[4] It was founded by a group of former employees from Royal Bank of Canada. The owners comprise a consortium of mutual funds, hedge funds, and individuals including employees.[5] Jim Clark, a co-founder of Netscape, is an owner and sits on the board. Other investors include large institutional players, including fund managers Capital Group Cos., which operate American Funds, and Brandes Investment Partners.[6]

Only broker-dealers can access and submit orders to the trading platform yet no broker-dealers have an ownership stake in IEX.[5] It has garnered support from Goldman Sachs and JP Morgan Chase.[7][8]

The market gained attention as an alternative to exchanges and other dark pools that cater to high frequency trading by charging a flat fee per every 100 shares bought or sold, offering only four order types, and, in particular, using a 350-microsecond delay (a "speed bump") on orders in order to level the playing field between high-speed electronic traders and others.[9] Also, IEX does not use rebates to attract orders.[10]

IEX entered the sphere of public debate after Michael Lewis touted the company in his 2014 book, Flash Boys, as the solution to a problem not everyone agrees exists: the "rigging" of equity markets against retail investors. Before approving the market, the Securities and Exchange Commission received 470 comment letters, most of them positive, but some strongly against the market's launch. IEX held at least 20 meetings with firms such as Citadel, who was most outspoken in its opposition to the exchange.[11]

IEX Group raised $75 million from firms such as Bain Capital Ventures and Spark Capital to fund its application to the SEC to become a full-fledged securities exchange.[12] As an ATS, its market share was limited because it was not included in all smart-order routers, which are used by brokers to send orders to venues with the best prices. [13]

The SEC approved IEX's plan on June 17, 2016, paving the way for IEX to become the 13th stock exchange in the U.S. and the first major new exchange since BATS Global Markets launched its exchange platform in 2010.[14] [15] The SEC’s approval meant that, as a formal exchange, brokers are now required to route trades to IEX when it has the best bid or offer at any given time.

In August of 2017 the SEC approved IEX's application to conduct opening and closing auctions, a crucial step in IEX's bid to launch IEX Listings.[16]

History

  • Founded in March 2012.[6]
  • Raised $26 million in three rounds: $1.5 million in June 2012, $9.4 million in December 2012, and $15 million in May 2013.
  • Launched the IEX ATS on October 25, 2013.[6]
  • For its first week of operation, IEX reported an average order size of 1,403 shares, compared to the industry average of 374. IEX reported an average aggregate fill size of 382 shares, compared to the industry average of 232.[17] Sal Arnuk, Co-Founder of Themis Trading, corroborated this number, claiming an average execution size of 400 in a Tweet on November 20th, 2013.[18]
  • Traded a milestone of 20 million shares on December 19, 2013.[19]
  • Saw its share of U.S. equity trading hit 1 percent for the first time on November 10, 2014.[20]

Technology

Eschewing industry norms, IEX does not offer clients the option to co-locate near its matching engine. Client servers are located in the Equinix data center in Secaucus, New Jersey, while the IEX servers are located in Weehawken, New Jersey.

This creates a roundtrip latency of 950 microseconds, designed to dissuade speed-driven trading strategies.[21]

IEX chose kdb+ software from Kx Systems for its data platform.[22]

Market Design

Orders submitted to the IEX ATS will be non-displayed - in this regard it is a dark pool. Yet, IEX anticipates providing a displayed quote in early 2014.[21]

The IEX fee structure differs from its competitors. It charges a flat fee of 9 cents per 100 shares for both buyers and sellers. It does not offer rebates for order flow.[1] On November 9, 2017 IEX announced it would charged a flat fee of 3 cents per 100 shares for companies listed on IEX, including the opening and closing auctions.[23]

IEX supports only four order types: Limit Orders, Market Orders, Midpoint Peg Orders, and IEX Check. Orders in the order book will be matched according to price-broker-time priority. Broker Priority is an order book feature that gives precedence to a broker's own order over all other brokers' orders at the same price. Agency and riskless principal orders receive priority over principal orders within a single broker.[1]

Transparency

Breaking from traditional disclosure practices, IEX publicly released its Form ATS, a typically private regulatory filing.[24] IEX's Form ATS is available online on its website.[25] The document details how the market operates, including how requests to trade are prioritized, what order types are available, the market's price structure, ways to access the market, who can access the market, and IEX's affiliations. Some information is redacted to protect third-party service provider confidentiality.

IEX launched a How To video series to describe its market operations. The first entry is called "Rest & re-allocate".[26] The second entry is "Minimum Quantity Order".[27] Both are viewable on the IEX website.

Key People

The team is a mix of technologists and market structure experts from the sell side, exchanges, ATSs and high-frequency trading firms.

"Flash Boys"

On March 30, 2014, IEX CEO Brad Katsuyama was featured in a segment on CBS News' 60 Minutes program. The segment aired ahead of the release of Flash Boys, a book by Michael Lewis that called the U.S. stock market "rigged" and that high-frequency traders engage in a form of "legal front-running."[28] The 60 Minutes piece detailed the events that led to Katsuyama's departure from the Royal Bank of Canada and his founding of IEX.[29]

View the 60 Minutes Video

The book and 60 Minutes segment stirred debate and pitted IEX against other exchanges such as Nasdaq, NYSE Group, and BATS, all of whom wrote comment letters to the SEC urging it not to approve IEX’s proposal to become a U.S. stock exchange. BATS had originally supported IEX's bid, but withdrew that support in February of 2016.[30] BATS argued in a comment letter that IEX had falsely characterized parts of all three exchanges' businesses either on purpose or by not doing enough homework to verify its claims.[31]

References

  1. 1.0 1.1 1.2 How we operate. IEX.
  2. IEX Outduels Citadel, NYSE as Flash Boys Exchange Is Approved. Bloomberg.
  3. IEX 'Flash Boys' exchange goes live, aims to disrupt market. Reuters.
  4. New U.S. trading platform, IEX, aims to disrupt market structure. Reuters.
  5. 5.0 5.1 IEX home page. IEX.
  6. 6.0 6.1 6.2 EX Completes Finra Registration, Eyes Oct. 25 Launch Date. Traders Magazine.
  7. Upstart Pitches Trading Sanctum. Wall Street Journal.
  8. Goldman Sachs Endorses IEX Stock Market Built to Fight Predators. Bloomberg.
  9. Goldman’s Un-Goldman-Like Fix for the Market’s Glitch Problems. Wall Street Journal.
  10. NYSE parent says exchange structure still too complex. Reuters.
  11. What investors can expect when IEX launches on Friday. MarketWatch.
  12. IEX applies for full exchange status. The Financial Times.
  13. IEX bumps up planned fundraising to $75m. The Financial Times.
  14. IEX trading venue wins battle to become an exchange. The Financial Times.
  15. IEX to Apply for Exchange Status. The Wall Street Journal.
  16. IEX Takes One Step Closer to Becoming Listing Exchange. MarketsMedia.
  17. IEX ATS Statistics. IEX.
  18. @ThemisSal. Twitter.
  19. @ChristopherNagy. Twitter.
  20. IEX Wins 1% Market Share in Quest to Blunt Speed Trading. Bloomberg.
  21. 21.0 21.1 How the “Navy SEALs” of trading are taking on Wall Street’s predatory robots. Quartz.
  22. IEX Adopted Kx Systems’ KDB+ For Its Data Platform. Traders Magaazine.
  23. IEX Announces Competitive, Flat-Fee Pricing for Auctions. Traders Magazine.
  24. IEX to reveal dark pool operations. Bloomberg.
  25. Setting A New Bar For Transparency. IEX.
  26. How To: Rest & Re-Allocate. IEX.
  27. How To: Minimum Quantity Order. IEX.
  28. Michael Lewis, 'Flash Boys,' and '60 Minutes'. CNBC.
  29. Is the U.S. Stock Market Rigged?. CBS News.
  30. 'Flash Boys' Market Loses Support From BATS as Opposition Mounts. Bloomberg.
  31. BATS Global Markets withdraws support for IEX exchange push. The Financial Times.