There is a new scandal brewing around the corner of Wall Street, and it is quite unlikely to be a minor one – the recent reigniting of debates around high-frequency trading (HFT) is pushing two of the major US retail stock brokerages to a new source of liquidity for their customers. The beneficent is widely discussed in the new book by Michel Lewis “Flash Boys: A Wall Street Revolt” IEX Alternative Trading System (ATS) which is registered at FINRA as a broker-dealer.
ATS’s are more commonly known as “dark pools”, however this definition is nothing but inaccurate when we talk about the IEX. It has been quite transparent in its operations and it is offering access to its services for all brokerages. All subscribers are listed on the company’s website where it has also publicized its rules. The main function of the exchange is to avoid HFT occurring by artificially setting a floor for latency, thereby eliminating the ability of HFTs to jump in front of the order queue.
Interactive Brokers – The First Company Rushing to Reassure its Customers
Interactive Brokers (IB) was the first retail brokerage to announce on Thursday that it will offer its retail customers the option to choose to send their US stock orders directly to IEX. The other technology that the firm provides is called SmartRoutingSM technology. IB’s SmartRouting looks for the stock, option and combination prices available at the time of the order and aims to immediately execute the order electronically.
The company’s Executive Vice President Steve Sanders has said that “customer interest in IEX as a result of recent media exposure is apparent. We determined that it makes sense to connect directly to this new trading venue, thereby providing our customers with another market center destination.”
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Monex’s TradeStation Follows Suit on Friday
The second retail brokerage to respond to popular customer demand following the heated debate about HFT across the media landscape has been Monex’s TradeStation company. On Friday the Group’s CEO, Salomon Sredni has communicated in a press release that “TradeStation is proud to announce we have started working with IEX to provide connectivity and access to its new and growing market center. In recent days IEX has been very vocal about its dedication to institutionalizing fairness in the markets. At TradeStation, we fully support innovation and technology that aim to evolve market structure and provide a level playing field for all.”
The company has definitely become concerned about its business and the ongoing claim resurfacing now and again that “the markets are rigged”. TradeStation’s CEO has added that “We have been troubled by recent reports in the media that high-frequency traders are taking advantage of information to which, legally or not, they have access and are using this information to gain an unfair advantage over retail and institutional investors and traders. We believe that the industry and regulators will investigate and address the issues that have been raised. As always, we at TradeStation are committed to avoiding all conflicts with our customers by not engaging in any proprietary trading.”
IEX’s Ultimate Goal – Becoming an Exchange
With the FBI and the Justice Department opening investigations into HFT, this is the latest domino to fall after the LIBOR fiasco and the FX fixing scandal that erupted last year. Confidence in the financial markets is essential for the industry and IEX is viewed by major retail brokers to be the place that is capable to restore the prominence of markets as a fair market place. Only in a matter of a week, since the release of “Flash Boys”, the daily volume traded on IEX has doubled to 24 million shares, which by no means looks like a big number, however it is speeding up IFX’s prospects that the company’s CEO Brad Katsuyama has outlined in an interview by stating that “we’ve been getting interest from corporate clients about listings and I think that definitely increases our interest in looking at becoming an exchange earlier than thought.”
Yes, you have heard him right, we might be getting a new exchange that will promise its customers that ho HFT companies will be hustling with their orders. One can not help but wonder, how will the other exchanges react to this development, and will we get some sort of fragmentation where there might actually be HFT friendly and HFT hostile exchanges.