On Friday, the Investors Exchange, or IEX Group, finally launched as a stock exchange after nearly two years of regulatory scrutiny and traded barbs with competitors. The new exchange, which was the subject of Michael Lewis’ 2014 book “Flash Boys”, obtained SEC’s approval to register as the 13th national securities exchange earlier in June 2016.
It’s been quite a journey for the exchange described by Michael Lewis as the solution to equity markets’ rig against retail investors – from working in a windowless room with no money in 2012, according to IEX CEO Brad Katsuyama, to launching its alternative trading system, and now competing with the likes of Nasdaq Inc, Bats Global Markets and New York Stock Exchange. IEX has been operating until now as a dark pool that processes trades primarily for large institutions.
Unlike other exchanges, the heart of IEX’s strategy is based on what the firm calls a ‘speed bump’ which slows down trading, requiring all trades to go past by 350 microseconds in a bid to prevent high-frequency traders from racing ahead of slower investors to take advantages of changes in bids and offers before they update.
Will the new exchange succeed?
While other exchanges — particularly the NYSE and NASDAQ — initially opposed the speed bump, and even the IEX’s application to become an exchange, some have said they were looking into implementing similar features after IEX won its exchange licence. In addition, the Securities and Exchange Commission ruled that the speed bump is a small delay that doesn’t violate any of its rules or hurt the spirit of existing regulations that require all participants be able to access quotes at the same time.
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More specifically, Nasdaq says it’s going to propose a new order type that rewards traders willing to stay in the order queue for an extended period of time by eventually allowing them to gain order queue priority.
In addition, IEX plans not to provide rebates for brokers to trade on its exchange and instead charges a flat fee of 9 cents for every 100 shares on all trades. Moreover, they do not allow co-location, a common practice on most other exchanges, where some groups pay to house their servers next to the exchange’s stock matching engine to gain a speed advantage.
Without paying brokers any incentives, IEX plans to increase its market share from less than 2 percent currently to 5%-6% in the first six months, as becoming a public exchange will certainly attract more volume. Also, it will be able to host initial public offerings (IPOs) as a public exchange.
Although some brokers will likely take a wait and see approach, rules under Regulation NMS prevent them from not routing trades to IEX regardless of their views or competing business priorities.