The 13th national stock exchange has been approved in the United States, after the Securities and Exchange Commission (SEC) gave the green light for the application by Investors’ Exchange LLC (IEX) to register as a National Market System (NMS).
The decision came as the deadline approached last week for a final choice to made, as covered by Finance Magnates in a related post, and according to an official subsequent announcement by the SEC.
IEX operates as an Alternative Trading System (ATS) and had a filed a Form 1 with the SEC last year to become an NMS, a decision that was met with resistance from some industry peers following the book ‘Flash Boys’ by Michael Lewis in 2014 and as the prospects for IEX’s business model were considered.
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On behalf of the entire IEX team, I would like to sincerely thank you all for supporting us throughout our application to become an exchange.
The SEC said that IEX must still meet certain conditions specified in the agency’s order before it can start to transform itself into a national securities exchange, according to the update. The regulator also provided an interpretation that will require other trading centers to honor the small delay, known as a ‘speed bump’, when automated securities prices are being accessed under the intentional latency.
The speed bump slows all orders down in order to deter predatory order flow or latency-driven arbitragers who use high-frequency trading (HFT) techniques to exploit time delays, while at the same time the speed bump is small enough keep the degree of latency controlled as to not affect genuine traders negatively.
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Today’s actions promote competition and innovation, which our equity markets depend on to continue to deliver robust, efficient service to both retail and institutional investors.
Delay at a de minimis level
As NMS prices in the U.S. can be subject to best-execution regulation rules under National Best Bid/Offer (NBBO), the SEC determined that a small delay won’t prevent investors from accessing stock prices in a fair manner based on Order Protection Rues, and provided guidance explaining that delays of less than one millisecond are at a de minimis level.
“Today’s actions promote competition and innovation, which our equity markets depend on to continue to deliver robust, efficient service to both retail and institutional investors,” said SEC Chair Mary Jo White, commenting in an official statement.
“A critical role of the Commission’s regulatory framework is to facilitate the ability of market participants to craft appropriate market-based initiatives, consistent with our mission to protect investors, maintain market integrity, and promote capital formation.”
IEX plans in August to begin phasing in securities one-by-one through September as it expects to launch, according to a timeline description on the exchanges website, and as explained by the company’s CEO Brad Katsuyama in a letter to IEX buy-side and sell-side clients:
“On behalf of the entire IEX team, I would like to sincerely thank you all for supporting us throughout our application to become an exchange. We are thrilled that the SEC has approved our Exchange Filing which puts us on track to commence a symbol-by-symbol roll-out on August 19th, concluding on September 2nd.”
The delay from IEX is provided via a 38-mile coil of optical fiber that is placed in front of its trading engine. This enables a round-trip delay of 0.0007 seconds – believed to deter a trader’s ability to respond on a dark pool venue ahead of IEX’s own pricing algorithms, as explained on the company’s website.
The 700 microsecond speedbump aims to prevent others from beating IEX’s own computers in terms of any latency that could otherwise be exploited if the speedbump was missing.