In the last few months, I have had a strange and interesting experience. In early April, I found myself the main character in Michael Lewis's book "Flash Boys." It told the story of a quest I've been on, with my colleagues, to expose and to prevent a lot of outrageous behavior in the U.S. stock market.
Many of us had worked at big Wall Street firms or inside stock exchanges, and many of us believed something was amiss in the market. But it took the better part of five years to discover exactly how the market had been organized to benefit financial intermediaries, rather than the investors, the companies or the economy it was meant to serve. Only after looking at a flurry of market innovations -- 40-gigabit cross-connects, esoteric order types, microwave towers -- did we understand that the market’s focus was less about capital formation and more about giving certain market participants an advantage over others. In the end, we felt that the best way to solve these problems was to build a stock market of our own, which we did.
After the book, our stock market, IEX Group Inc., became a topic of discussion -- some positive, some negative, some true and some false. Fair enough. If you're in the spotlight and doing something different, you should take the heat along with the light.
It's for this reason that we have done our best to resist responding publicly to misinformation about our company -- even when we read memos circulated inside banks that "Michael Lewis has an undisclosed stake in IEX" (he does not); that “brokers own stakes in IEX” (they don't); or articles in the Wall Street Journal that said we let "broker-dealers jump to the front of the trading queue,” putting retail investors and mutual funds at a disadvantage (in reality, all orders arrive at IEX via brokers, including those from traditional investors). Our hope in staying quiet was that the truth would win out in the end. But in recent weeks, the misinformation campaign has hit a new high (or low), and on one particularly critical matter, we feel compelled to set the record straight.
On July 7, Bart Chilton, a former commissioner of the Commodity Futures Trading Commission, wrote an article about us for the New York Times's DealBook. He argued, in effect, that because high-frequency trading has become so central to the stock market, it must be serving some necessary purpose. “At any one time, it is likely that 50 percent of all trades are made by high-frequency traders in United States equity markets," he wrote. "Even trading volume on the IEX exchange, which is trumpeted as creating 'institutional fairness' in the Michael Lewis book 'Flash Boys' about the topic, is now made up of roughly 50 percent high-frequency traders.”
This is false: While high-frequency trading firms are estimated to generate 50 percent or more of the volume on other stock markets, on IEX, high-frequency trading firms currently make up less than 20 percent of our volume. (Note: It’s difficult to predict the optimal proportion of HFT activity in any market, but it should definitely not be half the volume.)