NYSE wants IEX to explain speed bump

November 16, 2015 10:55 AM

IEX Group's application to become a U.S. stock exchange does not meet industry standards and regulators should not approve the upstart trading venue's request, which lacks key details on how it's so-called 'speed bump' would operate, the New York Stock Exchange has said of its rival.

IEX, which was featured in Michael Lewis's controversial book "Flash Boys: A Wall Street Revolt," began as an alternative trading system in October 2013, and applied to the U.S. Securities and Exchange Commission in September to become The Investors' Exchange. It aims to launch as such early next year, and would compete against the NYSE, Nasdaq and others.

"Flash Boys" ignited a furious debate as to whether the stock market was rigged in favor of high-frequency traders that use computer algorithms to trade and now makes up more than half of U.S. stock volume. It chronicled the efforts of IEX chief Brad Katsuyama and his team to build an exchange that would eliminate any advantages high-speed traders have over other investors.

But IEX's application falls short of the strict standards required to be registered as a national stock exchange, according to a letter sent by Elizabeth King, general counsel at Intercontinental Exchange Inc's NYSE, to the SEC dated Nov. 12, which was posted on the SEC's website.

"Like the 'non-fat yogurt' shop on Seinfeld, which actually serves tastier, full-fat yogurt to increase its sales, IEX advertises that it is 'A Fair, Simple, Transparent Market,' whereas it proposes rules that would make IEX an unfair, complex, and opaque exchange," she wrote, referring to a well-known episode of the U.S. television comedy.

The most contentious issue has been IEX's use of a 'speed bump' that slows down orders to the trading platform by 350 millionths-of-a-second. By doing so, IEX says it can update ever-changing prices before the quickest market participants can act on stale data, preventing any queue-jumping.

NYSE said IEX failed to adequately describe how the speed bump would work, and that it appears to create an unfair advantage for orders sent to IEX as compared to other marketplaces. It asked for more clarity and echoed an earlier letter by exchange operator BATS Global Markets.

IEX said it would soon provide more information to help clarify how its exchange would work.

"We are happy to answer NYSE's call to provide more information about the way our system works than they do about their own," Donald Bollerman, head of markets and sales at IEX, told Reuters. "We look forward to taking the lead in increasing transparency around exchange connectivity, latency and means of access."

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