Investment bank Goldman Sachs Group has thrown its support behind upstart trading venue IEX Group's bid to become a U.S. stock exchange, asking regulators to use the opportunity to address broader issues related to how the market is structured.
IEX, the private trading venue featured in author Michael Lewis' book "Flash Boys: A Wall Street Revolt," applied in September with the U.S. Securities and Exchange Commission to become a registered stock exchange called the Investors' Exchange.
As an exchange, IEX would offer an alternative for market participants who cannot or do not want to compete on speed with the fastest trading firms, and for those looking to get large trades done, Goldman said in a letter to the SEC dated Jan. 12, and posted on the regulator's website on Wednesday.
Decade-and-a-half-old regulations that ushered in an era of automated trading and effectively placed a bigger focus on the speed of trading, along with a proliferation of look-alike exchanges, have led to an overly complicated and less stable marketplace, Goldman said.
"These changes have effectively placed others with less sophisticated infrastructure at a disadvantage," its letter said.
IEX's exchange application has proven controversial, with hundreds of comment letters sent to the SEC. The vast majority expressed support, but some, from various trading firms and exchanges, have been vehemently opposed.
The most contentious issue has been IEX's "speed bump," which slows down orders by 350 millionths of a second so IEX can update fast-changing prices before the speediest traders can act on stale data and effectively queue-jump.
In "Flash Boys," Lewis chronicled IEX's efforts to build an exchange, using methods such as the speed bump and flat pricing system, rather than the standard tiered fee and rebate structure, in order to create a market that levels the playing field for all investors.
Firms such as the New York Stock Exchange, which is owned by Intercontinental Exchange Inc <ICE.N>, and market maker Citadel LLC have argued that the speed bump would be disruptive to trading and that it would unfairly benefit IEX and its customers.
Goldman, in its letter, asked the SEC to use the IEX application as an opportunity to reevaluate what is best for market participants.
"(T)he value to investors from this non-stop race for faster speeds may have reached a point of diminishing marginal returns for market efficiency and stability," it said.