Dark pool stock exchange IEX controversially approved by CFTC

CFTC’s approval of a new stock exchange puts the high frequency cat among the establishment pigeons as Brad Katsuyama’s IEX forges ahead with dark pool venue’s speed bump to slow orders

The U.S. Securities and Exchange Commission has given a controversial approval to IEX Group’s plan for a new stock exchange that comes with a built-in “speed bump” to check high-speed traders, despite protests from those traders that the move would interrupt trades marketwide.

With North America’s notoriously conservative regulator having given this a rubber stamp, it may reopen criticism from compatriots New York Stock Exchange and BATS Global Markets who accused IEX of skewing facts to help win approval.

Brad Katsuyama, CEO and founder of IEX is also no stranger to controversy, being the focus of Flash Boys, a non-fiction book by Michael Lewis about high-frequency trading (HFT) in the financial markets.

Mr. Katsuyama is an astute interbank financial markets senior executive, having spent many years at the Royal Bank of Canada , where he was formerly the Global Head of Electronic Sales and Trading. In this role, he was responsible for multiple global teams including: electronic sales, electronic trading, algorithmic trading, market structure strategy, client implementation and product management. His prior management roles at RBC were Head of US Cash Equity Trading, Head of US Hedge Fund Coverage, and Head of US Technology Trading.
HFT problems, discovery and response.

While at RBC, he noticed that placing a single large order that can be fulfilled only through many different stock exchanges was being taken advantage of by predatory stock scalpers. Scalpers, noticing the order would not be able to be fulfilled by one single exchange, would instead buy the securities on the other exchanges, so that by the time the rest of the large order arrived to those exchanges the scalpers could sell the securities at a higher price.

All these events would happen in milliseconds not perceivable to humans but perceivable to computers. He instead led a team that implemented THOR, a securities’ order-management system where large orders are split into many different sub-orders with each sub-order arriving at the same time to all the exchanges through the use of intentional delays.

IEX becomes disruptive new kid on the block

Following Katsuyama’s discovery of certain unfair high-frequency trading practices, he decided to improve the business of the stock market, leaving RBC in 2012 to start-up a fairer stock trading venue. The Investors Exchange, IEX was born from his RBC departure. IEX became an emerging stock exchange, organized as an alternative trading system, which is regarded as a dark pool.

Company representatives have stated their intention to convert to a public exchange upon reaching sufficient trading volume, and it opened for its first day of trading on October 25, 2013.

William O’Brien, at the time president of competing business BATS Global Markets, asserted in April 2014 the IEX was trying to build its business by generating ‘fear’, ‘mistrust’ and ‘accusations’. Financial writer Michael Lewis praised IEX as an appropriate and beneficial response to HFT abuses. Since the publishing of Flash Boys and the opening of IEX, several U.S. authorities have confirmed they are looking into certain practices used by high-frequency traders. The FBI, the U.S. Securities and Exchange Commission, the U.S. Justice Department and the Attorney General of New York State all have investigations underway.

The approval of the exchange, with implementation of a ‘speed bump’ means that orders which are sent to IEX for execution are slowed by 350 millionths-of-a-second, allowing ever-changing prices to be verified before sophisticated, opportunistic traders can act on stale prices, effectively queue-jumping.

Three years ago, other institutional ECNs such as EBS, the electronic brokerage division of British interdealer broker ICAP considered putting in a latency ‘floor’ for the same purposes and in order to appease certain European regulators such as BaFIN in Germany which began to take a very dim view toward HFT.

Despite the speed bump being implemented and approved by the CFTC, the exchange remains a moot point among Chicago’s vast, established electronic derivatives exchanges.

IntercontinentalExchange, which owns the New York Stock Exchange, has called IEX ‘un-American’, and many skeptics consider that over-regulation prevents exchanges from slowing orders and therefore when IEX itself sends orders for execution to other exchanges, they bypass the speed bump giving IEX an unfair market advantage.

Most certainly, HFT and the use of algorithmic systems is not only alive and well in America, but it is part of the landscape of the proprietary trading epicenters of Chicago and New York, this being a further development, however its approval is most certainly not of the usual direction.

 

Read this next

Retail FX

Banxso announces 8.7% interest rate on deposits in South Africa

“With Banxso, they can enjoy the benefits of both worlds – earning competitive interest and having the freedom to trade, all within the same platform.”

Industry News

FINRA to publish transaction details in U.S. Treasury securities

“Consistent with our longstanding practice, FINRA is introducing greater transparency in a calibrated and careful manner, benefiting liquidity and resilience in this critical market while also mitigating potential information leakage concerns.”

Institutional FX

OpenYield launches “cheap and easy” fixed income trading for brokers

“We’re on a mission to make bonds cheap and easy to trade, and are excited about the opportunity to build generational capital markets infrastructure.”

Digital Assets

Sumsub and Mercuryo publish a guide for VASPs: “Mastering Travel Rule Compliance”

“At Sumsub, we’ve concentrated our efforts on filling the gap in understanding the complexity of Travel Rule regulation and helping organizations find the best solution to stay safe and compliant while minimizing costs and avoiding potential risks of non-compliance. This guide we created with Mercuryo, our trusted partner, is the ultimate navigation tool all VASPs can consult.”

Digital Assets

Bitget Wallet Leads with Record Swap Volume & New Crypto Innovations

This week, Bitget Wallet achieved a milestone by surpassing Metamask with a record 388,757 Swap order transactions, securing the global lead. The significant 7-day trading volume, almost 68,000 more than its rival, underscores its liquidity and user trust. This robust activity signals Bitget Wallet’s prominent role and reliability in the dynamic crypto market.

Digital Assets

Embarking on a Digital Currency Journey

Imagine you’ve stumbled upon a treasure map, leading you to untold riches hidden in the vastness of the internet. Instead of gold coins and jewel-encrusted goblets, this treasure comes in the form of digital currencies, the modern-day loot coveted by many.

Reviews

Traders Union Experts Share The Trading Analyst Review For 2024

Navigating options trading in rapidly shifting markets poses a considerable challenge. This is where options trading alert services become invaluable. They aid traders in keeping abreast of evolving opportunities and market trends. In this assessment, Traders Union experts scrutinize The Trading Analyst alert service to ascertain its efficacy. 

Digital Assets

BlockDAG’s Presale Achieves $9.9M: Aiming For A 5000-Fold ROI As Cardano’s Price Rises And Fantom Launches Sonic

Explore Cardano’s surge, Sonic’s efficiency, and why BlockDAG’s growth makes it the top crypto choice. A deep dive into the future of blockchain investments.

Digital Assets

US, UK probe $20 billion Tether transfers tied to Russian exchange.

U.S. and UK authorities are investigating the movement of $20 billion in the USD-pegged stablecoin tether (USDT) through Moscow-based exchange Garantex.

<