The heroes of 'Flash Boys' are swinging back against critics

IEX Group, the upstart trading venue that’s trying to challenge the world’s largest stock exchanges, said its critics are stuck in the past.

The firm, led by Brad Katsuyama, filed to become a stock exchange in September, and that application has raised objections from rivals like the New York Stock Exchange and BATS Global Markets.

In a 19-page letter to the Securities and Exchange Commission, IEX said the criticism is based on the “false premise” that its ok for trading venues to let some firms gain whatever advantage their technology will permit.

The comments were posted on the SEC’s website. IEX gained national attention when its chief executive Brad Katsuyama was profiled by Michael Lewis in his book “Flash Boys” which accused high speed traders of profiting at the expense of others.

Speed bump

The firm tries to levels the playing field between hyperfast traders and ordinary traders using a 350-microsecond “speed bump.” This delay is created by having messages go through a coiled optical fibre equivalent to 38.07 miles in distance to slow them down.

In its objection, Citadel — which said it accounts for 14% of US-listed share-trading volume — argued some of IEX’s unique features would negatively impact the wider market.

IEX responded by saying other trading venues including the NYSE and Nasdaq also use coiled cables to create delays, but only for the benefit of certain paying customers. IEX says its system creates fairness “for all participants”

The letter is focuses on the objections raised by Citadel, stock trading venue BATS, the trade body FIA Principal Traders Group. The firm will respond to comments made by the New York Stock Exchange and Nasdaq separately.

The critical passages relate to the speed bump:

This design is not dissimilar to the coiled cable, provided by the New York Stock Exchange (“NYSE”), The NASDAQ Stock Market (“Nasdaq”), and BATS families of exchanges in their respective data centres. Those exchanges, however, coil cable within their data centres specifically to create equivalent latency for participants who have paid for the privilege of co-location…

… IEX’s coiling is structurally similar, but is a longer length of cable in an attempt to create fairness for all participants. In this way, the POP was designed as an alternative to the multi-tiered access system created by exchanges to sell faster market data, connectivity, technology, and co-location for high fees to firms who can take advantage of microsecond speed advantages in the existing market structure

IEX also said that the objections to its strategy are borne out of a belief that some firms should have an advantage over others:

We believe that these objections fundamentally rest on a false premise, namely, that in order for an entity to be approved as a national securities exchange, the entity cannot adopt any means to counter latency arbitrage or, conversely, that exchanges are required to enable individual trading firms to gain an advantage in any circumstance in which their technology (coupled with the exchange’s own technology) will permit.

And later:

“Citadel seems to assume that any measure of protection for one group of investors can only be gained to the detriment of others. In fact, by reducing incentives for certain speed-based strategies, IEX expects to provide a better experience for institutional and retail investors, brokers, and market makers, and to strengthen investor confidence generally. Market integrity is not a zero-sum game.”

Not everyone is objecting to IEX becoming an exchange. Some of the biggest investors in the business, including Southeastern Asset Management, a $US26 billion fund manager, and Capital Group, wrote their own letters last month endorsing the application.

Since then, the fund manager OppenheimerFunds has supported the application, while Virtu, a leading market maker and liquidity provider, said IEX’s “speed bump” had no impact on its market making on the platform. All of the feedback is available here.

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