The war of words between upstart trading venue IEX and the New York Stock Exchange has taken a new turn.
In a letter to the Securities and Exchange Commission, IEX took aim at NYSE, saying it empowers high-speed-trading firms in a way that widens the information gap between these firms and slower-moving investors.
It describes earlier feedback from NYSE at various points as “disingenuous,” “categorically wrong,” “ironic,” and “unfounded.”
It also said that the dominant exchange model poses conflicts of interest with stock exchanges’ responsibility to the public.
In one of the more memorable passages, NYSE likened IEX to the “non-fat yogurt” shop on “Seinfeld,” saying that while it advertises itself as “A Fair, Simple, Transparent Market,” it is proposing rules that would make it “an unfair, complex, and opaque exchange.”
IEX made the comments about the NYSE in its own letter to the Securities and Exchange Commission. It didn’t pull any punches.
The response reads:
IEX believes that, within the context of this existing legal and regulatory structure, the dominant exchanges have adopted a set of practices that unduly focus on the speed of quoting and trading, and unduly rely on ever-increasing fees for both access and market data that their members are effectively required to pay in order to trade for themselves and to seek best execution of their customers’ orders.
At the center of the debate about the IEX application is its use of a “speed bump.” IEX tries to level the playing field between hyperfast traders and ordinary traders using a 350-microsecond delay, or speed bump. This delay is created by sending messages through a coiled optical fibre equivalent to 38.07 miles in distance to slow them down.
The NYSE said the IEX speed bump would “result in the investors receiving stale and misleading quote information.” That echoed earlier feedback from Citadel, which had said that some of IEX’s unique features would negatively affect the wider market.
In its response, IEX said that the speed bump is “a response to disparities related to speed and technological capabilities that currently exist in the national market system.”
It then said such a delay wouldn’t be required or could be “materially shortened” if:
- Exchanges did not sell co-location services.
- Exchanges did not sell high-speed proprietary data feeds with speed advantages over public consolidated data.
- Exchanges did not sell low-latency technology used to access their markets.
- Exchanges did not sell other low-latency enhancements that drive the emphasis on speed in reaching exchanges.
- Exchanges were all located in the same facility.
The response letter addresses a number of NYSE’s objections directly.
It mentions NYSE more than 130 times. Here are some of the critical passages:
- NYSE and Nasdaq’s position would elevate a mindless speed-based philosophy over any other consideration and would, in practice, serve as an anticompetitive barrier to any new exchange entrant that refused to embrace it.
- The cost and method of access to IEX’s system is the same across all members, and IEX has deliberately chosen to differentiate itself from NYSE and Nasdaq by not selling preferential access to the highest bidder.
- NYSE reaps significant revenue by empowering its fastest participants in ways that widen the information gap.
- The NYSE letter suggests that the number and complexity of certain order types offered by IEX conflicts with its statement that it is a “simple, fair, and transparent market.” While we believe the comment is not relevant to the question of whether to approve our Application, a response is warranted because the comment is at best disingenuous, and its insinuation that IEX is proposing a relatively more complicated market as a factual matter is categorically wrong.
- We do not propose to operate as a “cookie cutter” replica of the dominant exchange business model. We believe that model poses conflicts of interest with what we view as an exchange’s public responsibility.
- As a new entrant in any industry that challenges established practices, it is by no means surprising that those with deeply rooted interests in maintaining these practices would seek to mischaracterize, malign, or denigrate the very differences that distinguish the challenger, and to block, limit, or delay its ability to compete. That story, of course, is much older than the market structure debates of recent years.
The IEX application has become a focal point for views on the future of equity market structure.
Business Insider reported in October that some of the biggest investors in the business have endorsed 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.
J.W. Verret, the former chief economist for the US House Committee on Financial Services, later sent a letter arguing that a failure to approve the IEX application should provoke an inquiry into “the Commission’s relationship with incumbent exchanges and related crony capitalism concerns.”
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