The trading community is in a tizzy over a proposal by America's upstart stock exchange

  • IEX is proposing a discount to attract brokers to its exchange.
  • But some market-watchers note similarities between the proposed discount and other exchanges’ rebate programs, which IEX has criticised.

Upstart stock exchange IEX is proposing a model to lure brokers to its exchange and Wall Street is in a tizzy.

IEX’s so-called Enhanced Market Making Proposal would provide brokers a one cent per 100 share discount on trading in certain circumstances.

“The IEX Enhanced Market Maker (IEMM) Program offers a discount on trading fees to market makers when they meet stringent market making requirements in IEX-listed stocks with only their principal order flow (not that of their clients),” a blog post describing the new model said.

IEX has gone head-to-head with its rival exchanges over other methods to attract brokers in the past. The New York Stock Exchange and Nasdaq pay rebates to brokers to incentivise them to send their orders to their exchange. IEX chief executive Brad Katsuyama once said “rebate practices cause clear and significant harm to investors.”

But some market watchers don’t see a difference between IEX’s discount proposal and its competitors’ rebates. “So rebates are bad – so what is IEX doing,” Larry Tabb, the founder and research chairman of TABB Group, a capital markets research firm told Business Insider in an email.

“Offering discounts on trading fees – what is another word for a discount – a rebate,” he concluded.

“I think their past logic is wrong and this is a perfectly rational thing for them to do,” Dave Weisberger, an IEX critic and head of crypto and equity markets at ViableMkts, said in an email.

The exchange stands by its long-held view on rebates. They say paying brokers for flow, even when it’s not in the best interest of their clients, is not the same as giving a discount to brokers who are trading for themselves. Here’s IEX:

“The way displayed quotes are currently incentivized in the market - rebates - has serious problems. Most obviously, they can create a conflict around client order routing if brokers prioritise rebates over best execution.”

Richard Johnson of consultancy Greenwich Associates told Business Insider that there is a “slight” difference between rebates and what IEX is proposing.

“IEX will argue that discounts are different to rebates and others will argue it’s the same thing,” Johnson said. “But the important point is that IEX acknowledges that it is sometimes necessary to provide incentives for liquidity discovery.”

Representatives from both the New York Stock Exchange and Nasdaq declined to comment to Business Insider.

This post has been updated to reflect Dave Weisberger’s most up-to-date title.

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