“The Securities and Exchange Commission Staff made a precedent-setting and important decision today – the approval of IEX’s exchange application. In doing so, they proved to the investing public that they will allow free markets to work and reward innovation in our financial markets – specifically innovations that put the interests of long-term investors ahead of short-term speedy traders. Investors have watched from the sidelines as markets have morphed drastically over the last two decades, with ever increasing speed. Today they can witness the SEC’s approval of a stock exchange solution that goes the other way and slows things down. We believe IEX’s business model, not dependent on selling fast access and data feeds to the highest bidder, is sustainable and in the best interests of long-term investors, and we applaud the SEC for granting IEX’s exchange application approval, amidst intense lobbying.
This is clearly a win for IEX, but it is a bigger win for investors.”
IEX is clearly a disruptor to the current exchange model. By not offering colocation, not giving rebate, not selling data feeds and vowing to protect client order flow, they have turned their back on the existing exchange model. But the most controversial part of IEX is their so called speed bump that slows orders and transaction reports by 350 microseconds. This is what caused the anti-IEX crowd to have a fit and write numerous comment letters to try and stop IEX from getting exchange status. The SEC emphatically disagreed with the anti-IEX crowd and explained why in their IEX approval notice :
“The Commission believes that the application of the POP/coil delay delays the ability of low-latency market participants to take a “stale”-priced resting pegged order on IEX (i.e., before IEX finishes its process of re-pricing the pegged order in response to changes in the NBBO) based on those market participants’ ability to more effectively digest direct market data feeds and swiftly submit an order before IEX finishes its process of updating the prices of pegged orders resting on its book. According to IEX, this setup is designed to “ensure that no market participants can take action on IEX in reaction to changes in market prices before IEX is aware of the same price changes on behalf of all IEX members.”209
To accomplish this, IEX slows down incoming order messages by 350 microseconds to allow it to update resting pegged orders when the NBBO changes, so that the resting pegged orders are accurately pegged to current market prices. Without this protection, pegged orders resting on IEX have the potential to be subject to “latency arbitrage” by those market participants using very sophisticated latency- sensitive technology, who can rapidly aggregate market data feeds and react faster than IEX to NBBO updates. In such case, pegged orders on IEX could be executed at disadvantageous
“stale” prices that have not been updated to reflect the new NBBO. Further, because non- displayed pegged order types will be available to all Users of IEX, all Users will be able to benefit from this order type on IEX and thus utilize the POP/coil delay.”
While the Commission did vote unanimously to approve IEX, there was some dissent. According to the ruling:
“By the Commission (Chair WHITE and Commissioner STEIN; Commissioner PIWOWAR concurring in part and dissenting with respect to Sections III.C.7 and III.C.8)”
Here are the parts of the approval that Commissioner Piwowar dissented on (pages 69-78 of the release):
Section III.C.7 – Protected Quote Status
For any market participant that chooses to use exchange proprietary data feeds, including IEX’s feed with its attendant 350 microsecond one-way delay, and calculate the NBBO for itself, they will not experience an unprecedented delay in receiving IEX’s data because the 350 microsecond delay on IEX’s data is well within the range of geographic and technological latencies that market participants experience today. Thus, latency to and from IEX will be comparable to – and even less than – delays attributable to other markets that currently are included in the NBBO.270 For this reason, the Commission does not believe the introduction of a small intentional delay like the POP/coil delay will impair market transparency, lead to greater incidences of locked or crossed markets, or materially impact pegged orders on away markets.
Today, the Commission is issuing a final interpretation that, when determining whether a trading center maintains an “automated quotation” for purposes of Rule 611 of Regulation NMS, the term “immediate” in Rule 600(b)(3) precludes any coding of automated systems or other type of intentional device that would delay the action taken with respect to a quotation unless such delay is de minimis – i.e., so short as to not frustrate the purposes of Rule 611 by impairing fair and efficient access to an exchange’s quotations.272
In accordance with that interpretation and the Commission’s findings, discussed above, that the application of IEX’s POP/coil delay is not unfairly discriminatory and is otherwise consistent with the Act, the Commission does not believe that IEX’s POP/coil delay precludes IEX from maintaining an automated quotation.
Accordingly, the Commission finds that an intentional 700 microsecond delay is de minimis and thus IEX can maintain a protected quotation.273
Section III.C.8 – Market Participants Required to Treat IEX’s Quotations as Protected
– market participants will be required to have reasonably designed policies and procedures to treat IEX’s best bid and best offer in such symbol as a protected quotation.
Today is a great day for all of us who have fought for fairer markets. We’ve been fighting this fight for over 10 years now and today is the first day that we can be a part of a substantial victory which will benefit long term investors. But we need to remind everybody that while this victory is huge, it is still just a battle in the overall war. We’re sure the anti-IEX crowd is already cooking up ways to keep their high speed mousetrap intact.
As for us, we will continue to move forward and stay on the offensive. We believe the next issue that needs to be tackled is payment for order flow. Now that IEX has been approved, the climate is right for more positive changes and we expect the Commission to roll out a maker/taker elimination pilot shortly. While this would be a positive step, we need to stay vigilant and make sure that all forms of payment for order flow are addressed in this pilot. We’re also looking forward to the October launch of the Tick Size Pilot which we fully supported and expect some good results especially from the test bucket that contains a trade-at provision.
So today, let’s raise a glass and toast the good folks at IEX but then let’s get right back to work and continue to fix our Broken Markets.
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