IEX Group Inc., a dark pool that plans to convert into a U.S. stock exchange, is breaking with tradition by publicly releasing the normally private regulatory filing that explains how it operates.
IEX, which opens for business on Oct. 25, today put its Form ATS on its website, detailing how requests to trade are prioritized, the types of orders available, price structure and ways to access the market. New York-based IEX is redacting some information to protect users’ security, Chief Executive Officer Brad Katsuyama said during an interview.
Almost 40 percent of U.S. stock volume now takes place privately on venues such as dark pools, spurring requests from public exchanges to curb the trading and new disclosure requirements from the Financial Industry Regulatory Authority. By revealing its trading rules, IEX hopes to push other alternative trading systems, or ATSs, to reveal more information, Katsuyama said.
ModernNetworks IR LLC’s Tim Quast said he cannot recall another dark pool taking this step.
“It’s a good development, and I can’t think of much bad that will come of this,” said Quast, the Denver-based president of ModernNetworks IR, which provides market-structure analysis to public companies. The decision helps IEX beat back accusations from exchanges that dark pools aren’t transparent enough, he said. “Doing this could go some distance to allay the fears, and it’s a way for ATSs to defend their fort.”
Trading in the $20 trillion U.S. stock market is spread across 13 public exchanges and 44 actively operated ATSs, according to a U.S. Securities and Exchange Commission research paper released this month. Bloomberg LP, the parent of Bloomberg News, runs an ATS called Bloomberg Tradebook. Transactions are also handled inside broker-dealers through a process known as internalization.
IEX has long-term plans to become an exchange, said Katsuyama. Bats Global Markets Inc. and Direct Edge Holdings LLC followed a similar path, opening years before officially converting into exchanges, a designation that carries regulatory and other obligations.
By releasing the Form ATS, “we plan on blazing a trail and challenging other ATSs to follow,” said Katsuyama, 35, who served as head of global electronic sales and trading for Royal Bank of Canada (RY)’s RBC Capital Markets LLC before founding IEX with ex-RBC executives Ronan Ryan, John Schwall and Rob Park.
“Understanding how a market works is critical to building trust that a market is truly operating in your best interests,” Katsuyama said.
The IEX trading platform, in development since March 2012, is pitching itself as a haven for long-term investors from predatory traders. IEX won’t pay firms to buy or sell shares, shirking a practice that many markets use to lure business from high-speed traders. Amid industry concern markets are more vulnerable to mistakes because trading has sped up, IEX will mandate a 350-microsecond delay between requests to trade and executions.
IEX’s backers include Capital Group Inc., which manages the American Funds mutual funds, and Brandes Investment Partners LP.
Joe Mecane, head of U.S. Equities at New York Stock Exchange owner NYSE Euronext (NYX), said this month that the relationship between exchanges and ATSs should be reexamined. NYSE and Nasdaq OMX Group Inc. (NDAQ), the two largest owners of U.S. stock exchanges, asked the SEC earlier this year to consider a trade-at rule, which would keep stock trades away from private venues unless those markets improve upon prices available on public platforms.
Off-exchange trading takes place without also requiring “an explicit improvement to the process, which in my opinion is supposed to be the compensation for trading in front of the person who’s willing to place their liquidity out loud,” Mecane said at a conference in New York.
“I don’t think we should cap it artificially,” Mecane said, speaking of the proportion of trading handled off exchanges. “I think the issue is whether we have the right incentives or not.”
Earlier this month, Finra issued proposals for ATSs to release more information about themselves, including weekly volume reports and how much trading of each stock they handle. While that will shine some light on dark pools, Katsuyama called for even more disclosure.
“If you’ve gone out and tried to Google search any of them, you might come up with a handful of hits,” he said. “Some of the ATSs, if you go to the broker’s website, it won’t even come up with a search result.”
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