Norway’s $880 billion sovereign wealth fund, the world’s largest, is throwing its support behind Brad Katsuyama’s new exchange.
Katsuyama’s IEX Group Inc., made famous in Michael Lewis’s best-selling book “Flash Boys,” could shield investors from the predatory habits of high-frequency traders, said the fund, which holds $521.2 billion in stocks globally and is Europe’s biggest equity investor.
“IEX is a trading venue where all players participate on the same terms,” oil fund spokesman Thomas Sevang said in an e-mailed response to questions. “We support this.”
IEX, which the oil fund uses for both direct and indirect trades, doesn’t pay firms to buy or sell shares, shunning a practice that many markets use to lure business from high-speed traders. It mandates a 350-microsecond delay between requests to trade and executions to prevent traders from pre-empting their moves through high-frequency maneuvers.
Concern about dark pools was amplified after the publication of “Flash Boys,” which portrayed an equities market where exchanges, broker-dealers and high-frequency traders are conspiring to cheat investors.
The book says the firms involved helped rig the $22 trillion U.S. stock market. The story centers around Katsuyama, who was global head of electronic sales and trading at RBC Capital Markets LLC before becoming president and chief executive officer of IEX, and his efforts to shed light on the alleged practice of front-running investors by gathering data on their trades before they’re executed and then acting on that information.
Volume on IEX has steadily grown since its creation, with an average of 31.3 million shares changing hands on the platform each day last month, compared with 29 million in April.
Katsuyama’s trading platform “might solve some of these problems, but not all of them,” Sevang said. “One problem related to IEX is that the pricing must take place at another market place, due to the fact that IEX is a dark pool.”
Katsuyama and Lewis were attacked by William O’Brien, the president of exchange operator Bats Global Markets Inc., in an April 1 interview on CNBC, for what he described as a misunderstanding of how markets operate. He accused Katsuyama of criticizing high-frequency trading to promote his own exchange.
“It’s a very, very old tactic to try to build a business on the planks of fear, mistrust and accusation,” O’Brien said in April. “This has certainly taken that to new level.”
Bats three days later corrected a comment by O’Brien from the same program, after he misstated details about the speed of data feeds used at two of his exchanges.
Norway’s wealth fund, which gets its guidelines from the government in Oslo, saw its stock holdings return 26.3 percent in 2013, while the total portfolio rose 15.9 percent. The fund is mandated to hold 60 percent in stocks, 35 percent in bonds and 5 percent in real estate.
In March, New York Attorney General Eric Schneiderman said he was looking into practices that give some firms a speed advantage in equities trading. Agents from the Federal Bureau of Investigation are investigating whether HFT firms break U.S. laws by acting on nonpublic information to gain an edge.
High-frequency traders rely on computers to post and cancel orders at rates measured in thousandths and even millionths of a second to capture price discrepancies on more than 50 public and private venues that make up the American equities market.