IEX Group Inc., the dark pool made famous by Michael Lewis, has raised $75 million from backers including billionaire Steve Wynn and Bain Capital Ventures for its efforts to become a registered stock exchange.
IEX, portrayed in Lewis’s “Flash Boys” as an upstart battling Wall Street to improve equity trading, has seen its share of the U.S. stock market rise to about 0.8 percent since it opened in October. The story resonated with money managers, according to Alex Finkelstein, a general partner at venture-capital firm Spark Capital. The enthusiasm encouraged him to invest in the firm and lead the funding round.
“The market is looking for someone that is transparent,” Finkelstein, who also takes a seat on IEX’s board, said in a phone interview last week. Institutional investors “want a company like IEX to happen,” he said. “They want the market to fix the problem, not regulation.”
As well as Spark, Bain and gambling mogul Wynn, IEX said it secured investments from MassMutual Ventures and Franklin Resources Inc. Jim Clark, a co-founder of Netscape Communications Corp., added to his stake in the company.
Finkelstein said he first made contact with IEX by cold-calling the company’s chief executive officer, Brad Katsuyama, in April. Wynn, the chairman and founder of Wynn Resorts Ltd., expressed his support for Katsuyama’s trading platform at the Milken Institute Global Conference in Beverly Hills, California earlier this year.
“I’d like to list my company on IEX,” Wynn said at the panel on April 29.
“We tried to get as broad and diverse a group together as possible,” Katsuyama said in a phone interview yesterday. “Despite the fact that many of them compete with each other in their individual businesses, they have a common belief that the market can be better than what we have today. Because the stock market sits at the center of the economy in many ways, many different groups are affected.”
Conceived as a safe market for long-term investors seeking to buy and sell stocks, IEX opened in October. In contrast with most of the 40-plus U.S. private trading venues, it isn’t owned by broker-dealers. Among the firm’s earliest backers were money managers including Brandes Investment Partners, David Einhorn’s Greenlight Capital Inc. and Bill Ackman’s Pershing Square Capital Management LP.
Lewis’s book depicted an equity market where exchanges, broker-dealers and high-frequency traders were conspiring to cheat investors. Concerns about fairness were amplified after New York Attorney General Eric Schneiderman’s June lawsuit against Barclays Plc alleged that the bank misrepresented the amount and type of high-frequency trading on its LX platform.
In the wake of the complaint, Barclays saw volume drop dramatically in the dark pool, though it has since staged a modest recovery. For the week of Aug. 4, the venue transacted 107 million shares according to data from the Financial Industry Regulatory Authority, about one-third of its business before Schneiderman’s complaint.
Investors have increasingly turned toward IEX, which saw trading activity grow to 42 million shares a day last month. That compares with a daily 18.9 million shares in March, according to its website.
“If you just look at the numbers each week and each month, it’s growing just as you’d want a company like this to be growing,” Finkelstein said. Spark Capital was an early investor in micro-blogging site Twitter Inc. and online home-furnishings retailer Wayfair Inc.
Total U.S. equity trading in August averaged 5.2 billion shares a day, compared with 6.9 billion in March, data compiled by Bloomberg show.
As volume has grown, IEX has brought forward its plans to convert from a dark pool to a registered public venue.
In June, it hired John Ramsay, a former acting director of the SEC’s Division of Trading and Markets, to serve as chief market policy and regulatory officer. Among Ramsay’s duties are helping the firm to register as the 12th stock exchange in the U.S. The first step in the process -- filing with the SEC -- will take place imminently, according to a person familiar with the matter, who couldn’t be more specific.