• Tackles `byzantine' system of paying for faster access
  • Accuses larger exchanges of mischaracterizing a new challenger

IEX Group Inc. is pushing back at rivals Nasdaq Inc. and NYSE Group, which have tried to block the dark pool operator’s aspirations of becoming an exchange.

IEX struck back at the stock market operators in a letter to the U.S. Securities and Exchange Commission dated Nov. 23. It accused them of trying to "mischaracterize" and "malign" the company and of protecting a business model that does not put investor interests first. Nasdaq and NYSE, a unit of Intercontinental Exchange Inc., are privileging firms that can pay for the fastest access to market information, IEX said.

In applying to become a full-fledged exchange, IEX has portrayed itself as a venue that prizes fairness for all investors, rather than catering to high-speed trading strategies. NYSE and Nasdaq, entrenched players that together control almost half of U.S. stock trading volume, wrote to the SEC this month demanding that IEX’s application not be approved in its current form.

No Cookie Cutter

"We do not propose to operate as a ‘cookie cutter’ replica of the dominant exchange business model," IEX said in its letter. "We believe that model poses conflicts of interest with what we view as an exchange’s public responsibility."

The letter comes as exchanges, brokers, high-speed trading firms and academics assess the precedent that the SEC would set by approving IEX’s exchange application.

IEX’s "speed bump" which slows incoming and outgoing orders by a fraction of a second, has been a recurring subject of debate as it tries to become a public market. IEX and its advocates say the 350-microsecond delay on orders helps create a fairer marketplace while critics have complained the speed bump would disadvantage orders at other markets and privilege IEX’s affiliated broker.

IEX said the delay would not burden the national network of exchanges, arguing that unintentional lag time exists all over the system because of geography and technology. IEX said that at four customers it surveyed there was a higher average lag time in filling orders on NYSE than IEX.

IEX also responded to a comment from Nasdaq that the latter’s proposal for a five-millisecond delay to some orders on its PSX platform had been withdrawn in 2012. IEX said its delay is different because it applies to all orders, not just a subset.

The company also said Nasdaq and NYSE have a "byzantine" system of charging members for faster access to market data, which IEX said adds to market complexity and caters to high-speed trading strategies.

"We believe that there is room in the national market system for an exchange to chart a different course, to favor investor protection over speed, and to allow the markets, the investing public, and corporate issuers themselves to render a verdict," IEX said.

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