Woman Behind ‘Flash Boys’ Exchange Approval Preps for Next Fight

  • IEX lawyer Sophia Lee played key role in exchange approval
  • Company will open the 13th U.S. stock exchange on Friday

Nobody at IEX Group Inc. had done more to prepare, amend and defend the company’s application to become a new kind of stock exchange than Sophia Lee, its general counsel.

So when the U.S. Securities and Exchange Commission approved the move in a 122-page document delivered late on a Friday in June, Lee’s colleagues who lingered late to hear the news could read the regulator’s verdict in her look of triumph.

Sophia Lee
Sophia Lee
Photographer: Chris Goodney/Bloomberg

“I don’t think I had a poker face,” Lee said. “People saw my face, they knew it was fine. I couldn’t hide it.”

With regulatory approval clinched, IEX is preparing to start trading as the 13th U.S. stock exchange this week. The victory belongs as much to Lee as to IEX founder Brad Katsuyama, hero of the bestseller “Flash Boys,” who envisioned a market designed to negate the advantages of speed traders. As IEX gears up to start trading as an exchange on Aug. 19, Lee and the company she championed are facing a new round of challenges: attracting traders and investors to its stock market, called the Investors Exchange, and tackling incumbent opponents eyeing their own new features to rival the upstart.

For a QuickTake Q&A on how IEX is trying to change markets, click here.

Katsuyama has been the public face of IEX since the 2014 publication of Michael Lewis’s book “Flash Boys,” which cast him as a hero and champion of fairer markets. He created a trading venue with a fraction-of-a-second delay on orders to scupper speed-trading strategies. Behind the scenes, it was Lee, 46, who steered the exchange application.

A native New Yorker, Lee graduated from the Massachusetts Institute of Technology with a degree in mechanical engineering, and experience working in cryogenics, solar energy and thermodynamics labs. Long before Lee helped IEX take the first steps toward its biggest goal, she had worked on creating a walking device for paraplegics for her undergraduate thesis. She wasn’t keen on taking an engineering job in a far-flung locale, so she decided to attend law school at New York University. She held jobs at electronic broker Investment Technology Group Inc. and spent 10 years at Liquidnet Holdings Inc., which operates a private trading venue.

‘Stronger Stomach’

“She’s clearly got a stronger stomach than most general counsels,” said Tyler Gellasch, a former SEC official and securities lawyer who heads the Healthy Markets Association, an investor advocacy group. “It’s clear she has helped shape their strategy in a way that says, ‘We’re going to be smart, we’re going to take on a fight, and, frankly, we’re not afraid to lose.’”

The SEC’s approval -- which gives IEX license to operate on par with the New York Stock Exchange, Nasdaq Stock Market and other exchanges -- comes with several prizes, including the ability to list companies and a greater voice in oversight of the entire $25 trillion U.S. stock market. The regulator’s blessing came against vocal opposition from those large exchange operators, and other market players including Citadel LLC, which argued IEX’s 350-microsecond “speed bump” on orders would amount to putting a pothole on the superhighway of the U.S. stock market.

Executives of the companies picked apart IEX’s model in public letters, at conferences and on company earnings calls with analysts. Jeff Sprecher, chief executive officer of NYSE owner Intercontinental Exchange Inc., even called IEX’s approach “un-American.”

Lee, who began at IEX in May 2014, shortly after Lewis’s “Flash Boys” vaulted the company to fame, came to the firm to tackle the grunt work of getting IEX approved as a full-fledged exchange. She speaks quickly, drills down into minutiae of legal arguments effortlessly, and sometimes says things like, “best execution is something I’m really passionate about.”

The Quarterback

“She quarterbacked the whole exchange process for IEX,” Katsuyama said in an e-mail. “She is meticulous in her attention to detail and works incredibly quickly on complex legal matters.”

Doug Cifu, CEO of high-speed trading firm Virtu Financial Inc., who worked with Lee earlier in her career at law firm Paul Weiss Rifkind Wharton & Garrison LLP, also saw her as a “perfect hire” for IEX.

“She knows the rules backward and forward,” said Cifu. “She’s very thorough and careful.”

Standing up against the opposition, Lee took her role as IEX’s champion and defender personally. And it went well beyond back-and-forth with the SEC. At an industry conference in April at New York’s Grand Hyatt hotel, she noted mistakes and misstatements panelists made about how IEX’s dark pool worked. At the end of the day’s discussions, at the cocktail hour, Lee talked with participants on the sidelines and corrected the language and descriptions of IEX that had dominated at the daises all day.

“You kind of bite your tongue, and keep a straight face” during the panels, she said. “It’s good to have side talks with people because I can correct them. I think people appreciate those side discussions.”

Nasdaq’s Warning

At the same conference, Nasdaq CEO Bob Greifeld had a telling warning for the industry. Greifeld, who opposed IEX’s exchange application, said chaos might ensue if the regulators paved the way for exchanges to compete on time delays. The fallout could cause an explosion of complex new order types, he said.

His warning was borne out this week, as Nasdaq announced its plans for a new kind of order “built for investors” that slows trading down in a different way. Nasdaq’s new order cannot be changed or canceled for one second, or another fixed period of time -- a design it says is meant to appeal to institutional investors.

In language similar to IEX’s own pitch, Nasdaq said that it’s “prioritizing factors other than speed” by introducing the new order. It expects to introduce the new kind of order on its main market by the end of the year, pending SEC approval.

“This is us taking a positive tack,” Greifeld said in a phone interview after the announcement. “We spent a lot of time thinking about: how do we make the market simpler?”

With Nasdaq’s warning shot fired, IEX’s next challenge will be gaining market share to prove the virtues of its model. IEX will need a significant trading boost on its venue to achieve Katsuyama’s dreams of becoming one of the largest U.S. equity markets. As a dark pool, IEX typically handles less than 2 percent of total volume, compared with about 25 percent on NYSE’s three markets. The venue’s revenue model and refusal to pay rebates to spur trading set it apart from most exchanges. That profitable but unusual model may slow down the company’s volume growth, according to Katsuyama.

For now, Lee said, she’s keeping her head down and focusing on the factors within her control, updating the exchange’s listing rules and helping to nail down nuances of their opening auctions.

“Just because we’re approved, doesn’t mean people are going to trade here immediately,” Lee said. “This is one step in a longer journey. We’re hoping to have a voice and a seat at the table. This is just the beginning.”

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