RBC Joins Goldman Sachs in Supporting New Stock MarketMichael P. Regan
Royal Bank of Canada joined Goldman Sachs Group Inc. in voicing support for IEX Group Inc.’s five-month-old U.S. stock market, which was designed to mitigate the influence of computerized high-speed traders.
The bank’s RBC Capital Markets unit executed the first trade on IEX in October, according to an internal memo from RBC’s head of global equities, Greg Mills, and the U.S. equities chief, Bobby Grubert. Royal Bank also supported the market’s development while its founders were still employed at the bank, according to the document.
Royal Bank has positioned itself as a champion of making the stock market more fair. It built a software defense known as THOR that tries to protect clients’ orders from the fastest traders. Also, the Toronto-based bank doesn’t run a dark pool, shunning a common practice among the world’s biggest brokerages. On broker-owned dark pools, customers’ orders are executed privately instead of being sent to public exchanges.
“We have always been strongly opposed to predatory trading strategies,” according to the memo. “RBC and IEX are fully aligned and have a shared philosophy of creating a fair and open market structure for investors and all industry participants.”
Kait Conetta, a Royal Bank spokeswoman, confirmed the document is authentic and declined to comment further. The company is Canada’s second-largest lender by assets. Neither Royal Bank nor any other broker owns a stake in IEX.
The endorsements of IEX come amid heightened scrutiny of the structure and vulnerabilities of the U.S. stock market, where more than 50 electronic venues compete to match buyers with sellers. “Flash Boys” by author Michael Lewis, scheduled for release next week, in part tells the story of IEX Chief Executive Officer Brad Katsuyama, according to excerpts from the book. New York Attorney General Eric Schneiderman said last week that he’s investigating whether exchanges and other venues are giving high-speed traders improper advantages.
So far, IEX has captured only a small slice of stock trading. Average daily volume increased to 14.7 million shares in February from 9.1 million in January, and is about 18 million in March, according to IEX. That’s less than 1 percent of the 2014 daily average of 6.9 billion on all U.S. markets, according to data compiled by Bloomberg.
IEX attempts to declaw high-speed traders by delaying reports of order executions by 350 millionths of a second, enough to curb the fastest firms. IEX also shuns the use of the maker-taker business model, in which exchanges and other venues pay rebates to market makers for providing bids and offers.
Royal Bank has urged regulators to consider alternatives to that system, saying it creates a conflict of interest for brokers who may pick a venue because of its rebates rather than the best interests of clients.
In a challenge to other dark pools, IEX last year released its normally private regulatory filing that explains how it operates. While currently organized as a dark pool, IEX has ambitions to officially become an exchange, Katsuyama said during an interview with Bloomberg News last year. There are 13 stock exchanges in the U.S., including the New York Stock Exchange and Nasdaq Stock Market.
Goldman Sachs said in its memo last week that “it would be best for the overall market if IEX achieved critical mass, even if that results in reduced volumes” on Sigma X, the Goldman Sachs dark pool.
The founders of IEX worked on their business plan for months while still at RBC, according to the RBC memo.
“While it was hard to part with such strong talent, it was the right thing to do for our clients,” the memo said.
“We are at the forefront of significant market structure reform,” Royal Bank said. “While we may see other industry participants potentially amending their practices based on recent developments, our approach as the client advocate has been consistent from day one and we will continue to stand by this philosophy in the months and years to come.”