IEX Gains Momentum as Upstart Market Tops Some Incumbents

Wall Street is showing more signs of plugging into IEX Group Inc., the dark pool that says it has the antidote to speed traders.

IEX, started by the heroes of Michael Lewis’s book “Flash Boys,” handled 23.9 million shares yesterday, up 27 percent from the daily average in March. While IEX accounts for less than 1 percent of total U.S. volume, the five-month-old platform has more trading than four of the 13 American exchanges, including IntercontinentalExchange Group Inc.’s NYSE MKT.

Gathering users is one of the challenges faced by Brad Katsuyama’s alternative venue, which uses time delays to cordon itself off from strategies it deems exploitative. Brian Barish, a money manager at Cambiar Investors LLC, says markets like IEX are the future of equity trading.

“There are a lot of people interested in working on an exchange or dark pool that flash traders won’t be involved with,” Barish, who helps oversee about $10 billion as president and chief investment officer of Denver-based Cambiar Investors, said yesterday in a phone interview. “As the volume builds, there’s more value in executing there versus other places,” he added.

In addition to NYSE MKT, the IEX market had more volume yesterday than the Chicago Stock Exchange, the National Stock Exchange and the CBOE Stock Exchange, according to data compiled by Bloomberg. It was just behind Nasdaq OMX PSX, where 32.5 million shares traded.

Lewis, Katsuyama

“We are encouraged that brokers continue to make adjustments in their routing decisions to send more flow as IEX market share increases,” Gerald Lam, a spokesman for New York-based IEX, wrote in an e-mail. “We have looked to provide the fairest trading experience for all of our participants and our volume growth reflects the quality of trading happening on the IEX market.”

High-frequency traders have been under unprecedented scrutiny following publication of Lewis’s book, which says the firms helped rig the $22 trillion U.S. stock market. The story centers around Katsuyama, president and chief executive officer of IEX, which opened in October.

“One or two other dark pools will come along and replicate what IEX is doing, and most of the liquidity will move to those,” Barish said. “Once that happens, there will be much less for flash traders to work with.”

IEX said last month that Goldman Sachs Group Inc. was the biggest broker on the platform. Goldman Sachs told employees in a memo that “it would be best for the overall market if IEX achieved critical mass, even if that results in reduced volumes” on its own dark pool, known as Sigma X.

Increased Scrutiny

The bank is studying shutting down Sigma X, the Wall Street Journal said this week. Tiffany Galvin, a spokeswoman for the New York-based firm, declined to comment on that report.

Debate has raged for weeks about high-frequency trading. In March, New York Attorney General Eric Schneiderman said he’s scrutinizing practices that give some computerized firms a speed edge, while regulators in Washington have also said the issue should be examined.

High-frequency trading comprises a diverse set of software-driven strategies that have spread as computer power grew and regulators tried to break the grip of centralized exchanges. They usually employ super-fast computers to post and cancel orders at rates measured in thousandths or even millionths of a second to capture price discrepancies on more than 50 public and private venues that make up the American equities market.

Firms using the tactics account for about half of share volume in the U.S., a statistic that shows their pervasiveness and hints at the obstacles faced by proposals to rein them in. IEX has become the most visible challenger.

“The publicity that they’ve received has been a positive driver of volume” on IEX, Rich Repetto, an analyst at Sandler O’Neill & Partners LP in New York, said yesterday in a phone interview. “It has some unique features that are definitely hitting a chord with the investment community and traders.”

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