IEX Debate Escalates With Public Knock to NYSE's Systems

  • IEX posts letter saying NYSE has a `speed bump' of its own
  • Referencing `Seinfeld,' NYSE pushed SEC not to approve IEX

IEX Group Inc., seeking U.S. approval to operate a new stock exchange, is dragging one of its potential competitors into the increasingly heated debate.

In a letter to the public, IEX’s head of markets and sales, Don Bollerman, accused the New York Stock Exchange of operating a system that privileges customers willing to cough up the most cash. Exchange groups including NYSE Group Inc. have said that if IEX becomes a registered exchange, its fraction-of-a-second “speed bump” on incoming and outgoing orders could harm the $22 trillion U.S. stock market. But NYSE effectively has a speed bump of its own, Bollerman wrote in the letter posted Sunday on IEX’s website.

Sunday’s missive escalates the debate over how IEX would fit into the market as a full-fledged exchange. So far the controversy has played out in a flurry of comment letters addressed to the U.S. Securities and Exchange Commission, the regulator that will decide IEX’s fate. Bollerman’s piece is the first of its kind that an IEX employee has written addressing criticism of its model.

“IEX’s detractors are trying to convince the Securities and Exchange Commission that IEX’s speed bump is bad for the entire U.S. stock market and that it gives IEX an unfair advantage,” Bollerman wrote. “The irony is that over the past 10 years, U.S. stock exchanges have invested huge sums of money creating two-tier markets -- building faster data and technology infrastructures that only a small niche of traders can benefit from or afford.”

‘Commercial Interests’

Taking aim at NYSE, he went on to recount IEX’s own interactions with the Big Board. Last year IEX realized that it was only able to trade 84 shares out of every 100 it attempted that were quoted at the NYSE, according to his letter.

After asking NYSE how to improve the so-called “fill rate,” NYSE suggested IEX upgrade a service used to connect with the exchange. Upon upgrading, the rate improved to an average of 97 shares traded out of every 100 IEX attempted at NYSE. The experience shows NYSE effectively has a fast lane and a slow lane, Bollerman said -- or a speed bump for participants who don’t choose to pay the exchange company for the very fastest access available.

Sara Cohen, a spokeswoman for NYSE Group, didn’t immediately have a comment on the letter outside business hours.

IEX contends its own speed bump dulls advantages that some speed traders have over other investors.

“Some would have you think that the debate over our exchange application is about rules, or even market structure philosophy, but it’s not,” Bollerman wrote. “What the debate is really about is commercial interests.”

Fatty Yogurt

In a comment letter to the SEC last year, NYSE said IEX was disingenuous in advertising a “fair, simple and transparent market,” and likened it to the frozen yogurt shop in “Seinfeld” that sells full-fat yogurt disguised as low-fat yogurt. While IEX advertises a fair and open market, NYSE said, the model it proposed would make its exchange unequal, complicated and opaque.

The NYSE critique contrasted with public praise from Jeff Sprecher, the chief executive officer of NYSE’s owner, Intercontinental Exchange Inc. “I admire what they’ve done,” Sprecher told attendees of a conference in June 2014.

NYSE isn’t unique in using a tiered system to charge brokers and dark-pool operators for access to its markets. Subscription fees for market data and access have been a growing source of revenue for exchange companies. Exchanges’ revenue from data, market access and technology has increased by 62 percent over the past five years, outpacing the 5 percent growth in trading volume, according to a report by Tabb Group LLC released last week.

(An earlier version of this story corrected the description of IEX’s interaction with NYSE systems.)

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