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QuickTake Q&A: IEX Puts Speed Bump in Path of Fastest Trading


Modern stock trading happens in the blink of an eye. IEX is trying to make a virtue of slowing things down -- at least by a fraction of a second. The venue championed by author Michael Lewis in his 2014 book “Flash Boys” just got permission to become a fully empowered competitor to the New York Stock Exchange, Nasdaq and other exchanges that put a premium on speed.

1. What is IEX?

IEX, which began trading in 2013, is currently a private stock marketplace -- a dark pool -- that handles electronic buy and sell orders from brokers who subscribe to it. It’s owned by a group of buy-side funds including Bain Capital Ventures, Greenlight Capital and Pershing Square. The U.S. Securities and Exchange Commission in June 2016 blessed its application to become a public stock exchange, a full-fledged competitor to the NYSE, Nasdaq and Bats.

2. Why does IEX sound familiar?

IEX is the trading system of choice for critics who say high-speed traders profit at everyone else’s expense. The company and its CEO, Brad Katsuyama, were portrayed as the good guys in “Flash Boys,” Lewis’s journey through the fiber-optic cables, computer servers and dark pools that supplanted men in blue jackets as the facilitators of stock trades.

3. What did Lewis say about IEX?

That it was formed “not to exterminate the hyenas and the vultures but, more subtly, to eliminate the opportunity for the kill.”

4. How does IEX work?

By routing information through a 38-mile coil of fiber-optic cable -- its “speed bump,” or “magic shoebox” -- IEX creates a delay of 350 microseconds between the moment it matches a buyer with a seller and the moment their transaction becomes visible to other traders. IEX says that tiny delay helps it counteract predatory high-frequency trading strategies that hinge on gleaning information a fraction of a second before others about how a stock price is going to move.

5. What’s the problem?

Before the SEC’s decision, critics including NYSE Group Inc. and Citadel LLC said that if IEX were approved as an exchange, it could create a pothole, not a speed bump, in the superhighway of the U.S. stock market. Their take: IEX could spur copycat delayed exchanges and further complicate the marketplace.

6. What’s next?

Nasdaq predicted that the SEC would lose if sued over approving IEX (without actually threatening to file a lawsuit itself). IEX, which now handles less than 2 percent of U.S. equity trades, could grab a bigger bite as a public exchange, since brokers would be required to route orders its way when it has the best price.

The Reference Shelf

  • A Matt Levine column on the IEX speed bump.
  • A QuickTake explainer on how computers have taken over trading.
  • A QuickTake explainer on dark pools.
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