Katsuyama Shook Up Industry Even Before His IEX Exchange Openedby
Nasdaq, NYSE want new kinds of orders in response to upstart
IEX begins trading as 13th U.S. stock exchange on Friday
Brad Katsuyama wanted a stock market revolution and he got one even before his Investors Exchange started trading Friday.
IEX Group Inc.’s new exchange, which says it blunts the advantages of speed traders in U.S. stock trading, has already provoked responses from competitors Nasdaq Inc. and NYSE Group Inc., which are aiming to steal some of IEX’s thunder with their own answers to dealing with the breakneck pace of markets.
Katsuyama founded IEX, he said, because high-frequency traders were able to use their speed to gain an advantage over investors as stock markets became more complicated. Now that the Investors Exchange is a reality, its competitors are also adapting to address the concerns he raised.
“They’ve come up with a product and a solution that the market likes and wants to use,” said Richard Johnson, a market-structure analyst at Greenwich Associates LLC. “They were doing something when the regulators were doing nothing. But it does increase complexity.”
A consequence is that markets also become more complex, an issue that’s at least as big of a concern as the power of speed trading strategies, critics say. Rather than incorporating a speed bump, NYSE and Nasdaq are looking to add to their already extensive collection of order types.
IEX shifted two stocks to its exchange Friday and starting Sept. 2, any U.S. stock can trade there. Its debut brings the count of U.S. stock exchanges to 13. Beyond those venues, there’s the dark pools and other alternative markets, which are second-class citizens from a regulatory perspective but handle about a third of the nation’s trading. It all adds up to a complicated web of connections, imposing a burden on brokers who have to navigate the landscape.
“It seems like we had a consensus that markets were becoming too complex and too numerous,” said Cameron Smith, general counsel of high-speed trading firm Quantlab Financial LLC. “And now, despite that commonly held view, it seems like we’re moving in that direction even faster.”
The signature feature of the Investors Exchange, brought over from the IEX dark pool that’s been running since 2013, is a 350-microsecond delay on orders. Nasdaq, one of the three big operators of U.S. stock exchanges, came up with its own new feature to respond. On Monday, Nasdaq said it would introduce a new kind of order that cannot be canceled or altered for one second, or another specified time period. In a description similar to IEX’s own marketing, Nasdaq said its so-called extended-life order type would be geared to investors.
“To me, it’s as simple as you can hope it to be,” Nasdaq Chief Executive Officer Bob Greifeld said in an interview following the announcement. “You make a commitment, you get a reward.” The feature should be available on the Nasdaq Stock Market by the end of the year, pending regulatory approval, he said.
Earlier, NYSE got clearance from regulators to add a feature that IEX introduced: a so-called discretionary pegged order that trades less aggressively when a security’s price is changing in the market.
Katsuyama says his competitors’ changes are just window dressing. “Investor protection is a philosophy, not a single product or order type,” he wrote in an e-mail. “We are flattered by the imitation, but we would encourage exchanges to take a holistic approach to serving investors. This could easily be achieved by eliminating trading rebates, excessive data and connectivity charges and superfluous order types.”
Its quest to lure trading volume could be an uphill climb. Its dark pool, IEX, handles less than 2 percent of trading in the U.S. stock market. NYSE Group’s exchanges, by comparison, handle almost 25 percent. Bats Global Markets Inc. has about 20 percent, and Nasdaq more than 15 percent.
IEX is unconventional in ways besides the speed bump. It charges a flat rate for trading on its venue, a practice that goes against the dominant exchange pricing model of giving rebates to players that make trading opportunities available. Katsuyama, who says he sees the rebates as the biggest conflict of interest in the U.S. stock market, sees IEX’s refusal to adopt the pricing model as potentially slowing its growth.
The stock market’s many venues and kinds of orders have caused prolonged industry soul-searching, which goes well beyond IEX. Reg NMS, a landmark regulation that went into effect in 2007, has often been blamed for spurring a more convoluted marketplace and driving more trading off of traditional exchanges.
Still, some worry the addition of a new player -- and its competitors’ response -- could create new and unforeseen complications.
“It will further muddy an already complicated equity market structure landscape,” said Alex Green, founder and president of FuturePoint Advisors, a consulting firm for asset managers.