NYSE, Former IEX Foe, Plans a Copycat Speed Bump of Its OwnBy
New exchange will copy features of IEX’s Investors Exchange
NYSE had fiercely opposed IEX’s attempt to open an exchange
NYSE Group Inc. opposed IEX Group Inc.’s proposal to run an exchange with a “speed bump” that delays orders to curb the advantages of the fastest traders. Now, it’s copying the idea.
The owner of the New York Stock Exchange will rename its tiny NYSE MKT exchange the NYSE American and introduce a 350-microsecond delay on orders there, according to a statement Wednesday. NYSE American will also add a new order type called a discretionary peg -- which IEX pioneered -- a so-called dark order because it isn’t publicly displayed. Both new features closely mirror how IEX’s Investors Exchange works.
Rich Repetto, an analyst for Sandler O’Neill & Partners, said it was a logical move for NYSE.
“If the rules of the market say you can use a speed bump, you expect other exchanges and market participants to play by those same rules,” Repetto said.
NYSE had argued last year that the U.S. Securities and Exchange Commission shouldn’t approve IEX’s exchange application. NYSE said delays on exchanges could damage the quality of the stock market and violate existing regulations. The Investors Exchange won regulators’ blessing anyway, and now handles almost 2 percent of volume in the U.S. stock market. NYSE MKT, the smallest of NYSE Group’s three exchanges, accounts for about 0.2 percent.
IEX’s quest to slow down the fastest traders -- something its founders believed was necessary to ensure fairness for everyone else -- was made famous by Michael Lewis’s “Flash Boys.” IEX originally ran a private venue called a dark pool, courting money managers to trade there, before becoming an exchange.
NYSE could do more to contribute to the health of the markets, by consolidating its venues, for example, said Gerald Lam, a spokesman for IEX.
“While we’re flattered by the imitation, investor protection is a philosophy, not a single product or order type," Lam said in a statement.
NYSE sees IEX’s speed bump -- and the special dark order that accompanies it -- as holding appeal for some institutional investors. The largest U.S. exchange operator wants to be able to offer the same thing to its clients. The new features still need regulatory approval, and will fit into a broader overhaul of NYSE’s markets, which will allow all securities to trade on all of its exchanges.
For a certain slice of institutional investors’ trades, the speed bump model makes sense, said Stacey Cunningham, NYSE Group’s chief operating officer.
“Some find that feature helpful,” Cunningham said on a conference call with journalists. “Some of them have success with it.”
IEX criticizes other aspects of the prevailing business model among big exchange operators, including the rebates they provide to drum up trading volume, and charging for privileged access to their systems and market data.
NYSE is not the first exchange to respond to the IEX speed bump. Since the SEC approved it, other exchanges started experimenting with new ideas for time delays. Nasdaq Inc. requested permission to add a new kind of time-delayed order to its exchange. The Chicago Stock Exchange devised a different kind of selective speed bump that delays only certain kinds of orders too.
Neither change has been approved by the SEC yet.