The US Securities and Exchange Commission has approved alternative trading group IEX Group Inc's request to launch a new US public stock exchange, in a move likely to intensify arguments over current market structure. IEX, made famous by Michael Lewis' 2014 book "Flash Boys: A Wall Street Revolt," is notable because it would be the only exchange in the United States to include a so-called speed bump - a 350 millionths-of-a-second delay in all incoming and outgoing orders.
According to IEX, that delay protects investors from high-frequency traders who can pick up on trading signals and use their faster technology to electronically front-run slower investors. The SEC approved the speed bump under what it called an interpretation of Regulation NMS, for National Market System, which disallowed intentional delays of price displays.
Despite that regulation, the agency said it had determined that "a small delay will not prevent investors from accessing stock prices in a fair and efficient manner." "We are grateful and humbled by the support we've received from the investor community, without it, we may have faced a different result," said Brad Katsuyama, co-founder and chief executive of IEX. "This is a milestone for all of those who have supported IEX and we look forward to becoming a stock exchange, which will provide us the opportunity to have an even greater impact on the markets."
In related decisions, the SEC said it will now consider delays of less that one millisecond at a "de minimis" level and will also conduct a study within two years to determine the effect of intentional delays on market quality, including asset pricing. A source familiar with the voting process said Chair Mary Jo White, Commissioner Kara M. Stein and Commissioner Michael S. Piwowar voted in favor of the application.
Due to the speed bump, the Commission ruled on what is known as a protected quote, which states a quotation must be "immediately and automatically accessible and be the best bid or best offer of a national securities exchange or national securities association." On that issue, the Chair and Commissioner Stein voted in favor of while Commissioner Piwowar voted against it, according to the source. Other exchanges, including Nasdaq, the New York Stock Exchange and BATS Global Markets, have vigorously opposed the idea of IEX gaining regulatory approval as a US stock exchange. Nasdaq has suggested that any SEC approval could be legally challenged but a source familiar with the SEC believed its authority could withstand any challenge.
Rival exchanges could be adversely affected by an additional exchange that will eat into the revenue pie from market data fees, while IEX's speed bump - which will affect the speed of orders throughout the system - could dampen trading volumes and hit revenue. Nasdaq declined comment on the decision while a Bats spokesman said, "Bats congratulates IEX and appreciates the significant changes they made to their application to address industry concerns."
Jamil Nazarali, head of Citadel Execution Services at Citadel Securities, one of the largest private US trading venues, has been a vocal critic of the application. "Today's decision will test and potentially reverse the gains in fairness, efficiency and transparency that have been made to our markets over the last decade," he said. "We must be vigilant to identify unintended consequences, and firm in our commitment to equitable and consistent treatment for all investors."
The approval marks the first time in three years that the SEC has sanctioned a new trading exchange. The most recent approval was when International Securities Exchange's options exchange, ISE Gemini, received the green light in July 2013. It also opens the door for other exchanges to petition for their own speed bumps. The SEC source said "if you do this for one you have to do it for all", but declined to speculate about whether other exchanges would want their own.
The IEX decision comes as the biggest exchanges have been losing market share to private trading venues, called dark pools, and other newer exchanges. The New York Stock Exchange and NYSE Arca, for example, combined for about 29 percent of market share in 2009, based on trading volume. They now have about 24 percent market share this year, according to Rosenblatt Securities data. IEX expects to implement trading in all stock symbols on September 2, ceasing operations of the IEX Alternative Trading System (ATS), also known as a dark pool, according to its website.
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