IEX

Founding and first trading

Founded in 2012^[1] and started by Brad Katsuyama, it opened for trading on October 25, 2013. The company’s offices are located at 4 World Trade Center in New York City. The matching engine is located across the Hudson River in Weehawken, New Jersey, and the initial point of presence is located in a data center in Secaucus, New Jersey.^[2] IEX's main innovation is a 38-mile (61 km) coil of optical fiber placed in front of its trading engine. This 350 microsecond delay adds a round-trip delay of 0.0007 seconds and is designed to negate the certain speed advantages utilized by some high-frequency traders.^[3] The exchange's market session runs from 9:30 am to 4:00 pm Eastern Time.^[4]

Federal approvals

The SEC approved the IEX to be an official exchange on June 17, 2016.^[5][6][7] In late 2016, IEX hired Sara Furber to lead its listing effort. A former managing director at Morgan Stanley,^[1][8] she reported to IEX chief executive Brad Katsuyama. The company aimed to start listing companies in 2017.^[8]

After a 13-month wait, on October 24, 2017, IEX Group Inc. received regulatory approval from the SEC to list companies. IEX said it would begin listings in early 2018, with a focus on getting companies to switch over from other stock exchanges, by undercutting listing fees of rivals. The exchange said that companies would be able to list for free for the first five years, before a flat annual rate of $50,000. In comparison, NYSE had annual listing fees as high as $500,000, and Nasdaq up to $155,000.^[1] The Wall Street Journal wrote that the approval paved "the way for the first competition to the New York Stock Exchange and Nasdaq Inc. in nearly a decade...Companies seeking to list their shares on a U.S. exchange haven’t had a choice besides NYSE or Nasdaq since 2008, when the American Stock Exchange was acquired by NYSE." Only Wynn Resorts Ltd. said publicly that it was considering a listing on IEX at the time of the approval announcement, with IEX not releasing more details on listings.^[1]

Operating principles

IEX was created in response to questionable trading practices that had become widely used across traditional public Wall Street exchanges as well as dark pools and other alternative trading systems. The IEX exchange aims to attract investors by promising to "play fair" by operating in a transparent and straightforward manner, while also helping to level the playing field for traders. Strategies to achieve those goals include:^[9]

• Publishing the matching rules used in the exchange's computerized order matching engine.
• Offering a limited number of simple and familiar order types.
• Charging fixed fees on most orders (or a flat percentage rate on small orders).
• Ensuring market pricing data arrives at external points of presence simultaneously.
• Slightly delaying market pricing data to all customers (no colocation).
• Refusing to pay for order flow.

These strategies are intended to ensure the trustworthiness of the exchange. A few dark pools are owned by trading companies that pay for certain types of orders to allow them to fill orders within the pool, rather than routing orders to public exchanges. IEX offers no rebates for orders,^[10] and only charges a flat fee of $0.0009 per share on trades executed within the dark pool (or 0.30% with shares worth less than $1.00). Trades forwarded to other trading venues are charged a lower rate.^[11]

IEX has five order types: market, limit, primary peg (pegged to national best bid/offer), midpoint peg and patent-pending discretionary peg.^[12] IEX discretionary peg is a primary peg that may execute at up to midpoint price when the quote is stable.^[13] A few optional parameters can be attached to the orders, leaving IEX with many fewer order types than most other exchanges.

IEX delays the flow of data from the exchange and ensures that it arrives simultaneously at two points of presence in New Jersey. Traders are not allowed to co-locate equipment adjacent to IEX's own servers, unlike many other trading platforms. IEX has its own low-latency links to other trading venues in the New York region, which it can use to execute trades for customers in under 320 microseconds. The point-of-presence links for traders to gain access to IEX have a built-in, round-trip delay of 700 microseconds from a 38-mile coil of fiber, so traders cannot beat IEX's own computers as orders propagate outward.^[3] The data delay prevents many predatory behaviors.^[14][15] It deters the practice of liquidity fading, where they peer into various trading venues and try to detect orders as they propagate from a broker's order router, and use this information to withdraw liquidity ahead of toxic order flow.^[16]

Market share (in percent)

(Source: IEX)

Broker priority

Before becoming an exchange, IEX operated a dark pool which did not adhere entirely to priority by price then time, unlike other U.S. trading venues. Instead, the IEX prioritized orders by price, followed by broker, and lastly time. Katsuyama argues that this arrangement advantages regular investors contrarily to high frequency trading (HFT) firms, by preventing, for instance, HFT firms from jumping to the top of the order queue and front-running normal investors.^[17]

When IEX applied for exchange status, it dropped the broker-based priority mechanism, and as an exchange it gives priority to the best price first followed by the time of order submittal (as do other exchanges).^[18][19]

Liquidity

Michael Lewis' book Flash Boys^[20] focused on the new trading platform, arguing that it was better than other dark pools since it created an equal playing field for investors by slowing down trading. Critics of the book argue that liquidity-provider firms need speed and direct market connectivity to manage risk,^[21] and a market that limits speed, such as IEX, would be illiquid and expensive for price discovery.^[22]

Investors Exchange board

• Brad Katsuyama (Chairman)^[23]
• Jeff Charney^[23]
• William H. Donaldson^[23]
• Brian T. Levine^[23]
• Jonathan Mariner^[23]
• Wade I. Massad^[23]
• Joseph Scafidi^[23]
• Helen S. Scott^[23]
• Jeffrey Sonnenfeld^[23]
• Jatin Suryawanshi^[23]

IEX Group board

• Lloyd H. Feller^[24]
• Alex Finkelstein^[24]
• Michael Lynton^[24]
• Brad Katsuyama^[24]
• Rob Park^[24]
• Ronan Ryan^[24]
• John Schwall^[24]