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IEX
IEX
TypeAlternative trading system
LocationNew York, New York (office)
Weehawken, New Jersey (matching engine), United States
Founded2012
OwnerIEX Group
Key peopleCEO: Brad Katsuyama
Ronan Ryan
CurrencyUnited States dollar
Volume119 million (October 2014)
Websiteiextrading.com

IEX is a dark pool, more formally known as an alternative trading system, based in the United States. Started by Brad Katsuyama, it opened for its first day of trading on October 25, 2013. The company's offices are located at 7 World Trade Center in New York City. However, the computer equipment that handles the actual dark pool is located across the Hudson River in Weehawken, New Jersey, and the initial point of presence for the dark pool is located in a data center in Secaucus, New Jersey.[1] IEX's main innovation is a 38-mile coil of optical fiber placed in front of its trading engine, which adds a round-trip delay of 0.0007 seconds and is believed to limit traders' ability to respond on the dark pool ahead of IEX's own pricing algorithms.[2] The dark pool's market session runs from 9:30 am to 4:00 pm Eastern Time.

Originally the founders had planned to name the business Investors Exchange, but after typing it into a web browser, felt that this combination of letters was distasteful (as it could alternatively be read "Investor Sex Change"). Thus they opted to shorten the name to IEX.[3] Company representatives have stated their intention to convert to a public exchange upon reaching sufficient trading volume.[4]

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 dark pool 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—and protect the dark pool itself—include:[5]

  • Publishing the matching rules used in the dark pool'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 dark pool. 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,[6] 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.[7]

IEX has four main order types: market, limit, midpoint peg and IEX Check (a type of fill or kill order). A few optional parameters can be attached to the orders, leaving IEX with many fewer order types than most other dark pools.

IEX delays the flow of data from the dark pool 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.[2] The data delay prevents many predatory behaviors.[3][8] 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.[9]

Trading volume

IEX has seen fairly steady growth in trading volume since opening on October 25, 2013. At one point in December 2013, the IEX was exchanging at a rate greater than 40 million shares per day, a larger number than AMEX.[2] In November 2014, average daily volume was 112 million shares (double-counted).[10]

Month Average daily volume
(double-counted)		 Average market share
January 2015 133,363,420 0.914%
December 2014 116,560,647 0.850%
November 2014 111,611,035 0.905%
October 2014 119,456,667 0.764%
September 2014 97,915,778 0.805%
August 2014 84,088,048 0.802%
July 2014 86,285,104 0.756%
June 2014 74,064,340 0.640%
May 2014 62,543,092 0.543%
April 2014 57,928,785 0.438%
March 2014 37,782,509 -
February 2014 29,388,608 -
January 2014 18,178,617 -
December 2013 10,066,406 -
November 2013 5,806,742 -
October 2013 2,148,727 -

Broker priority

Unlike all other U.S. equities trading venues, IEX does not adhere to the principle of price-time priority. Instead, the IEX prioritizes orders by price, followed by broker trades, and lastly time. Critics point out that this arrangement disadvantages regular investors and favors broker-dealers such as Goldman Sachs, by allowing them to jump to the top of the order queue regardless of the entry time of their orders.[11] This practice encourages broker internalization, which reduces the transparency and fairness of the markets.[citation needed]

Liquidity

Michael Lewis' book Flash Boys[12] 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,[13] and a market that limits speed, such as IEX, would be illiquid and expensive for price discovery.[14]

References

  1. ^ Foxman, Simone (2013-10-25). "How the "Navy SEALs" of trading are taking on Wall Street's predatory robots". Quartz.
  2. ^ a b c Lewis, Michael (2014-03-31). "The Wolf Hunters of Wall Street". The New York Times.
  3. ^ a b "On A 'Rigged' Wall Street, Milliseconds Make All The Difference". Fresh Air. 2014-04-01. WHYY. {{cite episode}}: External link in |transcripturl= (help); Unknown parameter |city= ignored (|location= suggested) (help); Unknown parameter |transcripturl= ignored (|transcript-url= suggested) (help); Unknown parameter |trascript= ignored (help)
  4. ^ Daras, Marina (4 July 2014). "IEX Mulls Public Exchange Options". Waters Technology. Retrieved 2 August 2014.
  5. ^ Picardo, Elvis (2014-04-21). "How IEX is combating predatory types of high-frequency traders". Investopedia. Retrieved 2014-04-25.
  6. ^ "About Us". iextrading.com. IEX. Retrieved 20 July 2014.
  7. ^ ""Flash Boys" Boosts IEX Trades 40%". Barron's. 9 April 2014.
  8. ^ Mamudi, Sam (2014-03-31). "IEX Welcomes High-Speed Traders, as Long as They Behave". Bloomberg L.P.
  9. ^ Kroft, Steve (2014-03-30). "Is the U.S. stock market rigged?". CBS News.
  10. ^ "Stats". IEX Group. Retrieved 2014-08-05.
  11. ^ Katsuyama, Brad (2013-05-29). "IEX president Katsuyama addresses 'broker priority'". CNBC.
  12. ^ Lewis, Michael M. (2014). Flash boys : a Wall Street revolt (First ed.). New York: W.W. Norton & Company. ISBN 9780393244663. LCCN 2014003208.
  13. ^ Larry, Tabb (2014-03-31). "No, Michael Lewis, the US Equities Market Is Not Rigged". Tabb Forum. Retrieved 2014-09-07.
  14. ^ "Opinions published in response to Michael Lewis' Flash Boys and recent comments" (PDF). Futures Industry Association. Retrieved 2014-09-07.
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