A Rare Loss For The HFT Lobby? SEC Staff Recommends Approval Of IEX Exchange Application

Tyler Durden's picture

In what may be a long overdue victory for the "good guys", the WSJ reports that the SECs staff has recommended that the agency approve IEX Group Inc.’s "controversial" bid to launch a new stock exchange, signaling likely approval when the agency’s commissioners vote on the order Friday. This decision takes place despite vocal objections of not only Nasdaq, by not only the entire HFT lobby, as IEX's technology would provide an HFT-free exchange as a result of its 350-microsecond speed bump which would force all traders to be on an equal footing, but most notably despite the repeated complaints by NY Fed darling, HFT powerhouse Citadel (and employer of one Ben Bernanke), which has argued in the past that granting IEX an exchange status would corrupt US equity markets.

That would end months of debate and lobbying over the startup’s proposal to launch the first platform that slows down trading, countering the decadelong trend toward ever-greater speed.

There is still a chance IEX may be rejected in the last moment: according to the WSJ, "the SEC’s three sitting commissioners aren’t required to support the staff’s views, and one may vote no. But the full commission rarely rejects a formal staff recommendation. If the SEC’s commissioners give the green light to IEX, which stands for Investors’ Exchange, it would be the first major new stock exchange in the U.S. since the SEC approved several venues in 2010 that are now owned by BATS Global Markets Inc."

For regular readers, IEX' campaign - and symbolism, in a dramatically fragmented market, catering exclusively to well-paying HFT clients who spend millions for the opportunity to frontrun orderflow - is familiar, but here is a brief recap:

IEX’s campaign to move from a private trading venue to a full-fledged exchange has divided Wall Street, with rival markets and some high-frequency trading firms opposing its bid to apply a speed bump to orders. IEX says the innovation will protect investment firms such as mutual funds from what IEX calls abusive high-frequency-trading strategies. IEX’s crusade was popularized in the 2014 Michael Lewis book, “Flash Boys,” which chronicled the race among American exchanges toward ever-faster trading.


The fight before the SEC has turned on technical questions, such as whether a speed bump would violate regulations that say orders must be “immediately accessible.” Critics, including Citadel LLC, the hedge-fund manager and electronic market maker, say IEX’s delay will lead to stale quotes and make it hard for brokers to know they are getting the best price for clients.

As reported in May, the staff’s recommendation follows a warning by Nasdaq Inc. that the agency could be sued if it approves IEX’s speed-bump design. Nasdaq’s lawyers wrote that the speed bump would violate rules that require orders be available immediately to traders. Granting IEX an exemption from that regulation would require a separate rule-making process, which the SEC so far hasn’t undertaken, the lawyers wrote.

That said, it may be premature to break out the champagne as IEX' victory could end up being hollow: the SEC opened the door to approving IEX in March when the commission voted to propose that the IEX 350-microsecond speed bump could be considered “de minimus” because orders already take longer than that to travel between exchange systems in Chicago and New Jersey. Under that legal interpretation of its rules, the SEC would permit speed bumps that delay orders by less than a millisecond, or one-thousandths of a second. However, the SEC’s staff has since revised that interpretation and plans to restrict the circumstances under which a speed bump would be allowed, the people said. Some investor groups had warned that granting blanket permission for speed bumps of less than one millisecond could open the door to many varieties of time delays, making it harder for brokers and investors to navigate the market.

As part of the recommendation, the staff has supported giving IEX what is known as a “protected quote,” meaning brokers would be required to send orders to IEX when it shows the best price across all 13 national stock exchanges, the people said. During the long battle, IEX’s opponents had lobbied the SEC to deny IEX that privilege, even if the exchange were to be approved. That would have essentially given IEX a hollow victory.

It is possible that the final vote will contain some variation on "protected quote" clause, thereby giving IEX its long-awaited exchange status but stripping its clients of the much needed anti-HFT protections, which are precisely the reason why so many vocal supporters of IEX have emerged in recent months.

But the real question at this point may be not so much if IEX will be granted full exchange status as is, but whether in a world in which nobody denies any more that central banks manipulated every asset class, there will be those who care to transact even in an environment devoid of HFT parasites. Because when history is written the question may ultimately be a simple one: who was more reponsible for the failure and collapse of faith in capital markets: central bankers or HFTs. The jury is still out.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
FreezeThese's picture
FreezeThese (not verified) Jun 14, 2016 2:46 PM

I'm told 3:00pm ramps will still be allowed

vote_libertarian_party's picture

Wouldn't it be hilarious if this is the Black Swan event that kills multiple asset prices.


The HFT 'float higher' game gets neutralized and asset prices crash around the world.


My VIX lottery tickets would like it.

RadioFlyer's picture
RadioFlyer (not verified) Jun 14, 2016 2:03 PM

Don't worry, The big ramp is tomorrow.  We'll still touch or go beyond 18k on the DJIA before this is all over.

south40_dreams's picture

We aren't holding our breath

Yttrium Gold Nitrogen's picture

I've read Flash Boys, so I wish the IEX all the best and I hope they get their approval. They have worked long and hard and for a good cause, so in my opinion, they deserve that approval.

herkomilchen's picture

Flash Boys brought way to much attention to IEX as the good guys.  SEC can't dismiss them without looking like the HFT partner it is.  So SEC will publicly approve them with great fanfare and hoopla.  Then undermine their entire business model at every turn with its interpretation of obscure side regulations that won't make the press.

The HFT's will "lose" in the current bright public spotlight then fully prevail in the dark, silence, and obscurity of SEC arcana once public scrutiny has moved on.

NoDebt's picture

You're nearly as cynical as I am.  Nearly.

herkomilchen's picture

I could never attain your level.

But I'm not cynical actually, just examining how all parties are being incentivized to behave under the current system.  Human nature is pragmatic.  People unconsciously respond to incentives as water flows downhill.

NoDebt's picture

I find myself rooting for IEX every time they're mentioned on ZH.  Tell me one good reason they should NOT be approved.

Doom Porn Star's picture

IEX to be purchased by Blackrock/Goldman consortium with freshly printed EuroDollars in 5. 4. 3. 2..

RaceToTheBottom's picture

Citadel will never give  up.  They are evil, evil, evil.

sopko16's picture

SO you all want to back to the time where humans, instead of computers, were front-running you? The times when the spreads were huge? Ok, really?!? I'd rather have a razor thin spread on everything AND the backup of knowing the right humans for if the SHTF and not just humans quoting wide-spread prices where I can tell they are front-running...


At least don't let me see it! haha. You all should go live in Amish country right? haah.. cue the downvotes here.

any_mouse's picture

How does one exchange, IEX, employing a speed bump affect the market for retail traders?


Nobody would be able to front run an order on IEX? Fake orders on IEX would have to last at a minimum, the speed bump time, before cancellation?


cliffynator's picture

Reminds me of how taxi companies protest Uber, and the like.

Rhal's picture

Last year ZeroHedge ran an excellent article on Michael Lewis's "Flash Boys". It was a great expose' to what is happening here, but I can't search it in archives. Are old archives lost?

Here is a quick vid for the curious; https://youtu.be/fq4xy-JWjlo