The biggest debate currently roiling the field of equity markets revolves around the August 21, 2015 submission by the dark pool made famous by Michael Lewis' Flash Boys, IEX, in which it is seeking become a public trading venue that will compete with the New York Stock Exchange and Nasdaq Stock Market.
As many market structure pundits are aware, what makes IEX different from all other "lit" venues and markets is its embedded technology which implements a 350 microsecond order delay which makes HFT frontrunning, spoofing, and quote stuffing of orders impossible.
And in a marketplace where the true nature of HFTs has become well-known to most, namely to "provide liquidity" by frontrunning big block orders, many investors are increasingly gravitating toward IEX, as seen in the following chart showing the dramatic market share gains IEX which has risen to the third spot by total trade volume, is on pace to become the surpass UBS and Credit Suisse as the most popular ATS in the US.
The result: traditional HFT-based players such as the most prominent one, Citadel, are becoming very worried. As a reminder, Citadel is the hedge fund which the NY Fed uses in times of market stress to "prop" the S&P higher by spoofing, or outright buying E-minis at key downward infletion points.
And as a result of concerns that it will be no longer able to frontrun order flow, mostly on the retail said, Citadel has dramatically stepped up its criticism of IEX Group, with the amazing argument that, in the words of Bloomberg, IEX' "plans to start an exchange that tries to level the playing field between firms with the fastest technology and other traders will actually hurt stock markets."
In other words, making the markets again fair and efficient, would hurt the markets according to the company that may be the biggest abused of HFT practices.
As Bloomberg notes, in its second letter to U.S. regulators (which can be read here) addressing the "unfairness" of IEX, Citadel said the exchange application lacks sufficient information and could “harm market quality.” Citadel took particular exemption with the disclosure around IEX’s trademark “speed bump,” a coil of wire purported to prevent faster traders from taking advantage of slower ones by delaying all incoming and outgoing orders by a fraction of a second.
Naturally, IEX has countered that its exchange would be an antidote to unfair practices that allow the fastest firms to get an advance look at market-moving orders and trade ahead of them.
Why is Citadel so worried? Because if everyone migrates to IEX as so many are clearly doing, HFTs will have no further advantage in the market and the "riskfree" frontrunning gains which HFTs have benefited from in the past few years, will evaporate.
The irony of Citadel's claims is exposed as particularly awkward when one considers how the Chicago hedge fund markets itself:
Perhaps Citadel can explain just how it "levels the playing field for retail investors" when one considers that as Nanex' points out, Citadel's own average execution delay is over 100 times worse than that proposed by IEX.
We don't expect Citadel will provide an answer, and we don't really need one: after all "internalizing" retail order flow, which is what Citadel does, in order to engage in bulk frontrunning takes time, and we appreciate it.
The question is whether the SEC does as well. Because as some have correctly pointed out, if the IEX application is declined, as we are confident it will, SEC will confirm two things: 1) they are a captured agency. 2) who exactly has captured them.
And when the SEC does reject IEX's application, maybe that most infamous recent employee of Citadel, Ben Bernanke, can pen a blog post about fair and efficient markets, or failing that, perhaps provide some color on just how the Fed has transacted with Citadel without disclosing it publicly in the time Bernanke was Chairman of the Federal Reserve.
Now that would make for a truly captivating blog post.