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

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.