New US Trading Platform, IEX, aims to disrupt market structure
Wednesday, 30 October 2013 00:00
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NEW YORK (Reuters): The IEX Group is the latest US trading platform alongside 44 other alternative trading system (ATS) and 13 stock exchanges, but rather than try to blend into the current market structure, IEX says its goal is to disrupt it.
IEX, which has ambitions to become an exchange, is owned exclusively by fund companies known as the “buy-side” and individuals, including IEX’s staff, Chief Executive Brad Katsuyama said in an interview.
“We will be the first registered ATS that is owned by the buy-side, which means we are not competing with different brokers. We’re more of a utility, and by definition, we can build things that are in the best interest of the buy side.”
Buy-side customers were able to connect on Friday to IEX through brokers and so far, more than 60 brokers have registered, or are in the process of doing so, to gain access to the platform, including Virtu Financial.
“We are connected and making markets in there today and supportive of people trying alternative models,” said Virtu Partner and former NASDAQ executive Chris Concannon.
Flat fee
Part of what sets IEX apart from its competitors is its fee structure.
Markets normally use what is known as a “maker-taker” fee model. A firm that makes liquidity by posting shares for sale receives a rebate, often around 30 cents per 100 shares. The taker, who is buying the shares, pays a fee, often offsetting the rebates.
Some markets offer rebates that are higher than the fees they charge in order to attract order flow, actually losing money on some transactions. Because rebates are given to brokers, they may not make it back to the customer, creating conflicts and modifying behaviours, said Katsuyama.
Intercontinental Exchange Inc CEO Jeff Sprecher, a futures market operator, recently said the high rebates in equity markets are “ridiculous,” and vowed to change the model once ICE completes its acquisition of Big Board operator NYSE Euronext.
“Philosophically, I completely agree with Sprecher. He’s a smart person who walks into this and says, ‘This doesn’t make sense,’” said Katsuyama, formerly global head of electronic sales and trading at RBC Capital Markets.
IEX is charging a flat fee of 9 cents per 100 shares for both buyers and sellers. The more orders IEX can attract the more profit it can make.
“Exchanges should be in the business of matching buyers and sellers and charging a fee for that. And the ones who do it better should get more of that flow,” Katsuyama said.
Most exchanges and ATSs tend to look more like technology companies with trading arms attached to them, generating significant income through selling technology, like trading systems, or microwave towers that can beam orders fractions of seconds faster than high-speed fibre optic networks.
“You look at the things that exchanges and other ATSs are selling; those are not things that are geared towards long-term investors. Microwave towers are not geared towards long-term investors. I think we are unique in that way,” Katsuyama said.
Opting out of the arms race
The push to get faster technology than the next trading firm or platform has been likened to an arms race. It has also magnified the damage from technical glitches, such as when Knight Capital Group, now a part of KCG Holdings, sent a flood of accidental orders into the market over 45 minutes, in August 2012, costing it more than $ 460 million and leading to the firm’s sale.
IEX has the most up-to-date technology, but with its focus on long-term investors, does not make speed its top priority.
Katsuyama said the danger of that arms race is that it skews priorities. If making a piece of software more resilient might require slowing it down by a few microseconds, the exchange trying to be the fastest might think twice about it. For IEX, which actually slows down all of its orders by fractions of a second in an attempt to create a more even playing field, the issue would not even arise, he said.
“People have lost confidence that the markets are working and are fair and that they’re working in their best interest. That’s such a significant crisis in confidence, and we think there’s a massive opportunity for us.”
