IEX Exchange Application: SEC’s Reassessment of Reg NMS Critical to Decision
Judging by the amount of ardent comment letters and acrimony on social media, IEX’s application to become an exchange has incited the passions of investors, market structure advocates, and even the general public like few other issues in modern finance. If the volume and level of discourse is unusual, it is because this issue transcends commercial considerations: It is a proxy vote on the state of the US equity market and whether it is fit for purpose.
Market structure issues rarely attract mainstream media attention. But the IEX application gets to the heart of the integrity of the market, the efficacy of the regulatory framework, and whether investors have a fair opportunity to earn a return.
In this context, CFA Institute has analysed the proposals and concluded that as things stand, a time-delayed exchange is incompatible with the existing regulatory architecture prescribed by Reg. NMS. Among other things, Reg. NMS calls for immediate dissemination of quotes and prices (programmed delays are prohibited). Programmed delays on price dissemination also obfuscate the National Best Bid and Offer (NBBO), which is already beset by latency problems) further complicating best execution. We’ve articulated these views in further detail in this article by my colleague Sviatoslav Rosov, CFA, originally published on TabbFORUM.
This week, the Securities and Exchange Commission (SEC) implicitly acknowledged these challenges by issuing a proposal for public comment on whether latencies below 1 millisecond should be considered “de minimis” (the IEX speed bump is 0.35 milliseconds, or 350 microseconds). If adopted, this change could potentially alleviate the inconsistency of IEX with the “automated quotations” provision (requiring immediate dissemination) under Reg. NMS. However, a possible side effect is the existence of multiple time-delayed exchanges, further fragmenting the market by time as well as space. For example, this New York Post article suggests NYSE and Nasdaq have considered plans for speed bumps of their own.
For supporters of IEX, antagonists of high-frequency trading, and investors who oppose speed-based trading, the SEC proposal on the de minimis exemption is encouraging. But the outcome of this whole process remains highly uncertain. Only time will tell if IEX is granted exchange status — and if so, what the market will look like in order to accommodate it.
CFA Institute is reviewing the SEC proposals. Look for more commentary on this issue in this space and elsewhere.
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Image Credit: iStockphoto.com: xijian
