Views on improving the integrity of global capital markets
24 June 2016

SEC OKs IEX Application; Can “Flash Boys” Hero Improve Market for Investors?

Posted In: Market Structure, US SEC

IEX won its battle to become the United States’ 13th registered stock exchange with the Securities and Exchange Commission (SEC) approving its application on 17 June. CFA Institute has covered the application since it was filed by the hero of Flash Boys in September 2015 (as well as issues raised in the 2014 best-seller, itself). We’ll continue to blog about the Investors Exchange as it goes live in August, and beyond, to see if it makes good on its promise “to gain market share by changing the way the $23 trillion US stock market operates and tilt the odds back in favor of investors.”

Here’s what we’ve said so far and what we expect might play out.

We expressed doubts about whether IEX’s application could be approved within the existing rules of Regulation NMS (see our 20 June opinion and 30 March post). We did not think the 350-microsecond time delay would be compatible with Rule 611 trade-through protection and the Regulation NMS requirement to disseminate information without any programmed delay (see our 2014 blog posts on 17 September, 22 September, and 26 September).

In announcing its decision about IEX, the SEC said that delays of less than one millisecond would be considered de minimis, thus negating the concerns over regulatory compatibility and potentially paving the way for similar types of speed bumps to be proposed by IEX’s competitors. Interestingly, IEX was not in favour of the de minimis interpretation initially, believing its application should be approved without any reinterpretation of existing rules.

Copycat Speedbumps Biggest Worry; Will They Make Market Even More Complex?

The response to the approval has raised a number of concerns about the impact of IEX’s market design on broader market structure. The biggest worries seem to focus on the apparent inevitability of copycat speedbumps conspiring to generate further complexity in a market that is already considered by many to be too complex. Some have even predicted that US market quality will worsen with reduced transparency, price discovery, and market efficiency.

Although these concerns may be overblown, there is a lot of evidence that previous regulatory interventions in markets, both in the US (Regulation NMS) and the EU (MiFID), have led to numerous unintended consequences. In fact, IEX was designed to ameliorate some of these negative consequences by limiting the ability of sophisticated high-frequency traders (HFT) to use certain speed-based strategies to take advantage of retail investors. The SEC described its decision as promoting “…competition and innovation, which our equity markets depend on to continue to deliver robust, efficient service to both retail and institutional investors.”

Investors and market observers will be eager to see whether IEX’s innovation delivers the intended benefits for institutional investors or whether these benefits are offset by the drawbacks critics highlight. That said, we may not get to observe whether this decision will have unintended consequences if NASDAQ moves forward with its previously threatened lawsuit against the SEC’s decision and is successful.

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About the Author(s)
Sviatoslav Rosov, PhD, CFA

Sviatoslav Rosov, PhD, CFA, is Director, Capital Markets Policy EMEA at CFA Institute. He is responsible for developing research projects, policy papers, articles, and regulatory consultations that advance CFA Institute policy positions, focusing on market structure and wider financial market integrity issues.

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