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Debate Over IEX Exchange Application Continues

Several existing exchanges are engaged in a heated debate with upstart Investors’ Exchange, LLC (IEX) over its application for official exchange status filed with the SEC in September. While IEX brands itself as “a fair, simple, transparent market,” commenters such as NYSE argued that instead “it proposes rules that would make IEX an unfair, complex, and opaque exchange.” According to IEX, “it is by no means surprising that those with deeply rooted interests in maintaining these practices would seek to mischaracterize, malign, or denigrate the very differences that distinguish the challenger, and to block, limit, or delay its ability to compete.”

To date, commenters have filed 26 letters in response to the application, including two from IEX addressing commenters’ criticisms. IEX noted that letters of support were filed by “asset managers representing over $1 trillion in equity assets, 3 several prominent agency broker dealers, retail investors, academics, notable industry experts, and a leading technology‐enabled market‐maker and global liquidity provider.” Though the comment period officially ended on November 6, 10 of the 26 letters were filed after that date and several commenters have called for IEX to amend its application and for the comment period to be extended.

One key feature of IEX is an intentionally imposed 350 microsecond latency designed to remove any perceived advantage of high-frequency traders. Several commenters, such as the NYSE and Nasdaq exchanges, complained that IEX’s application was unclear in how exactly this “speed bump” would operate and how the time delay would affect investors and the connected national market system. In addition, BATS and other commenters objected to IEX’s plan to not subject its routing broker to the same speed bump as IEX market participants, which BATS argued essentially creates an “IEX-only private data feed.”

In its letter, IEX sought to resolve commenters’ concerns and calls for clarity, stating that it would amend its application with additional information. It also argued that its speed bump “is not dissimilar to the coiled cable provided by the NYSE, Nasdaq, and BATS families of exchanges in their respective data centers” which is used “specifically to create equivalent distance for participants who have paid for the privilege of co-location, whereas IEX coils a longer length of cable in an attempt to create fairness for all participants.” It further pointed to tiered levels of connectivity offered by some exchanges that in essence impose different levels of latency. Lastly, it argued that, even with the intentional delay, latency on IEX is comparable or less than other exchanges and provided data from four of its subscribers showing an average latency for IEX of 1,232 microseconds compared to 735 microseconds for Nasdaq, 1,366 microseconds for NYSE, and 15,330 microseconds for Chicago Stock Exchange.