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IEX Wins Approval to Become National Securities Exchange

On Friday, the SEC approved IEX’s application to become a national securities exchange.  SEC Chair Mary Jo White said that the SEC’s actions “promote competition and innovation, which our equity markets depend on to continue to deliver robust, efficient service to both retail and institutional investors.”

One feature of IEX’s application, the “speed bump” that would result in intentional access delays, drew attention from other securities exchanges. IEX says that the speed bump was designed to reduce the influence of high frequency traders, by ensuring that no traders had access to the market faster than others.  Other exchanges questioned whether the speed bump was even permissible under the SEC’s rules that require automatic access to securities prices.  

To address these concerns, the SEC issued an interpretation of the order protection rule under Regulation NMS.  The order protection rule generally requires other trading centers to honor best automated quotations and not execute trades at inferior prices.  These protected trades are those that can be executed immediately and automatically.  The Commission determined that “a small delay will not prevent investors from accessing stock prices in a fair and efficient manner consistent with the goals of the Order Protection Rule.”  Therefore, the Commission would allow a trade to be considered “automatic” even if the system’s coding or other intentional action included a de minimis access delay.  In accompanying staff guidance, the SEC staff stated that delays of less than one millisecond would meet the de minimis standard.

Within two years, SEC staff will study the effect of intentional access delays on market quality.  The Commission will then use the results of that study to “reassess whether further action is appropriate.”