And the countdown has started in earnest towards full-fledged exchange status at buyside-sponsored trading venue IEX.
According to memo sent to its clients and shared with Traders, chief executive officer Brad Katsuyama said the venue planned to begin operation as a full-fledged exchange in late Q1 2016. [MGCAP(1)]
Katsuyama wrote that the Securities and Exchange Commission published IEX’s exchange filing on sec.gov today and in the coming weeks it will publish the filing to the Federal Register, triggering a 45-day period of public comment and an additional 45 days of Commission review.
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“This puts potential approval squarely in the midst of the holiday season. We understand the constraints and concerns with a new exchange launch during that time frame and the likely “code freeze” that many industry participants abide by,” Katsuyama. “We are excited to get moving, but we also want to avoid overburdening the industry during the holidays, and as such, we plan, pending Commission approval, to begin operating as an exchange in mid to late Q1 2016.”
He added that there are few notes clients should note that are in and excluded from in IEX’s exchange filing:
1. “POP” (Point of Presence). “We feel confident that a uniform distance imposed equally on all IEX participants, via a physical cable, creates a level playing field that allows IEX to protect orders from being disadvantaged by those who may have access to faster market information and connectivity.”
2. Listing Standard Rules are included. “It is important to note that IEX will not be operational as a listing exchange at launch. We are including listing standards, which have already been approved by the Commission for other exchanges, in our initial filing in order to begin certain administrative/regulatory processes and to provide optionality after our launch. We are honored to be receiving significant inbound inquiries from public companies regarding our intention around listings and while our focus so far has been to build a market that better serves the investor, we strongly believe we can help issuers improve their experience with the markets as well.”
3. No Broker Priority. “We initially designed our Broker Priority model to maximize the chance that a single broker, with both a buyer and seller of the same security, could first look to match those orders on IEX at no charge, before trading any residual shares against other IEX participants. The ability for brokers to “internalize” when they have earned an order from both the buyer and seller of a security is the primary reason for broker dark pools and is an outcome that cannot currently be achieved on any U.S. exchange. Given the rise of off-exchange trading volume and Broker ATSs (dark pools), we felt that this feature would allow IEX to be a neutral place for brokers to send orders without missing opportunities they have earned to internalize. While novel, Broker Priority did not have a statistically material effect on our business (trading less than 1% of IEX volume on a daily basis), so we decided to defer pursuing this feature and have removed it from our exchange filing. We still plan to charge no fees when a broker trades with itself, pending filing of our fee schedule with the Commission, and we may consider refiling to request SEC approval to add Broker Priority in the future as we believe it would benefit the broader market and its participants.”
Furthermore, Katsuyama added that IEX by becoming an exchange looks to affect systemic change to the current market structure.
“When we look at the state of today’s market, we do not see exchanges fulfilling this role (capital formation) effectively, but we do see an opportunity to honor key tenets within the Securities Exchange Act of 1934, mainly ‘the protection of investors and the maintenance of fair and orderly markets’.”
“IEX believes that technology and increased industry sophistication should have significantly lowered the costs that exchanges impose on our industry. When considering the evolution of market data and technology fees levied by the incumbent exchanges, the opposite effect has occurred as the fixed-cost burden on industry players, especially brokers and market makers, continues to rise. Rather, IEX believes data and technology should be provided at a reasonable cost or no cost at all, with the goal of institutionalizing fairness for the greatest number of market participants. This continues to be the philosophy that drives our business decisions.”
