The SEC has approved IEX, warts and all. The question now is: Whats next? How will the approval of IEX impact US market structure?
In my view, investors will rue this day. Spreads will widen, retail investors will be hurt, larger buy-side firms will be disadvantaged, market structure complexity will increase, sophisticated trading firms will profit, and the quality of the US markets will deteriorate.
Over the past 200 years, and especially over the past 15 years of market structure automation, we have seen two major trends: First, markets have become more deterministic as they have become faster and data quality has improved; and second, spreads (displayed and effective) have tightened. This is completely logical – the faster and cleaner the market data, the tighter firms can quote and trade.
The same will be true in reverse. The slower and more problematic the data, the wider firms will need to price their trades, as speedbumps, by definition, obfuscate data, slow orders down and reduce the markets determinism.
The IEX approval presents a number of challenges. This is my take.
Currently, there are 12 exchanges (13 with IEX); seven of the current exchanges have less than 5% market share. These seven markets have the most to gain from copying IEX. That said, these wont be exact cookie-cutter implementations of the IEX speedbump. We will see many variations on a theme.
If the SEC allows multiple speedbumps, we can absolutely expect an increase in execution complexity. Some markets will be first in: first out; others will have delayed order types. And some will have IEX-like DPEG and crumbling quote-type functionality, while still others will just have differing delays. If, like the movie Something About Mary says, eight-minute abs are fantastic, seven-minute abs must be better. We will be seeing a lot of seven-minute abs markets, and determining how to trade across these markets and order types will be challenging, to say the least.
To read the rest of Larry Tabb’s analysis, please visit TABB Forum.
Larry Tabb is CEO and founder of TABB Group.
