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IEX is a dark pool, more formerly known as an alternative trading system, based in the United States. Started by Brad Katsuyama, it opened for its first day of trading on October 25, 2013. The company's offices are located at 7 World Trade Center in New York City. However, the computer equipment that handles the actual exchange is located across the Hudson River in Weehawken, New Jersey, and the initial point of presence for the exchange is located in a data center in Secaucus, New Jersey, set to have a travel time of 350 microseconds by optical fiber. The exchange's market session runs from 9:30 am to 4:00 pm Eastern Time.

Originally the founders had planned to name the business Investors Exchange, but after typing it into a web browser, realized that this combination of letters also spelled something distasteful. Thus they opted to shorten the name to IEX. Company representatives have stated their intention to convert to a public exchange upon reaching sufficient trading volume.

Operating principles

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IEX was created in response to questionable trading practices that had become widely used across traditional public Wall Street exchanges as well as dark pools and other alternative exchanges. The exchange aims to attract investors by promising to "play fair" by operating in a transparent and straightforward manner, while also helping to level the playing field for traders. Strategies to achieve those goals—and protect the exchange itself—include:

• Following a published set of rules in the exchange's computerized order matching engine
• Offering a limited number of simple and familiar order types,
• Charging fixed fees on most orders (or a flat percentage rate on small orders),
• Ensuring market pricing data arrives at external points of presence simultaneously,
• Slightly delaying market pricing data to all customers (no colocation).
• Refusing to pay for order flow.

These strategies are intended to ensure the trustworthiness of the exchange. Publishing the rules used by the matching engine is perhaps the most powerful in this respect. Other dark pools don't explain how their matching engines work, so it is often unknown at which exchange the various chunks of an order were filled. In particular, many dark pools are owned by trading companies that pay for certain types of orders to allow them to fill orders within the pool, rather than routing orders to other exchanges.

IEX only has four main order types: market, limit, mid-point peg and IEX Check (a type of fill or kill order). A few optional parameters can be attached to the orders, leaving IEX with many fewer order types than most other exchanges. The order types are also simpler—IEX has employed a team of "puzzle masters" who research the orders offered on other exchanges, and in many cases have determined that they only exist to assist predatory trading techniques.

Some exchanges offer rebates/payments when customers place orders—another feature believed to have been added just to benefit predatory traders.

One common practice of high-frequency traders is a form of front running, where they peer into various exchanges and try to detect orders as they propagate from a broker's order router. HFT traders place many small order that indicate buying/selling pressure. Those with the shortest lag in reaching other exchanges then place orders on those exchanges to catch the rest of the order, at a more advantageous price.

Rebates are used to entice brokers to execute trades on exchanges that give the greatest speed advantage for high-frequency traders. Traders have also been known to use forms of arbitrage to extract rebates from exchanges without really providing good faith offers on the stock that gets used in the process. IEX offers no rebates for orders, and only charges a flat fee of $0.0009 per share on trades executed within the exchange (or 0.30% with shares worth less than $1.00). Trades forwarded to other exchanges are charged a lower rate.

IEX also tries to curb predatory behavior by delaying the flow of data from the exchange and ensuring that it arrives simultaneously at two points of presence in New Jersey. High-frequency traders are not allowed to co-locate equipment adjacent to IEX's own computers, unlike many other trading platforms. This largely prevents HFT companies from being able to use front-running techniques. IEX has its own low-latency links to other exchanges in the New York region, which it can use to execute trades for customers in under 320 microseconds. The point-of-presence links for traders to gain access to IEX have a built-in delay of 350 microseconds, so they can't beat IEX's own computers as orders propagate outward. IEX allows high-frequency traders to connect to their system, but the data delay prevents many predatory behaviors.

In addition, IEX is owned by a group of "ordinary (non HFT) investors" who are required to route orders through other brokers (who are not allowed to be investors in the company), which alleviates some conflict-of-interest issues.

Trading volume

IEX has seen fairly steady growth in trading volume since opening on October 25, 2013. At one point in December 2013, the IEX was exchanging at a rate greater than 40 million shares per day, a larger number than AMEX. In April 2014, average daily volume was 58 million shares (double-counted).

Criticisms

Broker priority

Unlike all other U.S. equities trading venues, IEX does not adhere to the principle of price-time priority. Instead, the IEX prioritizes orders by price, followed by broker trades, and lastly time. Critics point out that this arrangement allows broker-dealers such as Goldman Sachs, to jump to the top of queue regardless of the entry time of their orders, thereby disadvantaging non-broker participants such as regular retail investors. Katsuyama agrees that this practice is unfair to non-broker participants, but concedes that they cannot do anything about the core issue unless the IEX had "100% of the volume" in United States. Katsuyama further argues that " if you don't give the broker the , they will create their own private market to do it."

Conflicts of interest between IEX and its major equity owners

Several investors fear that there are significant conflicts of interest between IEX and its major equity owners. Most dark pools, such as Liquidnet and RiverCross Securities, are independently-owned and therefore only facilitate trades, and do not trade against their own customers. On the other hand, critics have pointed out that large buy-side trading firms own a significant stake in IEX. These include Bill Ackman's firm, Pershing Square Capital Management, which was notorious for shorting $400 to $500 million of stock in Herbalife; James H. Clark, billionaire co-founder of Netscape, who was also controversial for investing in IEX before introducing Brad Katsuyama to Michael Lewis; Daniel Loeb, billionaire hedge fund manager of Third Point LLC; Capital Group, a fund management firm with over $1.147 trillion in assets under management, and Goldman Sachs. As such, the same critics contend that the IEX may impose rules that favor large institutional firms and hedge funds over regular investors' interests.

See also

• High-frequency trading
• Flash Boys

References

1. Foxman, Simone (2013-10-25). "How the "Navy SEALs" of trading are taking on Wall Street's predatory robots". Quartz.
2. ^ Lewis, Michael (2014-03-31). "The Wolf Hunters of Wall Street". The New York Times.
3. ^ "On A 'Rigged' Wall Street, Milliseconds Make All The Difference". Fresh Air. 2014-04-01. WHYY. {{cite episode}}: Unknown parameter |city= ignored (|location= suggested) (help)
4. "How IEX Is Combating Predatory Types Of High-Frequency Traders". Forbes. Retrieved 2014-04-25.
5. Mamudi, Sam (2014-03-31). "IEX Welcomes High-Speed Traders, as Long as They Behave". Bloomberg L.P.
6. "Stats". IEX Group. Retrieved 2014-05-09.
7. Katsuyama, Brad (2013-05-29). "IEX president Katsuyama addresses 'broker priority'". CNBC.
8. "IEX Group - About Us". IEX Group. Retrieved 2014-05-25.
9. Stevenson, Alexandra (November 22, 2013). "Ackman Vows to Take Bet Against Herbalife 'to the End of the Earth'". dealbook.nytimes.com. Retrieved 2013-11-23.

External links

• Official website

• Stock exchanges in the United States
• Financial markets