In 2017, IEX received final approval to start listing companies. The stock exchange, founded in 2012 and made famous by Michael Lewis’ book Flash Boys, planned to lure companies from other exchanges. The following year it announced its first capture, Interactive Brokers, which moved over from Nasdaq.
But nobody else followed suit. Earlier this week, IEX announced it would quit the listings business and focus on its core area of trading, while also launching a string of new data products. Interactive Brokers is heading back to Nasdaq.
The difficulty of overcoming well-established competition and ‘corporate inertia’ led IEX to walk away, according to the exchange.
‘When we welcomed Interactive Brokers as our first listed company in 2018, we were hopeful that other companies would follow suit, enabling us to scale the listings business and extend the benefits of IEX’s trading innovations to more companies and their shareholders,’ a spokesperson for IEX tells IR Magazine.
‘After a year, however, it was clear to us that this is a business where the legacy exchanges are entrenched, with a substantial amount of inertia on the side of corporates.’
The release of Flash Boys, published in 2014, prompted a number of companies to express interest in potentially switching to IEX, says the spokesperson. But ‘getting the commitments was more challenging than we thought as companies tend to require unanimous board-level approvals, not just a majority.’
The NYSE and Nasdaq are the dominant players in the US corporate listings business. Both offer a variety of additional services to companies that choose to join their platform, from promotional opportunities to IR tools and corporate access events.
The listings market is highly competitive and doesn’t just include listings, says Don Duffy, president of IR firm ICR.
‘It’s really a partnership with an exchange, whereby a company doesn’t just get liquidity for trading – which IEX could do – but also a partner that can help drive awareness for their brand and stock, elevate them in the business community and represent them on key issues impacting listed companies,’ he explains.
Tim Quast, founder and president of market structure specialist ModernIR, says one of the barriers for IEX was that public companies do not fully appreciate how the market today favors short-term trading activity.
‘We still have a way to go for public companies to comprehend how pervasively active investment has been driven out of public equity markets in the US by both the rule structure and the short-term nature of trading on the platforms that exist today,’ he says.
IEX uses a ‘speed bump’ that delays the completion of trades to protect market participants against aggressive trading strategies, such as front running. When Interactive Brokers announced it would move its listing to IEX, it cited the exchange’s speed bump as well as lower trading costs as reasons for doing so.
Other exchanges have taken steps in recent years to address concerns about market structure. For example, last year Nasdaq launched a campaign that supports changes such as greater reporting flexibility and the chance for smaller companies to consolidate trading activity in fewer venues.
In a statement announcing its move back to Nasdaq, Interactive Brokers says it had hoped other companies would follow it to IEX.
‘Unfortunately, IEX could not gain more listings and there were fewer market-makers trading our stock on IEX than on Nasdaq,’ says Thomas Peterffy, chairman and founder of Interactive Brokers, in the statement. ‘We gave it a year and we tried our best, but we now have to accept that, in spite of our good intentions, returning to Nasdaq will be best for our shareholders.’
‘We look forward to working with and supporting Interactive Brokers as it continues to grow,’ says a spokesperson for Nasdaq.
IEX says the streamlining of its business will help it focus on its trading operations, which currently account for around 3 percent of daily trading volumes in the US. To build on this area, it will launch two new services this year. The ‘C-Peg’ is a new order type that IEX says will protect companies as they seek to buy back shares on the market. There will also be two new order types designed for retail investors, says the exchange.
‘Some aggressive trading strategies take advantage of restrictions placed on companies to announce their repurchase plans by front running orders that they spot as stock buybacks,’ says the IEX spokesperson.
In its announcement, IEX also revealed it is launching three new technology products: a developer platform that will ‘democratize access to financial data’, a data platform designed with asset managers to manage trading data, and a data-messaging service built on IEX’s existing technology.
