IEX wins full exchange status

IEX has won the battle to have its unique trading model granted exchange status, becoming the 13th stock exchange in the US following approval from the SEC late on Friday.

The announcement puts IEX on par with the NYSE, Nasdaq and Bats Global Markets, with the exchange – which rose to fame following the publication of Michael Lewis’ book Flash Boys – having faced intense criticism as the larger, established exchanges sought to block it winning full exchange status.

‘Today’s actions promote competition and innovation, which our equity markets depend upon to continue to deliver robust, efficient service to both retail and institutional investors,’ said SEC chair Mary Jo White in a statement on Friday. ‘A critical role of the commission’s regulatory framework is to facilitate the ability of market participants to craft appropriate market-based initiatives, consistent with our mission to protect investors, maintain market integrity, and promote capital formation.’

Rival exchanges and other critics, including market maker Citadel Securities, failed in their argument that intentional delays run contrary to market rules and would muddy stock prices. IEX operates with a 350-microsecond ‘speed bump’ designed to level a playing field its founders argue has been tilted in a quest for ever greater trading speeds that benefit high-frequency traders over long-term investors.

‘We are grateful and humbled by the support we’ve received from the investor community; without it, we may have faced a different result,’ says Brad Katsuyama, CEO of IEX. ‘This is a milestone for all of those who have supported IEX and we look forward to becoming a stock exchange, which will provide us with the opportunity to have an even greater impact on the markets.’

While securities rules require exchanges to make their price quotes immediately available to traders, the SEC now deems delays of less than one millisecond – almost three times the IEX lag – to meet that standard. SEC staff will conduct a study within the next two years regarding the effects of any intentional delays on market quality and asset pricing: ‘Based on the results of that study, or earlier as it determines, the commission will reassess whether further action is appropriate.’

Despite having been a critic of IEX, a Bats spokesman says in a statement: ‘Bats congratulates IEX and appreciates the significant changes it made to its application to address industry concerns.’

But Jamil Nazarali, head of execution services at Citadel Securities, says the decision ‘will test and potentially reverse the gains in fairness, efficiency and transparency that have been made to our markets over the last decade. We must be vigilant to identify unintended consequences and firm in our commitment to equitable and consistent treatment for all investors.’

Watch our video interview with John Ramsay, chief market policy officer at IEX.