Even non-traders have likely heard of the New York Stock Exchange and the Nasdaq, the two largest U.S. stock exchanges. However, there could soon be a new major player in town that experienced traders should take note of. Here’s everything you need to know about IEX.
IEX, or the Investors Exchange, started as a dark pool private stock exchange. It gained mainstream popularity when “Moneyball” author Michael Lewis profiled its rise in the book “Flash Boys: A Wall Street Revolt.” IEX gained regulatory approval from the SEC to transition from a dark pool exchange to an official public stock exchange back in June 2016.
IEX currently plans to land its first public listing by the end of October. In addition to targeting initial public offerings, IEX also plans to lure established, big-name listings from its two larger rivals as well. In fact, IEX investor Steve Wynn has said he is interested in taking his $13 billion Wynn Resorts, Limited (NASDAQ: WYNN) from the Nasdaq to the IEX at some point in the future.
The whole idea behind the creation of the IEX is to give retail traders the opportunity to mitigate the technological advantages that large investment banks and institutional investors have in the market. Specifically, since the high-speed trading algorithms these firms use run on powerful computers located within blocks of the stock exchanges, many of these institutional investors can enter and exit a position within microseconds—literally faster than the blink of an eye.
IEX CEO Brad Katsuyama explained the problem with the current system when he testified in front of the House Financial Services Committee earlier this year.
“Unlike the broad sweeping benefits of technological advances in other industries, in the equity markets these benefits have been narrowly distributed among a small group of insiders, with the result that the interests of short-term traders and exchanges have been prioritized over public companies and long-term investors, who represent the savings and retirements of millions of Americans,” Katsuyama said.
To combat the advantage that Wall Street traders have over Main Street traders, IEX has implemented a 350-microsecond “speed bump” delay on all its orders to level the playing field for all traders. In practical terms, 350-microseconds is less than one one-thousandth of a second. However, in the world of high-frequency trading, it’s an eternity.
As expected, the established exchanges aren’t taking the threat from the IEX lying down. In May, the NYSE was granted approval for an identical “speed bump” rule for its new NYSE American exchange. The Nasdaq and the Chicago Stock Exchange are also exploring similar rules.
The NYSE American exchange appears to be a NYSE’s attempt to nip competition from IEX in the bud. In addition to a speed bump rule, NYSE is offering huge rebates for market makers who trade on the American exchange. According to Katsuyama, the rebates are simply an attempt by the NYSE to preserve its main business of “selling speed advantages” on its main exchange.
It seems NYSE, Nasdaq, and IEX are on the brink of an all-out exchange war with major implications for retail traders. If IEX gains traction as a major exchange or influences the two top players to implement more balanced trading rules, it could be a step in the right direction for the average American investor.
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