IEX

IEX
IEX
Type	Alternative trading system
Location	New York, New York (office), Weehawken, New Jersey (matching engine), United States
Founded	2012
Owner	IEX Group, Inc.
Key people	Brad Katsuyama (CEO) Ronan Ryan John Ramsey
Currency	USD
Volume	126 million shares/day (March 2016)
Website	iextrading.com

IEX is a dark pool, more formally 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 4 World Trade Center in New York City. However, the computer equipment that handles the actual dark pool is located across the Hudson River in Weehawken, New Jersey, and the initial point of presence for the dark pool is located in a data center in Secaucus, New Jersey. IEX's main innovation is a 38-mile coil of optical fiber placed in front of its trading engine, which adds a round-trip delay of 0.0007 seconds and is believed to limit traders' ability to respond on the dark pool ahead of IEX's own pricing algorithms. The dark pool's market session runs from 9:30 am to 4:00 pm Eastern Time.

The company has since applied to the SEC to become an official exchange.

Operating principles

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 trading systems. The IEX dark pool 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 dark pool itself—include:

• Publishing the matching rules used in the dark pool'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 dark pool. A few 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 public exchanges. IEX offers no rebates for orders, and only charges a flat fee of $0.0009 per share on trades executed within the dark pool (or 0.30% with shares worth less than $1.00). Trades forwarded to other trading venues are charged a lower rate.

IEX has five order types: market, limit, primary peg (pegged to national best bid/offer), midpoint peg and patent-pending discretionary peg. IEX discretionary peg is a primary peg that may execute at up to midpoint price when the quote is stable. A few optional parameters can be attached to the orders, leaving IEX with many fewer order types than most other dark pools.

IEX delays the flow of data from the dark pool and ensures that it arrives simultaneously at two points of presence in New Jersey. Traders are not allowed to co-locate equipment adjacent to IEX's own servers, unlike many other trading platforms. IEX has its own low-latency links to other trading venues 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, round-trip delay of 700 microseconds from a 38-mile coil of fiber, so traders cannot beat IEX's own computers as orders propagate outward. The data delay prevents many predatory behaviors. It deters the practice of liquidity fading, where they peer into various trading venues and try to detect orders as they propagate from a broker's order router, and use this information to withdraw liquidity ahead of toxic order flow.

Market share

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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. Katsuyama argues that this arrangement advantages regular investors contrarily to high frequency trading firms, by preventing, for instance, HFT firms from jumping to the top of the order queue and front-running normal investors. He further claims that this practice increases the transparency and fairness of the markets by letting investors trade at the prices observed in the markets.

Liquidity

Michael Lewis' book Flash Boys focused on the new trading platform, arguing that it was better than other dark pools since it created an equal playing field for investors by slowing down trading. Critics of the book argue that liquidity-provider firms need speed and direct market connectivity to manage risk, and a market that limits speed, such as IEX, would be illiquid and expensive for price discovery.

External links

• Official website