IEX Stock Exchange Makes Long-Awaited Public Launch

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On Friday, the Investors Exchange (IEX) Group’s controversial new national stock exchange made its public launch.

Only two stocks were available for trade on opening day: Vonage VG and Windstream Holdings WIN. The company is planning to slowly phase in more stocks, and will add eight more by Wednesday, August 24th.

The following week, IEX will begin adding stocks that have tickers beginning with the last few letters of the alphabet, before ultimately adding all remaining stocks into the exchange by Friday, September 2nd. The gradual progression is meant to ensure that there are no early issues with the system.

What is IEX?

Like the Nasdaq or New York Stock Exchange (NYSE), IEX is a trading venue in which stock buyers connect with stock sellers. It was started by former Royal Bank of Canada trader Brad Katsuyama in 2013, and made famous by Michael Lewis’ 2014 book Flash Boys.

The book is focused on the rise of high-frequency trading (HFT). This refers to the practice of institutional investors using powerful computers and algorithms to make a large volume of orders at extremely high speeds.

By accessing data milliseconds before other investors, HFT algorithms can buy and sell stocks faster than regular traders can react. In the process, they sell stocks for a few pennies higher than at which they were purchased to traders who are reacting at human speeds to market trends. Although this may not seem like much, HFTs perform millions of trades, and the pennies add up.

IEX seeks to address the advantage this gives HFTs by including a 350 millionths-of-a-second delay on all incoming and outgoing orders. The idea is that by giving everyone the same speed bump, HFTs can’t take advantage of their algorithms to profit on the natural disadvantage of human reflexes. Furthermore, it ensures the IEX system will have enough time to get updated on the latest prices in all financial markets before executing an order.

IEX’s current daily trading market share is between 1.7% and 1.8%, but Katsuyama believes that growing to 7% or 8% within a few years is possible.

There’s Always Controversy

Many have concerns as to whether or not IEX can truly execute orders at the best price for investors. Furthermore, HFTs and other vocal dissenters believe that putting a speed bump on trades is taking a step back rather than forward.

The SEC received numerous letters about IEX, some positive while others were less-than-savory. Regardless, many believe that Katsuyama has done what is right to make the system fair for everyone again.

Bottom Line

Although getting SEC approval was the first major hurdle, the battle is just getting started for IEX. As it rolls out more stocks, its performance will be under heavy scrutiny from players and spectators alike. Should it prove successful, it could change the stock exchange status quo forever.

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