“Despite IEX’S attempts to make trading nicer, it is never going to be a country-club sport”
▶ The hero of Michael Lewis’s book wants to start a stock exchange ▶ “They should have to play by the same big-league rules”
Brad Katsuyama was lionized in Michael Lewis’s best-selling 2014 book, Flash Boys, for coming up with a way to protect ordinary stock investors from predatory high-frequency—that is, flash—traders. His trading venue, Investors’ Exchange, briefly pauses all orders to take away the edge pos-s sessed by traders with super-erfast computer networks.
Now his firm, IEX Group, isis trying to become a full-fledgedd public stock exchange. Such a designation would carry a stamp of approval from the U.S. Securities andnd Exchange Commission and boost the number of trades IEX handles. (It accounts for about 1.7 percent of daily volume for U. S. stocks.) Standing in the way: some of the same high-speed traders who were cast as the heavies in Lewis’s book.
Leading the charge is the hedge fund Citadel, whose billionaire founder Ken Griffin was furious about Lewis’s portrayal of the firm, according to two people who have spoken with him. Aligning themselves with such IEX competitorsp as the New York Stock Exchange andan Nasdaq, Citadel executives have trekked to Capcapitol Hill to lobby congressionalcon staff, and writtenwri letters critical of IEX tot the SEC, which has dedelayed its decision.
“Despitedes IEX’S attempattempts to make trading nicer, iti is never going to be a country-coclub sport,” says R. Cromwellc Coulson, chief executiveexec officer of OTC Markets Group, who has watched the babattle with keen interest. “Citadel playspla hard to win.”
IEX operates as a dark pool, a kind of private stock market that relies on brokers and traders to send it business. It employs a speed bump that shields investors’ orders from what it calls predatory traders. The information passes through IEX’S “magic shoebox,” which contains 38 miles of coiled fiber- optic cable that pauses transmissions by millionths of a second. The slight delay prevents speed traders from racing ahead and marking up prices when they see a big buyer in the market, or reducing them when they detect a seller, IEX says.
IEX’S opponents argue that delayed orders mean stale prices, putting it in conflict with a 2005 regulation that says investors should get the best available price.
“If they want to be an exchange and
play in the big leagues, they should have to play by the same big-league rules as everyone else,” says John Nagel, Citadel’s senior deputy general counsel. He declined to comment on his firm’s meetings with congressional staff and SEC officials.
Chicago-based Citadel, which also operates a market-making business, has invested heavily in high-frequency trading and is a massive presence in the U.S. stock market. It often accounts for more than 14 percent of daily transactions. The firm regularly comments on SEC issues.
Griffin views IEX as an existential threat to modern markets, say the people who have spoken to him. (They asked not to be named because the discussions were private.) He believes faster markets make trading easier and cheaper for all investors. He also didn’t like that Flash Boys portrayed Citadel as secretive. (A company spokesman says the book contained inaccuracies about Citadel. Lewis says there were some small errors, but none had “the slightest effect on the broader story.”)
The firm says it’s worried that if one exchange is allowed to slow trading, others would add speed bumps, leading to multiple venues with obsolete price quotes. The change might even provide opportunities for gaming the system, argues Citadel.
Katsuyama and John Ramsay, a former SEC official who is IEX’S chief market policy officer, have also lobbied House and Senate staff. In meetings, Katsuyama used a notepad to sketch pictures that simplified aspects of his firm’s market, down to the coiled cables, say people who attended. The firm’s executives dismissed Citadel as a beneficiary of the status quo.
“This fight isn’t about a speed bump,” Katsuyama wrote in an e-mail to potential allies. “This is a fight about money— who makes it and from whom.” The decision is being closely watched, as it raises questions that the SEC under Chair Mary Jo White has been slow to answer, about setting rules for markets in which machines move very, very fast. The bottom line Citadel, a big player in highfrequency trading, wants to stop IEX from becoming a public stock exchange.