NEW YORK (Reuters) - IEX Group responded to critics of its application to become a registered U.S. stock exchange, saying it offers a market-based solution to counteract the advantages that high-speed trading firms have gained over other investors, aided by exchanges.
“Is there room in the national market system for an exchange to adopt any means, however narrowly drawn, to counteract the more pernicious aspects of speed-based trading?,” IEX said in a letter to the U.S. Securities and Exchange Commission, dated Nov. 13, but made public on Monday.
IEX, which was featured in Michael Lewis’s controversial book, “Flash Boys: A Wall Street Revolt,” applied with the Securities and Exchange Commission in September to become The Investors’ Exchange.
It has operated as an alternative trading system since October 2013 and aims to launch as an exchange in early 2016, competing against the likes of BATS Global Markets, Nasdaq (NDAQ.O) and the New York Stock Exchange (ICE.N).
“Flash Boys” sparked an intense debate as to whether exchanges favor high-frequency traders that use computer algorithms to trade at dizzying speeds. It followed the IEX team as it set out to build an exchange that would be a level playing field for all investors.
Unlike most exchanges, IEX does not allow trading firms to locate servers inside its data center to reduce trading times, and it does not sell private data feeds that would give speed advantages to those who would pay for them.
The most contentious aspect of IEX’s exchange plan, however, involves the use of a “speed bump” that delays incoming orders to its trading platform by 350 millionths-of-a-second so that it can update rapidly changing prices before the fastest traders can act on stale data and effectively jump ahead in the queue.
Some market participants, including BATS and broker Citadel LLC, wrote letters to the SEC saying the speed bump should not be allowed, in part because it would degrade market quality.
IEX said the delay caused by its speed bump is similar to the amount of time it takes for an order to move between the data centers of Nasdaq and NYSE. It also said the prices it sends to the public data feed are not slowed down by the speed bump, so overall market prices would not be affected.
“In contrast to other exchanges, IEX’s model is offered as an alternative to their conflicted practices of selling access and technology,” IEX said.
Reporting by John McCrank; Editing by Alan Crosby