J.P. Morgan Executives Say Regulators Should Approve IEX as Exchange 

iex post logo

The country’s largest bank is siding with upstart market IEX Group Inc. in its effort to create a new stock exchange that pledges to be a haven for long-term investors.

Executives at J.P. Morgan Chase & Co. say regulators should approve IEX’s bid to become an exchange, a move that would allow the newcomer to invade the ranks of established rivals such as the New York Stock Exchange and Nasdaq Stock Market. The bank’s endorsement illustrates how even the largest Wall Street banks have warmed to a competitor that once said the stock market was rigged and vowed to disrupt how shares are traded.

IEX says the design of its market is aimed at thwarting predatory strategies used by some high-frequency traders to exploit slower-moving investors such as mutual-fund and pension-fund managers. The Securities and Exchange Commission last week proposed an order that would allow IEX to use a speed bump that briefly slows orders, an invention that has riven an industry accustomed to the speed race that fuels modern trading.

“IEX is one business with an innovative approach to address certain challenges in the current market structure,” said Brett Redfearn, J.P. Morgan’s global head of market structure strategy. “We are supportive of their exchange application.”

The endorsement from J.P. Morgan, the nation’s largest bank by assets, makes it just the second big bank to publicly support IEX, which stands to ramp up its share of trading if it graduates from private market to full-fledged stock exchange. Goldman Sachs Group Inc.said in January that it backed IEX’s effort to build a market that would appeal to investors who “value attributes other than the fastest venue access speed.”

IEX and its allies say its model neutralizes some of the technological advantages held by speed traders and other automated-trading firms. These traders tend to buy the fastest market-data connections directly from each stock exchange, giving them a leg up over investors who rely on a consolidated view of quotes that takes split seconds longer to update and may occasionally show stale prices.

IEX’s speed bump delays orders by about 350 millionths of a second. The tactic allows IEX to ensure that its view of the best available price is updated before any speed trader can pick off a stale quote on IEX, the firm says.

IEX’s founders, including Chief Executive Brad Katsuyama, won fame two years ago as the heroes of Michael Lewis’s book “Flash Boys.” The book chronicled their fight against Wall Street and alleged the stock market was rigged by exchanges and brokers in favor of high-frequency traders. In a statement, Mr. Katsuyama said IEX “greatly appreciates” J.P. Morgan’s support.

IEX says it has given up some profitable services to minimize conflicts of interest and cater to the needs of institutional investors. For instance, IEX doesn’t allow participants to place their computers next to its matching engine, a service known as “colocation” that gives traders a near-instantaneous view of changes in prices and order sizes.

IEX also uses a pricing model that doesn’t pay brokers to attract orders. Exchanges operated by Intercontinental Exchange Inc., Nasdaq Inc., and BATS Global Markets Inc. pay trading-fee rebates to brokers. SEC Chairman Mary Jo White has questioned whether such payments create a conflict of interest that skews where brokers route orders to be executed.

Nonetheless, IEX’s trading model has sparked a war with rivals such as ICE and high-frequency trading firms such as Citadel LLC, which say the speed bump would make it hard for investors to know they are getting the best available price. ICE CEO Jeff Sprecher said last month that approving IEX’s speed-bump plans would be “un-American,” because it would hand one firm an exemption from rules that bind exchanges to make all price quotes immediately available to traders.

The controversy has slowed IEX’s path to approval by the SEC, which said last week that it would take as much as three more months to rule on IEX’s application. But the agency also opened the door to approving the bid, writing that it “preliminarily believes” IEX’s speed bump wouldn’t hurt brokers’ ability to access the best available quotes in the market.

The SEC’s notice that it would rule on the IEX application by June 18 at the latest followed a decision by IEX to change how it routes some orders to other markets. IEX made the change after brokers complained that part of IEX’s plan would give it an unfair advantage over services they provide. J.P. Morgan, which sends more client trades to IEX than any other big Wall Street broker, was assuaged by the changes and now feels comfortable supporting IEX, Mr. Redfearn said.

Some critics argue IEX’s marketing pitch exaggerates the harm that may stem from high-frequency trading. Speed traders, who account for more than 50% of U.S. trading, trade so often and so efficiently that they have helped drive down trading costs for retail traders, according to Larry Tabb, an expert on equity market structure and founder of Tabb Group.

“If IEX becomes an exchange as currently proposed, for the first time in the past 15 years we will start seeing these numbers reverse to the detriment of millions of individual investors,” Mr. Tabb wrote in a column published on his firm’s website last week.

Brokers such as J.P. Morgan have incentives to support IEX, Mr. Tabb said in an interview. IEX’s trading model tries to de-emphasize speed as the driver of competitive advantage among brokers and trading firms. That would be a welcome change for many brokerage firms, whose profits are squeezed by the need to invest in the fastest market-data pipelines and other infrastructure that keeps orders zipping across markets in milliseconds, he said.

Source: WSJ

Leave a Comment


Broker Cyprus TopFX