The upstart IEX’s application to become a full-fledged stock exchange was contentious as it awaited approval by the Securities and Exchange Commission.
Once the SEC announced on Friday evening that IEX had won approval, though, lawmakers who had earlier submitted worrying comments about the possible market effects were quiet about the approval.
IEX has been a major topic on Wall Street since Michael Lewis told the story of its creation in the 2014 book Flash Boys. IEX’s application to be a full-fledged exchange aimed at slowing the market down with its novel “speed bump” mechanism came in late 2015, and the SEC announced its conditional approval on Friday.
As part of IEX’s approval, the SEC also set out a new interpretation of part of “Reg NMS” — which sets out rules for the national market system. The new interpretation “determined that a small delay will not prevent investors from accessing stock prices in a fair and efficient manner consistent with the goals of the Order Protection Rule,” according to the SEC’s announcement.
One critic of IEX’s application has been the New York-based Modern Markets Initiative. MMI represents high-frequency traders and favors a regulatory regime that’s friendly to high-frequency trading, which the group says makes trading more efficient and affordable.
Now that the SEC has approved IEX, the debate will move on to whether the newly approved exchange is a strong enough private-sector solution to some of the market structure problems that high-frequency trading critics have said IEX exposed.
“The debate will now move to best execution, and whether IEX can improve its quality to be on par with other exchanges,” MMI chief executive Bill Harts said in a statement provided to Morning Consult. “Brokers must be diligent about getting the best deal for their clients.”
Harts said the debate over IEX’s application was notable because it was the “first time [high-frequency trading] had a real seat at the table on these important issues.”
“We alerted people about the increased complexity we expect from IEX’s approval,” Harts said. “The commission approved them, and we accept its decision. We will no longer have to speculate. We will actually be able to see how IEX’s approval affects the market.”
IEX’s approval marks something of a setback for some of the major financial companies, including the New York Stock Exchange, which sounded an alarm about the negative effect that its approval could have on markets.
Citadel LLC, the Chicago-based asset management giant, was regularly critical of IEX in its comments to the SEC, and it lobbied for the commission to rule against the exchange. BATS Global Markets, Inc., a Kansas-based exchange, also withdrew its earlier support for IEX’s application in a February comment to the SEC.
Comments from Washington weren’t quite as frequent or vehement as those from opponents in the industry. Three of the five members of Congress who submitted comments to the SEC — Reps. Steve Israel (D-N.Y.), Brad Sherman (D-Calif.) and Stephen Lynch (D-Mass.) — were generally supportive of the application.
Another Republican House member, Rep. Randy Hultgren of Illinois, indicated support for IEX’s mission. In a statement provided to Morning Consult, Hultgren said he expected “the SEC has thoughtfully weighed the impact on investors, and I look forward to seeing the promised savings passed on to consumers.”
Sen. Mark Warner of Virginia, a Democrat and frequent commenter on equity market structure issues, tweeted that he thought the SEC made the right decision. Warner is the ranking Democrat on the Senate Banking Committee’s subcommittee on securities, insurance and investment.
— Mark Warner (@MarkWarner) June 18, 2016
The offices of Rep. David Scott (D-Ga.) and Sean Duffy (R-Wis.) didn’t respond to requests for comment IEX’s approval. Scott and Duffy both sit on the House Financial Services Committee and sent the SEC separate letters expressing skepticism about IEX’s application and its possible effect on the market regulatory regime.
House Financial Services Committee Chairman Jeb Hensarling (R-Texas) and Senate Banking Committee Chairman Richard Shelby (R-Ala.), who are frequent SEC critics themselves, didn’t respond to requests for comment.
Even for supporters of IEX, though, the SEC’s decision might not be enough to bring solace to market observers who are worried about the possible risks of high-frequency trading. In a late Friday statement, Better Markets President and CEO Dennis Kelleher said that the SEC “must do more” beyond IEX’s approval.
“It must stop the mindless race among [high-frequency trading] firms for the latest technological gimmick and the fastest speed in an endless predatory quest to get in front of and exploit investors’ orders,” said Kelleher, whose Washington-based group is influential among Wall Street critics. “The capital markets are supposed to be engines for the country’s economic security, opportunity, and prosperity, not gambling casinos for insiders to unjustly enrich themselves at the expense of the investing public.”