Brad Katsuyama, President and CEO, IEX Group, Inc.
An update on our exchange application process
Dear IEX Subscriber / Valued Partner,
On behalf of the IEX team, I am reaching out to both our Subscribers on the sell-side and our Partners on the buy-side to share our expectations and plans regarding IEX’s exchange application process, but first I’d like to thank you for your support thus far.
The IEX team would like to extend our sincerest thanks for your business, engagement, and support. Since our founding in March 2012, you’ve helped to take IEX from an idea – that markets can better serve investors and their agents – to the first buy-side owned ATS, which launched October 2013, and now to one of the fastest growing markets in the United States trading over 7,000 unique symbols each month and hitting recent record highs of 1.86% market share and 414 million shares of subscriber volume in a single day. We fully realize that this market could not have been built without tremendous support from investors, brokers, and market makers and we could not be more thankful.
The Investors Exchange (pending SEC approval) aspires to be the exchange that serves a broad cross-section of market participants including investors, brokers, market makers, and issuers. Securing approval to operate a national securities exchange would allow us to compete directly against the incumbent exchanges to effect lasting, systemic change.
IEX believes that the role of the exchange in the capital markets ecosystem is a critical one – helping companies raise capital and helping investors in those companies efficiently allocate capital by matching buyers and sellers on simple, fair, and transparent terms. When we look at the state of today’s market, we do not see exchanges fulfilling this role effectively, but we do see an opportunity to honor key tenets within the Securities Exchange Act of 1934, mainly “the protection of investors and the maintenance of fair and orderly markets.”
IEX believes that technology and increased industry sophistication should have significantly lowered the costs that exchanges impose on our industry. When considering the evolution of market data and technology fees levied by the incumbent exchanges, the opposite effect has occurred as the fixed-cost burden on industry players, especially brokers and market makers, continues to rise. Rather, IEX believes data and technology should be provided at a reasonable cost or no cost at all, with the goal of institutionalizing fairness for the greatest number of market participants. This continues to be the philosophy that drives our business decisions.
We firmly believe that IEX can be an agent of change to address these issues, and many more, in pursuit of creating more efficient capital markets, where exchanges fully commit to serving issuers, investors, and their agents, while charging a reasonable and transparent fee for services provided.
The Securities and Exchange Commission published our exchange filing on sec.gov today. In the weeks to come, the Commission will publish our filing to the Federal Register, triggering a 45-day period of public comment and an additional 45 days of Commission review. This puts potential approval squarely in the midst of the holiday season. We understand the constraints and concerns with a new exchange launch during that time frame, and the likely “code freeze” that many industry participants abide by. We are excited to get moving, but we also want to avoid overburdening the industry during the holidays, and as such, we plan, pending Commission approval, to begin operating as an exchange in mid to late Q1 2016.
A few notes about what you will and will not find in our exchange filing:
- You will find our “POP” (Point of Presence). We feel confident that a uniform distance imposed equally on all IEX participants, via a physical cable, creates a level playing field that allows IEX to protect orders from being disadvantaged by those who may have access to faster market information and connectivity.
- You will find Listing Standard Rules. It is important to note that IEX will not be operational as a listing exchange at launch. We are including listing standards, which have already been approved by the Commission for other exchanges, in our initial filing in order to begin certain administrative/regulatory processes and to provide optionality after our launch. We are honored to be receiving significant inbound inquiries from public companies regarding our intention around listings and while our focus so far has been to build a market that better serves the investor, we strongly believe we can help issuers improve their experience with the markets as well.
- You will not find Broker Priority. We initially designed our Broker Priority model to maximize the chance that a single broker, with both a buyer and seller of the same security, could first look to match those orders on IEX at no charge, before trading any residual shares against other IEX participants. The ability for brokers to “internalize” when they have earned an order from both the buyer and seller of a security is the primary reason for broker dark pools and is an outcome that cannot currently be achieved on any U.S. exchange. Given the rise of off-exchange trading volume and Broker ATSs (dark pools), we felt that this feature would allow IEX to be a neutral place for brokers to send orders without missing opportunities they have earned to internalize. Statistically Broker Priority did not have a material effect on our business (trading less than 1% of IEX volume on a daily basis), so we decided that the novelty of this feature was best pursued in isolation and have removed it from our exchange filing. We still plan to charge no fees when a broker trades with itself, pending filing of our fee schedule with the Commission, and we may consider refiling to request SEC approval to add Broker Priority in the future as we believe it would benefit the broader market and its participants.
Our team will be communicating with you over the coming weeks with more detailed information about the contents of our proposed rule book, the membership process, testing and deployment plans, and FAQs. Please share any and all feedback you have on how we can better serve you and your customers.
We are truly excited to work with you to build a simpler, fairer, and more transparent marketplace.
Chief Executive Officer and Co-Founder, IEX
* Pending approval by the SEC.