Exclusive: Upstart trading venue IEX may prompt U.S. market rule change

Wed Jul 30, 2014 8:12pm EDT
 
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By John McCrank

NEW YORK (Reuters) - U.S regulators may relax rules that require the fastest possible execution of securities trades, potentially helping upstart trading venue IEX Group's plans to become a full-fledged stock exchange.

IEX was described in author Michael Lewis' book "Flash Boys: A Wall Street Revolt" earlier this year as a place for investors to place buy and sell orders without worrying that they are being "front-run" by other traders whose order transmission speeds are faster than theirs.

IEX has put in place a "speed bump" – delaying incoming orders by 350 millionths of a second, or a thousandth of the time it takes to blink -- on its trading venue, letting it update prices faster than the fastest market participants can calculate them, so that high-frequency trading firms cannot use their speed advantage to front-run others.

The strategy has proved popular with investors, who have made IEX the 7th most used alternative trading system in the U.S. for the week of July 7, according to data from the Financial Industry Regulatory Authority. However, instituting any sort of trading delay clashes with current market rules for exchanges, which is eventually what IEX has said it wants to be.

The U.S. Securities and Exchange Commission may decide to revisit the rules, keeping with its stated goal of protecting investors, while allowing IEX to keep its speed bump when it becomes an exchange, according to a person familiar with the SEC's thinking.

Though the commissioners will make a decision only after IEX applies to become an exchange, the SEC is likely take into consideration that the high-speed trading phenomenon and the proliferation of such firms took hold only after the rules were written in 2005, the person said.

IEX and the SEC declined to comment on the use of speed bumps and their legality under the current exchange rules, called Regulation National Market System (Reg NMS).

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Traders work on the floor of the New York Stock Exchange shortly after the market's opening in New York July 28, 2014. REUTERS/Lucas Jackson