Citadel is taking no chances that the SEC will get its message about IEX Group’s application to become a national securities exchange. The privately-owned, Chicago-based high-speed-trading firm, institutional asset manager and market maker sent its third missive to the SEC on Monday, and it’s not the only interested firm signalling serious concerns via a flurry of activity that threatens to continue until IEX submits the revised application they all say is necessary
Citadel has apparently not met with or spoken on the phone with Securities and Exchange Commission Chairwoman Mary Jo White or the other commissioners or staff, according to notices posted so far by the SEC, relying instead on three strongly worded comment letters to make its points.
Rival exchanges—BATS Global Markets, Nasdaq OMX Inc
, Intercontinental Exchange Inc’s New York Stock Exchange
unit —have also written at least one comment letter, each adamantly opposing the IEX application in its present form because it creates, in NYSE’s words, an “unfair, complex, and opaque exchange.”
As of Dec. 7, the SEC has posted 31 letters about the IEX application, including two from IEX itself in an attempt to explain its application further and respond to the critics.
IEX also met with White and her staff, and staff from Commissioner Kara Stein’s office, in two separate meetings in mid-November. The NYSE has also met in person with staff from Stein’s office. Representatives from Nasdaq met White’s staff about IEX on Dec. 4 and the notice was posted the same day.
An IEX spokesman told MarketWatch, “Investors and participants we are trying to protect have commented positively, while negative comments have come from firms that have a lot to lose if our application is approved. This is the fight we expected all along and we have no plans to back down now.”
Walt Smith, vice president and head of the U.S. equities business for Nasdaq, told MarketWatch, “The SEC has to consider how a structure that may be suitable for the IEX dark pool fits into the public exchange ecosystem where fairness and displayed price discovery are paramount.”
What’s the biggest beef competitors have with the IEX exchange application?
Larry Tabb, CEO of Tabb Group, a market structure consultancy, explained in his comment letter that the IEX order matching engine “employs a speed bump to slow orders arriving from/departing to clients of the IEX exchange.” That simple difference sets IEX apart from its competitors, as described by Michael Lewis in his book “Flash Boys: A Wall Street Revolt,” which promoted the speed bump as a way to save a “rigged” market from high-speed traders.
What really gets the exchanges and Citadel hot is that this set-up, they say, forces brokers to use the IEX router or be at a competitive disadvantage to those that do. The issue, according to these comment letters, is that orders that use the IEX router that are partially filled do not go back over the speed bump.
Citadel says that’s unacceptable.
“Investors are running a 100-yard dash,” says John Nagel, Citadel’s senior deputy general counsel and the signatory of its three comment letters, “and IEX wants to give its own broker-dealer a 15-yard head start.”
Nagel warns the SEC that the proposed IEX structure is “deliberately designed to eliminate” the current level playing field “by delaying the reporting of execution or other order handling information to all broker-dealers, while allowing the IEX affiliated broker-dealer to operate without any delay.”
Bill Harts, CEO of the Modern Markets Initiative, an organization advocating for the role of high-frequency trading firms in the markets, also thinks the idea promoted by the Lewis book that IEX is anti-HFT is wrong. “HFTs love IEX. They use it to provide liquidity and that’s good for everyone.”
Citadel agrees. In its Nov. 30 letter to the SEC, writes, “We are consistently one of the most active participants on IEX, and on some days the most active participant.” The firm “is very familiar with” IEX, Nagel told MarketWatch in an interview. “Our idea of getting it right,” says Nagel, “is prohibiting intentional delays for protected quotes.” A quote is protected when it goes through an official stock exchange.
All of those interviewed said that a revised application for IEX, incorporating responses to criticisms and additional clarification, is expected. What is not yet known is whether the SEC will put that revised application through another comment period.
A spokeswoman from the New York Stock Exchange did not respond to a request for comment. A spokesman for BATS says it does not comment on conversations with regulators.