IEX: Redefining The Modern Trading Venue

With Ronan Ryan, Chief Strategy Officer, IEX

How are your relationships across the Street developing?
Ronan RyanThe buy-side is an essential component to ongoing market change. A few years ago the buy-side started asking, “Where are you routing my order?” This has morphed into a demand for more granularity and more control over their orders. By virtue of the fact that the buy-side originated the order, they are owed an explanation of what happens next, and I think IEX is part of the next metamorphosis of this trend. As long as the buy-side continues to realise that they are the key to affecting change in the markets, I think it’s a win-win for everyone.

As we went to roll out the platform, the buy-side helped us get the brokers to connect. So from day one, we had virtually every broker connected to us, which is rare for a venue that’s not owned by the broker community. The buy-side is asking us how best to use IEX; they are the ones helping us with some suggestions. They are working with brokers to configure custom algos to better utilise IEX. So it has just been phenomenal how involved the buy-side has been in this process, and continues to be so.

And the relationship with the sell-side?
It’s been fantastic. We’re buy-side owned but we only have sell-side subscribers. We currently stand at 69 connected brokers with more in the pipeline. Of the dark pools in the US we’re the only one not owned by the brokers, so this sell-side adoption to our venue is critical to us as we didn’t create a Liquidnet whereby the buy-side comes directly to us. The sell-side at the beginning showed some reservations over us being yet another venue to connect to, but now that we’ve shown some legs and we’re printing some volume, the feedback from the brokers is great. In no way is it the intention of IEX to pit the sell-side versus the buy-side. The only way for this to scale and scale for the greater good of the market and both the buy-side and the sell-side, is if we remain neutral.

The sell-side is also setting up meetings for us to meet with their buy-side clients and helping us better configure their systems to interact with IEX. So it’s become very consultative: they are considering our opinion and don’t feel we’re ramming a platform down their throat.

Is there a critical mass for an exchange, and are you there yet?
We’re at a point where we’re breaking even on several days, but I would say there is a “rising tide lifts all boats,” effect. We have a critical mass in terms of the number of brokers and the constituents that are connected to us, but it would be somewhat reckless to start sending vastly more volume to IEX. You need to dip your toe into the water, then dip another toe into the water and slowly build flow. We currently have the biggest brokers connected to us, but they’re not all going to throw a few hundred million shares our way. We recently ended up at around 0.6 of a percent of overall ADV, which is still big for a venue as young as IEX. What is happening is that the reallocation and the amount of orders that we’re getting, (both the size of the orders, how long each order rests and how many orders we’re getting from the brokers) is growing; not always day by day, but week by week for sure. So it’s a matter of proving ourselves, earning more volumes: the ball is firmly in our court. The buy-side is working with the sell-side to create custom algos to maybe oversize IEX a little bit more than they would otherwise.

In our first six months, we’ve matched over 3 billion shares. Considering we are a venue that has no broker ownership, no high frequency firms who own us, it’s pretty remarkable but we haven’t let out a sigh of relief yet. If we end today at this volume, we’re making a little bit of money but we haven’t really affected any change. So we’re very happy with where we are, based on the trajectory of how fast we have got here, but we still have a long way to go.

To what extent are you having to redefine how an exchange measures itself against its peers?
We’re still a dark pool and there’s no standardisation as to how dark pools or exchanges report their statistics, which is a difficulty. So, for example, average trade size can be measured in several different ways; we have IEX statistics and we put out daily stats that are very consistent with what other venues put out because that’s what people expect to get from venues.

We also monitor the standard things; we routinely do a hundred thousand share prints, our biggest print to date being around 428,000 shares. The feedback from the buy-side when they’re on the side of those trades is very positive; they’re absolutely thrilled.

On the back end of things, we’re doing a lot of different toxicity studies and we’re getting vast amounts of day to day data. We’ve ordered a fleet of data servers and we’re starting to look at IEX analytics and how we can best present the flow on our venue. We have only been operating six months so we don’t claim to have all the answers, but we’re doing a huge amount of analytics, we’re taking all the direct feeds, we save every trade, we’re trying to come up with a better way to measure because at the moment, it’s all about volume and there are certain strategies out there that are just manufactured volume. A common question we are asked is: if IEX is supremely successful, aren’t we going to take volume out of the market and will that impact liquidity? The answer is yes, if IEX went mainstream across all US equity markets, it would take volume out of the market, but it wouldn’t impact liquidity. A lot of volume out there is someone buying from one seller to sell to another buyer in a fraction of a millisecond, which is providing liquidity to a certain extent, but it is unnecessary provision, unnecessary mediation.

So, while we are making an impact because we’re disruptive, we need to learn the industry ourselves in our capacity as venue operators before we go out and tell people what those new benchmarks are.

Is there a point at which something needs to change in terms of regulation, or is this something that’s best served by market solutions?
Clearly our belief is in market practitioners and market solutions. The market doesn’t need or want broad stroke regulatory change. However, we are very supportive of the regulators at IEX and they’re supportive of what we’re doing. What I would say is that the SEC has become far more data driven. So instead of using white papers to base opinions on, now they’re taking in a lot of the data. They’re doing a lot of that analytical work too. We’re very happy to see that the regulators are open to looking at the data but they’re also open to market solutions.

On high frequency trading, we find ourselves defending high frequency trading more often than not because it’s another broad stroke definition. In our opinion there are good high frequency strategies, there are some predatory high frequency strategies, there are some that I would call unnecessary high frequency strategies, but there is no single target to shoot at. You have to build a market whereby those unnecessary or those predatory strategies are negated by technology. We are 100% pro-technology. We have many high frequency guys working at IEX. There are 34 of us; probably 75% of us are technologists and we took the approach: what would a predatory strategy need to survive? What would it need for an arb opportunity? How do you referee a market so that those things can’t happen?

We don’t do maker-taker; we don’t have a whole range of order types. But it’s impossible for any industry practitioner to make a call on who is “good”, “bad” or “unnecessary”. It is probably unreasonable to expect regulators to do it on their own.

Neither speed nor technology is the enemy. Even at IEX, here we are taking in and normalising the market data in 260 microseconds. We’re delaying something by 350 microseconds. That doesn’t mean that low latency technology is bad. It’s just a potential loss of utility. The introduction of technology has had a positive impact. Trading is cheaper. You can’t really argue that, but what we’re saying is that the utility could be greater if certain elements were cleaned up.

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