With Sara Furber, Head of Listings, IEX
IEX was launched more than four years ago to protect investors from unfair advantages enjoyed by predatory high frequency traders in the equities secondary market. Now, IEX is taking an initiative in the primary markets that should alleviate many of the problems encountered by corporate issuers with listings in other exchanges.
In early August, IEX gained approval from the Securities and Exchange Commission (SEC) to introduce opening and closing auctions. Moreover, the SEC also gave the go-ahead for IEX to enable the transfer of listings from other exchanges and hold opening auctions for initial public offerings (IPOs) on listing day.
The decision cleared one of the last significant obstacles for IEX to become a primary market venue for companies in mid-October, challenging the duopoly held by the New York Stock Exchange (NYSE) and Nasdaq.
For its operations, IEX will support security directory and auction information messages on its market data feeds, introduce dedicated IEX-listed test symbols and quote its listed securities on Network B data feeds, and generate and distribute daily list files.
The IEX auction process provides electronic price discovery mechanisms that match orders in IEX-listed securities at a single price using a double auction. These auctions enable IEX participants to execute against On-Open and On-Close interest at the exchange.
During the process, IEX will calculate and disseminate current price, size, imbalance information, auction collar information and other relevant information about future auctions. It will also introduce four new order types for use in auctions exclusively: two for the opening auction (Market-On-Open, Limit-On-Open) and two for the closing auction (Market-On-Close, Limit-On-Close).
Perhaps naturally, the incumbents would prefer that they retained their dominant position, but the SEC has clearly shown its preference for further competition and choice, and has been constructive during IEX’s application process.
IEX’s auction aims to broaden investor participation and prevent market manipulation, which is reflective of IEX’s core philosophy. In fact, IEX was first started to protect investors from predatory traders, and mitigate against speed advantages. Long-term investors in particular have been enticed by IEX’s protective innovations, superior execution quality, and their free-access, pay-as-you-trade pricing model.
When it launches its primary market capability, IEX initially plans to persuade companies to shift their listings from other exchanges, then later, after building a track record for successful auctions and accumulating a critical mass of listings, it will be in a position to attract IPOs.
IEX should also increase its share of secondary market trading because a company’s stock tends to trade more frequently on its home exchange at the open and close of trading. Moreover, between 5% and 15% of daily trading volume takes place at the opening and closing auctions, and these are the segments that IEX aims to tap.
Arguably, NYSE and Nasdaq compete largely on branding and marketing. IEX believes it offers companies a service-oriented value proposition, that aligns itself with and takes responsibility for the interests of its shareholders. IEX intends to build and sustain relationships with its clients and provide them with a more supportive voice.
Just like IEX’s market data, IEX’s auction data will be free with equal access for all participants, which creates a level playing field for all investors. IEX will disseminate information every second, compared with longer periods by Nasdaq and NYSE.
IEX also plans to offer an alternative pricing model to its listed companies, that reflects it’s client-centric, service driven approach. In practice, this means a lower-cost, flat fee; a refreshing alternative to the complex array of additional levies are charged for corporate actions, such as mergers, rights issues or stock-splits. This reflects feedback from companies who felt they were being treated as products, rather than clients and sometimes faced surcharges in excess of their annual listings fee.
In order to compete, other exchanges will likely have to offer better services – although business models that rely on complex fee structures and by selling data might struggle to change.
Of course, there will be challenges. IEX will need to overcome some understandable inertia in order to attract listings by companies that are drawn by the apparent prestige of a NYSE listing and the glamour of ringing the opening bell, the ticker tape in Times Square and the CNBC market commentary.
However, ethical and fiduciary responsibility should prevail and listing choices are likely to be based on efficiency and cost, rather than branding.
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