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Exclusive: BATS says IEX's 'Flash Boys' speed bump is unfair
November 3, 2015 / 2:33 PM / 2 years ago

Exclusive: BATS says IEX's 'Flash Boys' speed bump is unfair

Brad Katsuyama, President and CEO of IEX Group, Inc. speaks at the Sandler O'Neill + Partners, L.P. Global Exchange and Brokerage Conference in New York, June 4, 2015. REUTERS/Mike Segar

NEW YORK (Reuters) - Exchange operator BATS Global Markets on Tuesday said regulators should require upstart trading venue IEX Group to amend its application to become a registered stock exchange to remove what it called an “unfair and unreasonably discriminatory” aspect.

Specifically, it questioned IEX’s use of a “speed bump” that delays incoming orders to its trading platform by 350 millionths of a second, which IEX says allows it to update ever-changing prices before the quickest market participants can act on out-of-date prices, preventing them from jumping ahead in the queue.

IEX, which was featured in Michael Lewis’s March 2014 book “Flash Boys: A Wall Street Revolt,” applied in September with the Securities and Exchange Commission to become the 12th U.S. stock exchange, which would be called The Investors Exchange. It aims to launch as such in the first quarter of 2016.

“Flash Boys” ignited a furious debate on Wall Street as to whether the stock market was rigged in favor of high-speed traders. It chronicled the efforts of IEX chief Brad Katsuyama and his team to build an exchange that would eliminate any advantages high-speed traders have over other investors.

IEX does not, for example, allow trading firms to pay to locate their servers inside of IEX’s data center, which would reduce trading times. It allows only a handful of order types, and it uses the speed bump.

But the speed bump gives IEX’s own affiliated broker-dealer, which routes orders to other exchanges, a distinct advantage over other routing broker-dealers, BATS said in a letter to the SEC, seen by Reuters.

“As a result of this IEX-only private data feed, other broker-dealers will be routing to IEX’s now stale quote; and the IEX broker-dealer will have an exclusive routing speed advantage over all other broker-dealer members of the IEX exchange,” it said.

BATS asked the SEC to clarify the extent to which electronic stock orders can be slowed down.

In rules adopted a decade ago, before trading occurred at near-light speed, the SEC said automated trading centers must be able to accept automated quotations which are “immediately and automatically” executed. It said this “precludes any coding of automated systems or other type of intentional device that would delay the action.”

IEX currently matches up buyers and sellers of stocks as an alternative trading system (ATS), which has less regulatory burdens than an exchange. It has reached a market share of nearly 2 percent and on its busiest day traded 414 million shares, making it the third-largest U.S. ATS.

As an exchange, broker dealers and other trading centers, such as those run by BATS, Nasdaq Inc, Intercontinental Exchange Inc, would have to send their orders to IEX if IEX were displaying the best prices available.

BATS said it “applauds” IEX for agreeing to the higher standards applied to exchanges and that IEX should be granted registration as a national securities exchange, once its application is amended.

Reporting by John McCrank; Editing by Chizu Nomiyama

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