The war of words between the New York Stock Exchange and IEX, America's newest stock exchange, just took a strange turn.
Back in January, NYSE announced plans to introduce a 350-microsecond delay in trading on its market for small-cap companies. The delay would apply only to NYSE American, the small market previously known at NYSE MKT, and would be similar to the so-called speed bump introduced by IEX.
These speed bumps are intended to slow trading down and level the playing field between big investors and tech-driven high-speed traders. The idea, championed by IEX, has been controversial and was met with fierce opposition from established trading platforms — including the NYSE.
The NYSE had lobbied aggressively against approval for IEX from the Securities and Exchange Commission, largely as a result of the speed bump. The NYSE said IEX's speed bump would "result in the investors receiving stale and misleading quote information."
But the IEX got its approval, and now NYSE is introducing its own speed bump — at least in one corner of its trading network. Where the twist just appeared is that, now, IEX is the one pushing back against the NYSE's plan for a speedbump.
NYSE recently filed a proposal with the Securities and Exchange Commission to introduce the speed-bump, and IEX just filed a letter commenting on the proposal. According to IEX, NYSE's proposal "should be either re-filed or disapproved."
Here's an extract from the IEX letter:
NYSE is now proposing its own version of a speed bump, and it gives as the only justification that it wants to offer more choice in exchanges. But NYSE says nothing about its choices in putting forth the Proposal, how it thinks investors and the quality of the markets will be affected, or how MKT would compare in those respects from the three other exchanges it operates. Especially considering its prior statements, we think NYSE is required to provide a complete explanation to gain approval under the standards set by the Exchange Act.
Just to revisit how it has all gone down, this bullet point guide might help:
- IEX applied for exchange status with a novel 350-microsecond speed bump feature
- NYSE pushed back aggressively
- IEX won stock exchange approval
- NYSE decided to introduce a speed bump to one of its four markets
- IEX pushed back
The battle between NYSE and IEX has been hard to follow, and spans across multiple different market structure issues, ranging from speed bumps and so-called stale quotes to the cost of market data. Multiple other firms have engaged on each of these topics, sometimes forming odd allegiances. At one point, a discussion around market data descended into an argument over Game of Thrones references.
On this occasion, Healthy Markets, an investor-focused non-profit, has also filed a comment letter expressing skepticism over NYSE's speed bump proposal. It said:
Given the relatively tiny market share occupied by the presumed competitor (IEX), it’s more than a bit puzzling why another exchange would be rushing into compete with it. Taken along with the extreme brevity of the the NYSE Mkt Proposal (it’s only a few pages), and the vagueness of its justification, it appears as though the proposal may be being sought as a placeholder, to be further adjusted and potentially used in the future. The Commission should view such a vague proposal with a healthy skepticism.
We sat down with NYSE president Tom Farley back in January, and asked then about the decision to introduce a speed-bump. Here's the relevant extract (emphasis added):
Turner: You said earlier that as a general principle, NYSE is pro-simplicity, so with that said can you talk me through the thought process behind introducing a speed bump?
Farley: There are more or less four different models out there in the US for trading securities. There is out NYSE hybrid model, floor and electronic, that de-emphasizes speed with the use of floor brokers and DMMs. There is the all-electronic model that is quite prevalent at Nasdaq and BATS and elsewhere. Then we have our NYSE Arca business, which works quite well as a primary listing venue for ETFs and structured products. There is the speed-bump model, and there is the first speed bump that the SEC allowed from IEX, we've seen subsequent speed-bump requests from Chicago, we've had a distant cousin from Nasdaq with the long life order. That's the third model.
The fourth model is what I will call "other." You can almost look across the pond as well. You have a greater reliance of auctions, would be one example of that. Taker-maker, rather than maker-taker. That gives you an idea of the different models out there.
We want to be able to offer choice to our institutional investor customers, so our goal is to have all four of those. NYSE, Arca, the speed-bump model on NYSE American. We think we can improve on the existing speed-bump model, because frankly, we can do it a lot cheaper for customers.
The price out there for customers trading on the speed bump model, this kind of midpoint trading, is very, very high, and so we think we can do it at a much more effective price, and our institutional customers who are working hard to satisfy their fiduciary obligation will appreciate that, that's our view. In addition, we think we can do it better in terms of attracting lit liquidity, because the existing speedbump model is substantially all dark trading.
Finally, the fourth model is the NSX medallion that we've announced. We've not announced exactly what we're going to do, but suffice to say, that's how I'm thinking of it, as that kind of fourth model. That will be our sandbox to try some of those other models in the not-too-distant future.
Turner: You had fought pretty aggressively against the IEX speed-bump model. Can you see why it appears odd that you're now employing the same model?
Farley: Our view is that we need to work together as an industry toward consolidation and simplicity. The way we operate our business is, we are going to do everything we can to have the best listings franchise, and we're going to look at what competitors are doing, and whether they may or may not be competing for our listings business, and respond in a way that enables us to protect that. We're going to be listening to our institutional investors, when they say, "Hey, with respect to the models that are allowed by SEC regulations, congressional laws, we want you to be offering choice."
That doesn't mean that we don't believe in simplification. We absolutely do. We're the first ones to throw our hands up. In fact, we've told the industry for three years that we think that there is a much better way out there. That is, to respect the primary of the public quote — in other words, if someone puts a price on a lit exchange, and someone wants to trade at that price, make them trade with the person that did that first.
Access fees, we'd be willing to agree to a lower access fee cap as part of that. Even just those two things alone would result in a great deal more simplicity and less fragmentation, and frankly, would not be particularly good for two of the four medallions that we own.
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