The US is getting a new stock exchange from the most prominent critics of high-frequency trading.
After months of delays and a brutal lobbying battle that divided Wall Street, the IEX Group Inc on Friday won approval from the US Securities and Exchange Commission (SEC) to become the nation’s 13th official stock exchange.
IEX is run by the people at the center of the Michael Lewis book Flash Boys: A Wall Street Revolt, which profiles the early efforts of the IEX team to create a trading exchange that would be somewhat shielded from high-frequency traders.
Other exchanges and trading firms had urged the SEC to reject IEX’s application.
IEX opponents, including the other stock exchanges, have argued that the structure of the new exchange will add unnecessary complexities to an already complex market and potentially hurt small investors.
However, the three SEC commissioners all voted to approve the IEX exchange, with one commissioner, Michael S. Piwowar, a Republican, dissenting on a few points.
“Today’s actions promote competition and innovation, which our equity markets depend on to continue to deliver robust, efficient service to both retail and institutional investors,” SEC chairwoman Mary Jo White said in a statement.
The most novel and controversial feature of the IEX exchange is a speed bump that would slow trading slightly to throw off traders that rely only on speed.
The speed bump slows trades by only 350 microseconds — or millionths of a second — but that is an eternity in a stock exchange universe in which computers can buy and sell stocks in nanoseconds — or billionths of a second.
NASDAQ, and other exchanges, have said that the IEX’s speed bump would violate rules mandating that exchanges make their prices available to all parties at the same time.
IEX’s critics have also said that the speed bump could add complications to a stock market infrastructure that is already criticized for its complexity.
In a statement, the SEC said the commissioners had “determined that a small delay will not prevent investors from accessing stock prices in a fair and efficient manner.”
The SEC did say, though, that within two years it will do a study to examine whether the delays lead to problems in the markets.
If nothing else, the approval of the exchange would provide an opportunity to test the many competing theories about what impact the IEX’s speed bump will have on trading.
The IEX has been a flash point in the broader debate over technological changes that have altered the basic functioning of the US stock markets over the past two decades.
IEX won support — and financial backing — from several large mutual fund companies, which said the exchange would help them trade more cheaply and efficiently, as well as from hundreds of small investors, many of whom read **Flash Boys** and wrote to the SEC.
IEX chief executive Brad Katsuyama said throughout the application process that IEX would provide a market-based solution to the problems created by high-frequency trading rather than requiring the SEC to change the rules governing the markets.
IEX has already been operating as a private trading pool and has recently been attracting about 1.6 percent of all daily trading volume.
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