In the last few months, I have had a strange and interesting experience. In early April, I found myself the main character in Michael Lewis's book "Flash Boys." It told the story of a quest I've been on, with my colleagues, to expose and to prevent a lot of outrageous behavior in the U.S. stock market.
Many of us had worked at big Wall Street firms or inside stock exchanges, and many of us believed something was amiss in the market. But it took the better part of five years to discover exactly how the market had been organized to benefit financial intermediaries, rather than the investors, the companies or the economy it was meant to serve. Only after looking at a flurry of market innovations -- 40-gigabit cross-connects, esoteric order types, microwave towers -- did we understand that the market’s focus was less about capital formation and more about giving certain market participants an advantage over others. In the end, we felt that the best way to solve these problems was to build a stock market of our own, which we did.
After the book, our stock market, IEX Group Inc., became a topic of discussion -- some positive, some negative, some true and some false. Fair enough. If you're in the spotlight and doing something different, you should take the heat along with the light.
It's for this reason that we have done our best to resist responding publicly to misinformation about our company -- even when we read memos circulated inside banks that "Michael Lewis has an undisclosed stake in IEX" (he does not); that “brokers own stakes in IEX” (they don't); or articles in the Wall Street Journal that said we let "broker-dealers jump to the front of the trading queue,” putting retail investors and mutual funds at a disadvantage (in reality, all orders arrive at IEX via brokers, including those from traditional investors). Our hope in staying quiet was that the truth would win out in the end. But in recent weeks, the misinformation campaign has hit a new high (or low), and on one particularly critical matter, we feel compelled to set the record straight.
On July 7, Bart Chilton, a former commissioner of the Commodity Futures Trading Commission, wrote an article about high-frequency trading for the New York Times's DealBook. He argued, in effect, that because high-frequency trading has become so central to the stock market, it must be serving some necessary purpose. “At any one time, it is likely that 50 percent of all trades are made by high-frequency traders in United States equity markets," he wrote. "Even trading volume on the IEX exchange, which is trumpeted as creating 'institutional fairness' in the Michael Lewis book 'Flash Boys' about the topic, is now made up of roughly 50 percent high-frequency traders.”
This is false: While high-frequency trading firms are estimated to generate 50 percent or more of the volume on other stock markets, on IEX, high-frequency trading firms currently make up less than 20 percent of our volume. (Note: It’s difficult to predict the optimal proportion of HFT activity in any market, but it should definitely not be half the volume.)
There is a reason for this vast difference on IEX: We have sought to eliminate the unfair advantages HFT has over genuine investors (such as the combination of high-speed data and the ability to place their computers feet away from exchange-matching engines). By using technology to eliminate what we see as systematic unfairness -- and the opportunity for certain traders (who purchase premium access at other markets) to prey on ordinary investors -- we have discouraged a great deal of predatory high-frequency trading on IEX. Those high-frequency traders who do trade on our market (we like to call them electronic market makers) are the ones who do not require some unfair advantage to succeed. By creating a market without distinct advantages, IEX has allowed the HFT crowd to define itself.
Chilton’s claim has the effect of making us look no different than any other market. More generally, all these false rumors about IEX attack the foundation of what our team is trying to build -- a fair marketplace, free of the conflicts of interest that have long plagued our financial markets. I am not sure what Chilton’s motives were in using that statistic, but his sources were suspect at best: He claims they were “industry folks."
One thing we have witnessed in the Internet age is that a fiction can spread, eventually appearing to become fact. A few days after the article, the brokerage firm Raymond James & Associates Inc. published a report about exchanges and dark pools. We read in disbelief as a licensed securities analyst claimed that “IEX isn’t quite the sparkling pillar of righteousness that it is often portrayed in media reports. For example, much-vilified high frequency trading firms are a major source of liquidity on IEX.” His validation for writing this was Chilton’s incorrect claims.
With so many billions of dollars at stake, it is not surprising that some people will spin rich fictions about IEX -- to deter others from believing in a fairer stock market. This is a battle being fought with words and numbers. So before you accept them as fact, make sure you consider the sources and their motivations.
To contact the writer of this article: Brad Katsuyama at firstname.lastname@example.org.
To contact the editor responsible for this article: David Shipley at email@example.com.