LEVELLING THE PLAYING FIELD.
Ronan Ryan, chief strategy ofﬁcer discusses how IEX is creating a fairer trading venue.
There has been a lot in the press about the company’s view regarding high frequency traders. There are differing reports so I wanted to ask what the real perspective was?
One of the problems in the industry is that people like black and white answers but it is not always possible to give such answers. From day one our proposition has been to give fair access to all participants. As with any strategy, there are good high frequency trading strategies and some predatory ones. Some ﬁrms that could be labelled as HFT look like traditional market makers in trading in a consistent way on both sides of the market and providing healthy liquidity. We are pro technology and our aim is to create a fairer market. We have met with HFT ﬁrms and although the press might give off the perception that we are anti-HFT, we are not. We do not want to ban HFT from the market. In fact we’ve met with multiple high-speed trading ﬁrms with some telling us that we do not ﬁt their strategy while others are interested in IEX.
What were the drivers behind creating IEX?
The founders of the company are from RBC and one afternoon we were in a conference room assessing our technology product THOR, which we launched in 2009. It normalises the amount of time it takes for data to travel to all the exchanges, neutralising the speed advantage of predatory strategies. It was a real differentiator for RBC and we rose in the Greenwich Associate rankings for customer service for electronic trading to number one from 19 within less than a year in 2011.
At the time, THOR was only used by RBC clients and we thought it would be beneﬁcial to offer the technology to others. The idea was to build a utility that created a level playing ﬁeld for trading ﬁrms of all types and not just for the fast or the slow. If you look across the whole exchange universe we are also the only venue that is owned and funded by the buyside. There are around 20 investors including MassMutual Ventures, Massachusetts Mutual Life Insurance Company and Franklin Resources as well as private investment ﬁrms such as Cleveland Capital Management and TDF Ventures. We have also raised funds from venture capital ﬁrms such as Spark Capital and Bain Capital Ventures.
How did you decide what type of venue you were going to create?
We sat in a room with some people from HFT ﬁrms, exchanges and people who had left with us from RBC. We looked at what the key components would be that would make us successful and decided not to co-locate as other exchanges and venues have. Virtually all the 11 exchanges and 43 dark pools in the US are in four data centres in New Jersey. We decided to put our matching engine in one of the data centres and create what the press has called a speed bump. This delays incoming orders by 350 millionths of a second, or a thousandth of the time it takes to blink, but more importantly it gives us the time we need to refresh our view of the market. This means that high- speed traders will not be able to trade at IEX with data we don’t already know.
What is your relationship with the sellside? I’ve read leading brokers have signed up with you.
Although we are owned by the buyside, they do not trade directly on the platform. We only allow registered broker dealers to trade on the platform and 13 months into operation the relationship has become stronger. In November, Goldman Sachs, JP Morgan, Morgan Stanley, Bank of America, Citigroup, Deutsche Bank, UBS and Barclays were among at least 17 brokers that have adapted their algorithms to allow automatic routing to us. Altogether we have 135 connected as participants and their adoption has been critical to our success. We had no intention of pitting the sell and buyside against each other and we realised that people may have felt threatened if we circumvented the brokers. Our ﬁrst year has gone by very quickly and we would not have gotten here without the support from both sides.
I hear you just captured 1% of equity market share – what is the next milestone?
In November we captured 1% of US ADV (Average Daily Volume) for the ﬁrst time, although we have gone above that number recently. This compared to an average of 0.764% in October and 0.543% in May. That might seem small to some people, but according to some industry sources, we have quickly grown to be one of the largest of the 40+ dark pools.
Our biggest goal over the next 12 months is to achieve exchange status. We recently raised $75m from investors and have shared a draft Form 1 with the Securities and Exchange Commission. We will roll out functionality throughout 2015 and have already announced that we plan to publish a displayed quote through our TOPS data feed in the ﬁrst quarter of 2015. This should help market participants identify available interest in our market. The quotes shown will be non-NMS protected, meaning they will not be included in determining the National Best Bid and Offer but they will be accessible to all our participants.
As a new exchange, we have the chance to create a new model that is more transparent and accountable to both sellside and buyside stakeholders, for example in determining how exchanges should charge for market data.
What are the challenges and opportunities for the company?
In terms of challenges, we need to stay focused on what we are doing. The model has proven that it works and we are working towards getting exchange status. Trading venues typically do not talk to the buyside and we want to continue to learn how to interact with them and how we can improve the venue.
© BestExecution 2015