The U.S. Securities and Exchange Commission is expected to decide Friday on whether to approve a new national stock exchange that would thwart the ill effects of high-speed trading. The agency has a deadline on Saturday to decide on the matter.
IEX — short for Investors' Exchange — is the brainchild of Brad Katsuyama, the high-frequency trading critic featured in the best-seller "Flash Boys."
The IEX exchange would operate in such a way as to slow down high-speed traders who, IEX founders say, have an unfair advantage over investors using fewer technological tricks.
Yale University law professor Jonathan Macey said you could think of an average investor as a truck that needs to gas up at a station. Now imagine that a motorcycle — a high-speed trader — is able to figure out the truck's intentions using sophisticated computers and algorithms. Then the motorcycle zooms ahead to the next gas station and buys up all the gas.
“When the truck driver finally shows up at the station on the highway, the motorcycle guy has all the gas and is only willing to sell it to him at a higher price,” Macey said.
IEX’s solution, Macey said, is to put a kind of speed bump along the motorcyclists' or the high-speed traders’ paths so they can’t make such a maneuver.
“So they're not going to be at a distinct advantage they might be on many of the other current exchanges and other venues,” said Tyler Gellasch, executive director of Healthy Markets Association, a group of institutional investors.
IEX is already operating as a private trading venue. It's not clear how much influence it would have as a public stock exchange. But Gellasch said brokers would be forced to route trades through IEX in its public form — if it offers the best prices.