IEX Exchange: Traders vs. HFT

IEX Exchange: Traders vs. HFT

History of Creation

While working at Royal Bank of Canada (RBC), a global electronic trading team led by Brad Katsuyama, Ronan Ryan, John Schwall, and Rob Park discovered that some market participants had an advantage over others due to speed. Seeing this inequality, they took it upon themselves to level the playing field for traders, primarily long-term investors such as mutual and pension funds. The team decided that the best way to change the system was to build a new exchange from scratch. In 2013, IEX (Investors' Exchange) was created, and by 2016, it became part of the National Market System (NMS). The story of IEX's creation was described in Michael Lewis's 2014 book "Flash Boys: A Wall Street Revolt."

NYSE and NASDAQ – Giant Exchanges and Alternatives

The main volumes of stock trades are conducted on two exchanges:

• NYSE (New York Stock Exchange), founded in 1792, lists over 4,300 securities.
• NASDAQ (National Association of Securities Dealers Automated Quotation), established in 1971, lists over 3,000 securities.

NYSE and NASDAQ collectively control nearly the entire U.S. stock market.

However, since the 1970s, it became possible to establish other exchanges, leading to the emergence of platforms like BATS, Direct Edge, and later, IEX. From that moment, the stock market became decentralized. Furthermore, large brokers began creating their own Dark Pools—essentially mini-exchanges where the rules for executing trades remain secret for both their clients and most participants.

How High-Frequency Trading (HFT) Bots Hinder Large Investors

Over recent decades, exchanges have actively sought to attract traders who perform a high volume of transactions. One such approach was building access points as close as possible to exchange data centers. This proximity, combined with high technology, provides a speed advantage in order execution. As a result, traditional investors cannot execute orders at the best prices because they are outpaced by faster bots.

What Did IEX Propose and Implement?

Before its trading equipment, the exchange placed a coil of fiber-optic cable 38 miles (61.16 km) long, introducing a signal delay of 350 microseconds. As a result, during this delay, no trader can gain a speed advantage over other market participants. This innovation sparked a wave of protests from high-frequency trading supporters, but IEX defended its position. To make speed restrictions legal, the SEC adjusted the rules to consider delays of less than one millisecond as negligible.

Why Does IEX Level the Playing Field?

Because high-frequency bots cannot outpace your buy or sell orders. Typically, if you send an order for 1,000 shares to BATS, but BATS has only 300 available, the remaining 700 are forwarded to other exchanges. At this point, HFT bots intercept and buy the 700 shares faster to resell them to you at a higher price. At IEX, the signal delay was specifically introduced to prevent HFTs from being faster than investors.

What Other Advantages Does IEX Offer?

• Attractive listing. The cost of listing services on the exchange is $50,000 per year. Companies transitioning to the exchange receive at least $250,000 in commission rebates, effectively allowing them to list for free for five years.
• Free quotations. The exchange provides all its quotes at no charge.
• Fixed trading schedule. Trading occurs only from 9:30 AM to 4:00 PM. All orders submitted before 9:30 AM are gathered to set an opening price at the start of trading.
• Open API. The developer and engineering service set is open-source and provided free of charge.

Achievements and Mission

On its official website, IEX publishes trading volumes across all exchanges. The turnover handled by IEX exceeds 2.5%.

"Markets are natural mechanisms for exchanging products, services, and even ideas. At IEX, we believe that everyone should have the opportunity to compete on equal terms with transparent rules and processes. That is why we work every day to build fairer markets," said Brad Katsuyama, CEO.

Fees and Charges

• Quotation fees — None.
• Adding or removing non-displayed liquidity — $0.0009.
• Adding or removing displayed liquidity — $0.0003.
• For stocks priced below $1 — 0.30% of TDV.

How Can This Material Be Useful to Traders?

In the Sterling Trader Pro and RT trading terminals, it is possible to select IEX ECN and trade through it.

Traders who use this exchange are guaranteed that no HFT bot will intercept their orders and execute them at worse prices. Don't miss the opportunity to join the world of a fair market and contribute to its development.