The IEX alternative trading system wants to banish high-frequency robot algorithms from stock trading.
High-frequency trading (HFT), the practice of using software algorithms to buy and sell stocks within milliseconds to capitalize on tiny market movements, has drawn controversy lately.
Dissatisfied with the state of the stock market, many are moving away from the HFT-dominated stock exchanges and into alternative systems.
The IEX alternative trading system
One such exchange is the New Jersey-based IEX, which deliberately adds a 350 millisecond delay to each trade in order to deter HFT algorithms. It accomplishes this by routing all orders through a 38-mile length of fiber optic.
This ensures a level playing field, allowing the IEX matching engine to find the best available buy/sell price before other market actors (such as HFT algos) can increase or undercut the offer.
Operating since 2013, IEX was originally formed as an alternative trading system, also known as a dark pool.
That meant it was a a private stock trading platform for brokers and investors, not subject to the stringent transparency requirements of regular exchanges. However, it voluntarily published its private regulatory report, which most dark pools don’t.
In 2016 IEX won regulatory approval from the SEC to become a new stock exchange.
Since its inception, the IEX’s average daily volume has enjoyed substantial growth .
In early 2016, it accounted for a record 1.783% of the total U.S. stock market.
It has also received some high-profile endorsement. Norway’s sovereign wealth fund, the largest in the world (and owner of $521 billion in stocks), has publicly supported the exchange.
As it gains in popularity, it may even move outside of stocks. Its head of business development, Jay Fraser, told the Wall Street Journal that it may expand to quant, ETF, and derivatives trading.
Updated. Cover photo courtesy of IEX, modified by Curiousmatic.