Meet IEX, The Alternative Stock Exchange That Shuts Out Robot Traders

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.

Critics say that HFT contributes to market instability and cheats investors by collecting data on their trades before they’re executed and then acting on that information.

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.

IEX is connected to 11 national exchanges, as well as the LavaFlow ECN.

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.

Growing popularity

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.

And in an internal memo obtained by Bloomberg, Wall Street giant Goldman Sachs revealed that it was one of the largest players on the exchange, and that a successful IEX could serve the market well.

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.

Ole Skaar