Updated on November 18 at 5:28 p.m. ET
In his 2014 book Flash Boys, Michael Lewis introduced readers to Brad Katsuyama, a Canadian trader who was seeing the world of high-frequency trading for the first time. Katsuyama observed an entire market in which traders, using paid, privileged access to high-speed trading technology, made huge piles of money simply by getting in their orders ahead of everyone else. Lewis’s book sparked regulatory action, and in 2014 the New York Stock Exchange paid the SEC $4.5 million in penalties for providing these high-frequency traders an infrastructural edge to get their orders in faster.
In response to what he found, Katsuyama, along with two other traders, started IEX (which stands for Investor’s Exchange), a marketplace that uses a 350-microsecond “speed bump” so that all trades come in at the same time. “The speed bump is similar to technology deployed by other exchanges: coiled fiber between the point where some users connect to the exchange and the exchange’s trading systems,” says John Ramsay, the chief market policy officer at IEX. “But we use it to maintain a set distance between us and all of our users.”
IEX has so far been a fringe response to the prominence of high-frequency trading, accounting for only 1.4 percent of U.S. stock trades (IEX says currently their share for the month is a bit more than that—closer to 1.7 percent). As of now, IEX is something that traders have to actively seek out. But that may soon change: In September, IEX filed a request to the SEC seeking enhanced status in the eyes of the law. If certified by the SEC as a public stock exchange, IEX would start processing any general orders sent by traders for which it has the lowest price. That’s key, because one of IEX’s big claims is that its speed bump reduces the incidence of mis-priced securities. If IEX’s prices turn out to be lower, brokers might start going there to trade instead of places such as the New York Stock Exchange.