Letter to Regulators Reveals Citadel Opposition to IEX Speed Bump

Nov 10 2015 | 5:21pm ET

By John McCrank (Reuters) - Citadel LLC has asked regulators to deny the U.S. exchange application of "Flash Boys" heroes IEX Group, saying a key element of the trading platform is unfair and would harm market quality.

At issue is IEX's use of a "speed bump" that delays stock orders to and from its trading platform by 350 millionths-of-a-second, which IEX says allows it to refresh ever-changing prices before the fastest market participants can act on out-of-date data, preventing them from jumping ahead in the trading queue.

But the delay would actually hamper the ability of market participants to trade, while giving IEX's routing broker-dealer, which would not be subject to the speed bump, the speed advantage, Citadel said in a letter to the U.S. Securities and Exchange Commission dated Nov. 6, but posted on the SEC website on Monday. 

"A very substantial percentage of orders in the market are executed or canceled within the time frame of their speed bump and you only need to be first by a few microseconds to win every single time. So while it sounds small, those advantages can be insurmountable," John Nagel, Citadel's senior deputy general counsel, said in an interview.

IEX, which was featured in Michael Lewis's March 2014 book "Flash Boys: A Wall Street Revolt," applied to the SEC in September with the aim of launching as The Investors' Exchange early next year.

"We will be reviewing all letters submitted on our Form 1 and look forward to responding to material comments, including clearing up any confusion about how our market works, during the review period," IEX spokesman Gerald Lam said in a statement on Monday.


"Flash Boys" chronicled the efforts of the IEX team to build an exchange that would be a level playing field for all investors and it ignited a furious debate as to whether the market was rigged in favor of HFT, which makes up over 50 percent of market activity.

But Citadel, which is a top market maker in stocks and listed options and runs a $26 billion hedge fund, said the speed bump gives IEX and certain of its customers the advantage.

"The entire market will be trading on stale data, whereas their router will have up-to-date data because it's based on their direct feeds and that's just wrong," Jamil Nazarali, head of Citadel Execution Services, said in an interview.

On Friday, however, Virtu Financial, a global market maker that uses HFT strategies and is one of the most active traders on IEX, said the "speed bump" has had no impact on its trading activity.

Virtu said it engages in the same strategies on IEX that it uses on alternative trading platforms such as those run by Barclays and JPMorgan and exchanges like the New York Stock Exchange and NASDAQ.

IEX currently operates as an ATS, and broker-dealers and other trading centers can choose whether to trade there. But as an exchange, firms would be required to send their orders to IEX if IEX was displaying the best prices available for those orders.

Approval of IEX's exchange application would start "a race to the bottom," as other exchanges would likely seek to create their own speed bumps, Citadel said.

The SEC will weigh the industry's comments in deciding whether or not to give IEX exchange status. Of the 15 letters posted on the SEC's website as of midday Monday, 13 - one of which included 15 asset managers as signatories - voiced support for the application.

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