Nasdaq Tries to Appeal to Investors Lured by New Rival IEX
August 15 2016 - 12:10AM
Dow Jones News
In the latest sign that American stock exchanges are inching
away from a decadelong arms race toward ever greater speed, Nasdaq
Inc. plans a new option for investors who complain they can't keep
up with rapid-fire trading.
The move shows how exchange operators are angling to respond to
IEX Group Inc., the startup that won regulatory approval in June to
launch a market that slows the pace of trading. Nasdaq and other
rivals such as Intercontinental Exchange Inc. opposed the bid from
IEX—made famous by the book "Flash Boys," which maintained that
exchanges sold advantages to high-frequency traders—saying its
"speed bump" is an artificial barrier that violates rules requiring
all orders be immediately accessible to traders.
Before IEX won approval from the Securities and Exchange
Commission, Nasdaq had threatened to sue the agency if the SEC
certified the startup.
But Nasdaq Chief Executive Robert Greifeld said in an interview
Sunday that the exchange won't sue even though it would have had a
"very strong" case that the regulator shouldn't have approved IEX
without changing the rules that required quotes to be immediately
visible.
Instead, Mr. Greifeld said Nasdaq decided to compete rather than
fight, by finding its own way to slow down the market for some
investors.
"It was an abuse of process and misuse of process, and I am
still somewhat mystified by how the commission approached it," Mr.
Greifeld said. "Clearly with the SEC's willingness to approve IEX,
we said, 'OK, let's be more aggressive in terms of what we might
ask for.'"
The SEC approved IEX's exchange application in June, ruling that
its 350-microsecond speed bump is so minuscule that it doesn't
violate the SEC's rule book that quotes be immediately accessible.
IEX's speed bump makes it harder for high-speed traders, who often
cancel dozens of orders for every trade they make, to withdraw
their price quotes. It also protects slower investors against
predatory traders who may have a faster view of changing quotes and
can thus take advantage of orders at stale prices, IEX's founders
say.
Nasdaq plans to seek SEC approval for a new function that may
appeal to institutional investors such as mutual funds. Investors
who use the function, known as an "extended life" order type, would
move ahead of other similarly priced orders if they agree not to
cancel their orders for approximately one second. Investors who use
the function wouldn't have to worry about traders who can get to
the Nasdaq Stock Market faster, Mr. Greifeld said.
That would give those traders a better chance of having their
orders filled and could reduce the volume of cancellations, which
some investors complain makes it harder to trade.
Mr. Greifeld said Nasdaq's order type is different than IEX's
innovation because it is an option for investors that doesn't apply
to every order, unlike the speed bump. It also doesn't slow how the
exchange processes or reports orders, but simply alters the
priority they are given compared with competing quotes.
"This is an attempt to de-emphasize speed," said Adam Sussman,
head of market structure at Liquidnet Inc., a broker-dealer that
operates a private trading venue known as a dark pool. "Or at least
to use time in a different way in order to maximize liquidity, as
opposed to just always focusing on the fastest."
The precise amount of time—whether one second or slightly
greater or slightly less—will be finalized in a filing that Nasdaq
makes with the SEC.
Nasdaq's new order type would change the standard way that
exchanges prioritize quotes and would have to be approved by the
SEC. Orders are given priority first based on price, and then on
the time at which they arrived at the exchange.
An SEC spokeswoman declined to comment.
Gerald Lam, a spokesman for IEX said: "We're encouraged to see
that IEX has finally inspired other exchanges to better serve
investors and we look forward to seeing if any new products can
neutralize the advantages they currently sell."
He also defended the SEC's decision to certify its exchange,
saying it was "in the best interest of long-term investors."
Mr. Greifeld said Nasdaq developed the order type after speaking
with investors, public companies and brokers. He said Nasdaq also
looked for inspiration to the Canadian equity market, where the
Toronto Stock Exchange has introduced a similar order type. He
acknowledged that IEX's unique model compelled Nasdaq to respond
with a "multiphase plan."
Executives at Intercontinental Exchange Inc., the owner of the
New York Stock Exchange, have said they also are considering how to
tweak their market to respond to IEX, which begins trading as an
exchange on Aug. 19.
Traditional exchanges like Nasdaq, which executes about 14% of
total stock trading, have seen their market share decline in recent
years as more volume moved to dark pools and other broker-run
platforms.
Write to Dave Michaels at dave.michaels@wsj.com
(END) Dow Jones Newswires
August 14, 2016 23:55 ET (03:55 GMT)
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