NEW YORK IEX Group Inc plans to push what it views as predatory trading strategies out of the market by raising fees for firms that cash in on stale prices, the stock exchange operator said on Friday.
Much like the high-speed trading firms it is trying to thwart, IEX uses algorithms to analyze orders and trades that occur on exchanges. It has been tracking firms that try to capitalize on predicting price moves using what it calls a "crumbling quote indicator" (CQI) for some time now, but only just announced its plan to start charging them more.
Many of the shares being targeted come from market-making firms that use high-speed algorithms to provide liquidity to the market, profiting from the difference between bids and offers.
"If we can stop HFT (high-frequency trading) market makers from getting picked off by predatory HFT strategies, the byproduct should be more liquidity and a better experience for folks interacting on IEX," IEX's chief strategy officer, Eric Stockland, said in an interview.
For instance, IEX's algorithms might detect that all available sell orders for a stock at a given price are scooped up in a single trade on one of Nasdaq Inc's (NDAQ.O) exchanges, and then microseconds later, the same thing happens on one of Intercontinental Exchange Inc's (ICE.N) exchanges. This could indicate the stock price is about to tick higher.
At the same time, a high-speed trading firm could detect the same pattern, race to buy up the remaining stock on other exchanges, and then resell the stock almost immediately when the price rises, capturing the profit. IEX would deter that behavior by charging higher fees to firms that do it excessively.
"We are both in the business of predicting price change, but we predict price change to protect orders, and they predict price change to feast on these orders," Stockland said.
IEX launched the its exchange, the 13th in the United States, one year ago, but was thrust into the spotlight in 2014 with the controversial book "Flash Boys: A Wall Street Revolt."
The author, Michael Lewis, followed IEX's founders as they set out to build a more investor-focused market. They pioneered a "speed bump" that slows down stock orders in an attempt to level the playing field for fast and slow traders alike.
Firms that execute against more than 1 million "resting" shares per month on IEX during times that the CQI is on - providing the shares account for more than 5 percent of the firm's volume executed on IEX - will be charged 30 cents per 100 shares for similar executions beyond that threshold.
Currently, trading on IEX is free for publicly displayed orders, or 9 cents per 100 shares for firms using hidden "dark" orders.
IEX estimates that in any given stock, the amount of time the strategies it is targeting can be used add up to just 1.24 seconds out of the 23,400 seconds in a trading day – or roughly 0.005 percent. But during that short time, IEX receives more than 30 percent of its marketable orders.
(This version of the story corrects paragraph 10 to insert dropped word 'against')
(Reporting by John McCrank; Editing by Lauren Tara LaCapra and Leslie Adler)