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IEX aims to remove high frequency traders’ advantages by introducing 350 ms delay on all orders
IEX is gaining momentum with equity traders. Will it also make its way to FX?
Conservative risk management of order flow and David Einhorn may well be considered two polar opposites, however the billionaire hedge fund manager has purchased a stake in fledgling institutional trading platform IEX.
IEX was established just five months ago which, according to CBS Corporation’s 60 Minutes was designed to overcome perceived flaws in the US stock market.
Mr. Einhorn’s commercial investment which was carried out by New York-based hedge fund Greenlight Capital which he founded and is CEO, was followed by his statement in a press release from CBS news that the platform “is going to succeed in a very big way.”
The statement previewed a “60 Minutes” interview in two days with Michael Lewis, whose upcoming book “Flash Boys” argues that high-frequency traders, exchanges and Wall Street banks use legal methods that “cost the rest of the market’s players tens of billions of dollars a year.” according to CBS.
Mr. Einhorn’s fortune increased from the initial $900,000 which he utilized to start Greenlight Capital in 1996, which has subsequently generated him a personal net wealth of $1.26 billion, some of which has been accrued via high-risk strategies including corporate stock in major banks immediately prior to the financial crisis which he very wisely foresaw and sold at precisely the right time, citing exposure to illiquid real estate investments by such institutions as a potential cause of unsustainability.
He also participated in the World Series of Poker Big One having had a million dollar buy-in in New York in 2012. Mr. Einhorn’s winnings amounted to $4,352,000 which he subsequently donated to charity.
In this particular investment, Greenlight Capital is taking a different direction, as IEX has a built-in functionality which imposes a 350 millisecond delay on all orders, rather similarly to the methodology considered by British ECN and ICAP subsidiary EBS last year. Latency floors such as this have been the subject of board room discussion recently in the light of what certain jurisdictions around the world consider to be the disruptive market activity generated by algorithms and high frequency traders. The European Parliament is already a long way down the road toward putting a stop to the use of algorithms, spearheaded by German regulator BaFIN’s intention to implement a mandatory latency in all electronic transactions.
The United States, home to the lion’s share of the world’s proprietary trading firms, has avoided such legislation, however with such a new platform having the feature included, it could be that IEX is setting its sights internationally and is carefully future-proofing itself.
IEX was set up partly to address concern that technology advances and fragmentation have made the $22 trillion U.S. equity market too fast and opaque. It imposes a delay of 350 microseconds, or 350 millionths of a second, on orders — enough to curb the fastest trading firms. IEX also aims for greater transparency by making its trading rules available for public review, unlike other electronic venues.
That the US has spared FX companies the inauguration of the anti-proprietary trading Volcker Rule when it was imposed on banks and executing venues last year, and that it has publicly accepted that HFT has advantages does not necessarily point to a lack of discourse among America’s business leaders.
“The problem with high-frequency trading right now is that there’s a perception that for the little guy, the markets aren’t fair,” Commissioner Gallagher told CNBC during an interview. “That perception to me is a reality. It’s something we need to address.”
Even IntercontinentalExchange Group CEO Jeff Sprecher, whose firm bought the New York Stock Exchange in November, said last year that small investors are being ripped off by sophisticated traders.
Nasdaq OMX Group CEO Robert Greifeld warned yesterday against banning high-frequency trading, saying those firms provide needed liquidity to equity markets, at a time when the company is taking a serious interest in exchange-based FX.
Mr. Einhorn is most certainly one of the more astute investors in the entire industry, which goes some way to indicating that he perhaps realizes the direction of the institutional market in the near future.
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