1. IEX’s proposal to give protected status to its quotes despite their being subject to an intentional access delay
2. The introduction of pegged order types with a speed advantage over other order types
3. IEX's affiliated broker dealer not being subject to the access delay in the same way as other non-affiliated broker dealers.
2. Eliminates the speed advantage of pegged orders, and
3. Levels the playing-field between its own routing broker-dealer and other members.
The letter is available here, and the full text follows.
Intentionally Delayed Quotes Do not Qualify for Protected Status under Rule 611 of Regulation NMS
At least one other U.S. exchange proposed instituting an intentional delay in the execution time of marketable orders and withdrew that proposal shortly after it was published for comment.6 This proposal acknowledged that the exchange’s quotations would be deemed “manual quotations” under Regulation NMS as a result of this intentional delay.7 While the proposed delay (5 milliseconds) was considerably longer than the IEX’s access delay, according to the Regulation NMS Adopting Release, intent is what matters here, not duration. Similarly, the Alpha Exchange in Canada has proposed to intentionally delay inbound orders and cancellations ranging from 1 to 3 milliseconds and such quotes will not be considered protected quotes by the Ontario Securities Commission.8 It is clear that an intentional delay in accessing the IEX trading system should preclude IEX from having protected quotes under the plain language of Regulation NMS.
Moreover, deeming IEX quotes to be protected despite the IEX access delay would harm the markets. If the IEX quotes are deemed protected, market participants would be required to route orders to IEX whenever IEX shows the best bid and offer. Quotes on IEX, however, will often be stale because of the IEX access delay and this would lead to lower fill rates and inferior executions. For example, as noted by one commentator, if all the exchanges have a bid-offer of $10.00/$10.02 and the market moves to $9.99/$10.01, all of the other exchanges, except IEX, would immediately change their quotes.9 For at least 350 microseconds, however, IEX would still display a bid-offer of $10.00/$10.02. The $10.00 bid on IEX may disappear after 350 microseconds, but if a market sell order comes in, the order would be required to be sent to IEX, since the national best bid is still displayed at IEX. The order would be delayed and by the time the cancel message is returned to the sender (again passing through a 350 microsecond intentional delay) the order may no longer be able to be executed at even $9.99. As such, IEX’s access delay would harm market transparency and degrade the value of the NBBO.
Similarly, due to the prohibition on displaying locked and crossed markets, IEX would effectively freeze the entire market for at least 350 microseconds in many cases if its quotes were deemed to be protected. For example, if the NBBO including IEX is $10.00/$10.01 and the market is in the process of moving to $9.99/$10.00, other exchanges could not move to the new price without locking the IEX quote. We believe that the IEX access delay would also result in the appearance of more locked and crossed markets as firms that send ISOs10 to IEX would display quotes on other exchanges that appear to lock or cross the latent IEX quote. Many firms do not use ISOs and would thus have to wait at least 350 microseconds for the IEX quote to move (or not).
This could be particularly problematic during periods of high volatility or during sharp market moves (such as May 6, 2010 or August 24, 2015) in which rapid repetition of such freezing behavior across multiple instruments could be expected to interfere with market stability.
The Commission should also consider the impact of the IEX access delay on pegging orders at other venues. Any exchange or ATS that offers its users logic to peg their orders relative to the NBBO (including IEX) would peg those orders to the latent IEX quote. Ironically, by pegging to the latent IEX quote, users of other trading venues would be subject to the exact condition that the IEX access delay was designed to prevent. Other market participants would have the ability to trade with the order pegged to IEX at a stale price just prior to the price updating. We believe that this would effectively require other exchanges and ATSs to create new order types designed to peg to all quotes excluding IEX.
IEX Should Not be Permitted to Give Pegged Orders a Speed Advantage
IEX Should Not be Permitted to Violate Principles of Fair Access for Its Own Broker-Dealer
The Commission has permitted exchanges to own and operate broker-dealers for the limited purpose of routing orders. The Commission has historically limited the scope of activities that these exchange affiliated broker-dealers can perform. Specifically, the Commission has been concerned about potential competitive issues that may arise between exchange affiliated broker-dealers and other member broker-dealers due to preferential treatment of the affiliated broker-dealer.12 IEX has proposed that the computer servers of its affiliated broker-dealer order router (IEX Services, LLC) would be co-located with the IEX matching engine after the IEX access delay. Therefore, when routing orders to IEX, this router could effectively bypass the IEX access delay that all other broker-dealers must endure. By doing so, IEX would provide its affiliated Broker-Dealer an unfair competitive advantage over all other member firms attempting to access IEX’s quotes. The SEC should require that any such routing function be located outside of the IEX access delay, and have the same access to the IEX trading platform as all other broker-dealers.