Ex. 2: Investors Exchange

On October 25, 2013, Brad Katsuyama and several others launched the Investors Exchange (IEX). The purpose of this exchange was to eliminate predatory trading practices by HFT firms. The market was setup with 13 different public exchanges and over 40 dark pools owned by various banks. This allowed HFT firms to intercept trades and turn small profits at the expense of the investor. The system became too large for any one person to understand the market. One IEX employee said, “’All of a sudden the market is all about algos and routers. It’s hard to figure this stuff out. There’s no book you can read. It’s just calling up people talking to them’” (Lewis, 2014, p. 209). The market became too confusing for brokers and investors and those who understood the mechanics of the market were able to profit greatly, such as HFT firms who had faster data and were able to process orders faster than larger banks.

These small HFT firms had the advantage of seeing transactions and price changes before larger banks and they were able to profit because of this advantage. Beniger (1986) states that one component of integration is the “capacity to communicate and process information” (p. 57). The goal of IEX is to integrate the markets into one place and simplify it for investors and brokers. This allows investors to see the information they need and make trades at the prices they see. It also built in a delay for the exchange that eliminates the advantages of HFT firms. Katsuyama saw that the demand for speed was a competition and the fastest firms “caught the prey.” IEX simplifies the market by collecting prices from all 13 public exchanges and having that information disseminated to all firms at the same exact speed. Instead of making competition on Wall Street dictated by speed, it has based competition on investor savvy and trading guile.