Friday, 22 February 2019

IEX - the cable guy

IEX has a pretty, petty, and embarrassing youtube advert that is kind of funny in a cringeworthy way:

The basis for the ad is to build on their junk whitepaper.  IEX improperly represents technology costs at other exchanges.

Far from being the fairest girl in Mordor, IEX is the evil one plumbing the darkest depths looking to give you an unpleasant burn around an unmentionable ring. Ramble on.

IEX is complaining about business models here.

For example, Aquis, the exchange with a dodgy and inefficient execution model, only charges for the cable. Aquis would argue that is fairer than IEX not charging for a cable. While IEX doesn't charge for their market data, IEX has very expensive trading fees, baked in unfairness, and a poor execution model. At IEX when you pay nothing for your cable, perhaps you're getting what you pay for. At Aquis, you can trade all you like for free if their dubious model suits your poor taste. Who is better there? Aquis is probably a better place to trade than IEX just on the basis that IEX makes lots of money from very little trading with their high fees and the Aquis income line is fairly lightweight. At the end of the day, both exchanges' weak models impair market structure. The cost of impairing economic efficiency should be better understood by regulators.

BATS also used to have a free market data model, but they succumbed to the pressure of profitability by eventually adding fees for that too. ICE/NYSE, CBOE, and Nasdaq certainly charge some big fees for their fast market data. When you spend a few hundred million dollars on a co-location facility in Mahwah, plus a suped-up Ferrari to run your low-latency high-bandwidth network, you end up with slightly more costs to reclaim than IEX crudely and rudely ruminates on.

Most exchanges try to balance the fees between trading and market data. Market data, like petroleum for your car, is pretty inelastic in its demand curve. Price whatever: you have to have it, or you can't get your work done. Reg NMS, as the highway system for trades, is powered by market data. High market data fees act as a tax on efficiency.

Trading fees are more elastic in demand than market data. As you seek out best execution, you don't have to trade everywhere. You just have to avoid trading poorly. IEX's high trading fees represent an unfortunate tax on efficiency. At least, you're not forced to trade on IEX's dodgy two-bit exchange even if you need to consume their dodgy data feed directly or indirectly.

NYSE and Nasdaq have had high rates of growth in market data fees. Many think this is unfair, including SIFMA,
"This pragmatic ruling by the SEC indicates increasing recognition by policymakers that the fee structure for proprietary market data products is broken. As noted in the unanimous decision, ‘the exchanges fail to meet their burden to demonstrate that the fees are fair and reasonable and not unreasonably discriminatory’ as required under current law. Today’s decision should prompt further examination of policy reforms to ensure the efficiency of public market data feeds and fairness of fees"
The SEC recognised this,
"Today, the Commission held that neither NYSE Arca, Inc. (“Arca”) nor Nasdaq Stock Market LLC (“Nasdaq”) had met its burden to show that the fees, filed in 2010 for ArcaBook and Level 2 (together, the “products”) and subsequently challenged by SIFMA, were fair and reasonable under the Securities Exchange Act of 1934."
The SEC paused this silliness. This marketing BS from IEX has at least now risen from toxic misrepresentation by whitepaper, to being kind of funny in a cringeworthy way. Perhaps by lowering the debate, IEX's schmarketing is at least more palatable. Hence the greater danger in misrepresentation here. More people may digest this without the necessary degree of cynicism. This diarrhoea for your grey matter is undeserving of grey water.

I don't think this kind of advertising could stand in Australia. We have pretty tight laws about false and misleading advertising. Many US adverts I see on US television wouldn't pass muster here. I guess IEX will do anything to try and get to a monthly 3%. Ethics begone.

This is not so dissimilar to their false and misleading claims regarding long and short queues at exchanges where IEX improperly dropped CHX's short queues from their charts. It's also a bit similar to how they project mid-point trading to being good when it misses the point that trading at best gains you half a spread over mid-point. Their rebates are called discounts to hide their hypocrisy. IEX say not having a co-lo is fairer when the move to colocation was one of the great improvements in fairness in exchange history. Latency arb potential is worse at IEX than all other US NMS exchanges and yet they'll promote themselves are your latency arb saviour. A very dark exchange.

Don't be a schmuck. Follow the money. IEX makes a fair bit of revenue from very little turnover. If you can't tell who the sucker at the table is, think harder.

So, in summary, beware of IEX's free pipe. It is not the pleasant ale you're looking for. It is directly connected to their sewer.



"These aren't the droids you're looking for." - Simon Baker


Side note: I used to work with Simon, not that he'd probably remember, as is asymmetry.


Happy trading,


--Matt.

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