January 3, 2016
1/4/2016
Brent J. Fields
Secretary
U.S. Securities and Exchange Commission 100 F Street, NE
Washington, D.C. 20549
Re: Investors Exchange LLC Form 1 Application (Release No. 34-75925 File No. 10-222)
Dear Mr. Fields
It has become evident that people or firms that are directly or indirectly profiting off of investors (high frequency trading firms, online brokers, big banks, exchanges), DO NOT want the Investors Exchange (IEX) to be approved.
It is also noticeable that, with limited exception, the brokers who handle investor orders have not commented in favor of IEX. Meanwhile, the investor customers of those brokers, including large mutual funds, pension funds, and small investors, have overwhelmingly commented in favor of IEX.
Larry Tabb, a commenter, who despite being opposed to IEX becoming an exchange, acknowledged that IEX has developed a great trading model that...stops super fast traders from taking advantage of price moves by adjusting the price of hidden/midpoint orders to the most current price before matching buyers and sellers. IEX also has a tightly integrated routing engine that obtains liquidity in the customers best interest.
This gets to the point of my letter. I don't want my orders being taken advantage of by super fast traders, yet my broker is sending my orders directly to those super fast traders. IEX has a great trading model, but I'm being told I can't use it and my broker currently has no obligation to connect to IEX.
In 2014, I was told by my broker that I could not send my orders to IEX because my broker was not connected to IEX because it was not an exchange. My broker told me that they would connect and allow me to send my orders to IEX if it became an exchange. I accepted this explanation at the time, even though my brokers quarterly report on order routing for Rule 606 of Regulation NMS suggested that my broker was sending my orders to high frequency trading firms, which are also not exchanges, and who were paying my broker for my orders.
Now, faced with the possibility of IEX becoming an exchange, one of the same high frequency trading firms that receives orders from my broker, a firm which publicly commented that it executes more U.S. retail stock orders than any other firm, is strongly opposed to IEX becoming an exchange.
This high frequency trading firm likely knows that if IEX does not become an exchange, my broker – any many others - will not connect to IEX and they will continue to route to the same high frequency trading firm that is telling the SEC not to allow IEX to become an exchange.
Realizing all this, I investigated changing my broker, but I found that none of these other brokers are connected to IEX, presumably using the same justification as my broker. I also researched those brokers quarterly reports on order routing for Rule 606 of Regulation NMS, and found that they too route their customers orders to the same high frequency trading firms.
I checked the Wealth Management divisions of the large banks and found that none of them route orders to IEX and mostly route through their institutional trading divisions or capital markets divisions. I checked the quarterly report on order routing for Rule 606 of Regulation NMS of the institutional trading divisions of the major banks and not one of them reported IEX as being a significant venue that required to disclose they route any percentage of non-directed customer orders to IEX. Yet, a few of them also route to the same high frequency trading firm that is telling the SEC not to allow IEX to become an exchange.
This was all enlightening. The IEX website shows that IEX has market share ranging from 1.2% - 1.7%. Yet, if the online brokers are not connected to IEX and the major banks are not routing to IEX unless they are directed by investors, this suggests that the vast majority of orders getting to IEX are likely being driven by investors themselves, not by their brokers.
If IEX has a such a great trading model that stops super fast traders why aren't brokers independently sending orders to IEX? Perhaps it's because many brokers own their own dark pools, get large trading rebates from exchanges, sell their orders to high frequency traders, or own a stake in BATS Global Markets, Inc., which has announced plans to IPO early this year.
This is why it is so important for the SEC to approve IEX as an exchange. It will obligate brokers to connect to IEX and obligate them to route orders to IEX under certain circumstances. This will give investors the choice to send orders to a market that stops super fast traders and to route orders in a manner that obtains liquidity in the investors best interest. This will give investors an opportunity to independently overcome the conflicts of interest that plague the financial services industry.
Sincerely,
Brian S. Sullivan, DPM