I was still at the Securities and Exchange Commission, overseeing the Division of Trading and Markets, when I first heard about a small band of traders and technology experts at the Royal Bank of Canada who were using technology to tilt the playing field back in favor of ordinary investors. I could hardly have imagined at the time that I would end up joining them. By the time I met Brad Katsuyama and his remarkable team of 37 people assembled from all parts of Wall Street, they had already created and successfully launched IEX, a new trading venue that was explicitly devoted to a vision of new, re-energized markets that are fairer, more transparent, and wholly devoted to the service of investors.
I spent nearly 15 years of my career in government service because I wanted to try to find a way to make a positive difference. Since joining IEX in June, I have found a way to continue that purpose in the private sector. And I have found a group of colleagues who are as devoted to that purpose as anyone I have met, inside or outside government.
At the same time, the focus on what one company is doing to purposefully disrupt Wall Street misses the broader point. This is about a movement and we’re trying to spur the investing public to take action. And it is a movement that needs broad participation and for which individuals must take personal responsibility.
Our mission at IEX is simple: to create a level playing field for all investors. We built a modern electronic stock market – from the ground up – to eliminate inefficiencies and loopholes that enable an unfair edge for some. Along the way, we took care to minimize the conflicts of interest that plague the trading ecosystem from our market and ownership model – seeking to create a better sense of balance using technology, design, governance and transparency.
As documented by Michael Lewis in his book, Flash Boys: A Wall Street Revolt, we believe the stock market is currently skewed in favor of a narrow group of traders armed with speed and other advantages needed to exploit structural inefficiencies in the marketplace for personal gain. Industry analysts estimate that high-frequency computerized trading now accounts for over half of market volume. One of their sources of advantage: fiber optic cables which connect their computers directly to the markets, often giving them a “first look” advantage.
Small discrepancies – even millionths of a second of advance knowledge about what is being bought and at what price – have led to billions in profits earned across the public and private trading exchanges that make up the American stock market, questioning the ability of exchanges to be ‘safe havens’ for average investors. Everyone who owns equities is vulnerable to the predation, including average investors whose pension funds and mutual funds are managed by institutional investors.
At IEX we view ourselves as stewards of the US equity market, so it’s about creating and sustaining trust. Right now, many traditional investors don’t trust the markets to have their best interests in mind. While it is true that the US stock market has experienced great innovation, efficiency and cost reduction, it has become overly complex and opaque, eroding trust that pushes investors away. Imagine the potential we could unleash if we restored trust to the system? At a practical level, our challenge boils down to convincing the industry there’s more value to serving investors than serving intermediaries. Plus it’s the right thing to do.
Revolutionary thinking? Perhaps. Restoring trust and eliminating industry conflicts of interest are indeed tall tasks. We are a small, focused team of experts, but we are taking on one of the most massive, well funded, set of vested interests in industrial history. Nonetheless, we believed our chances of success would be greatest if we went right to the heart of the industry and targeted the actual marketplace itself – the “plumbing” around which the greater ecosystem and Wall Street engines are built. Which is why IEX was created and why we are filing to become a national stock exchange.
But that’s only half the challenge. Investors have to choose to trade at IEX instead of any of the 50+ venues that exist in the US National Market System, comprised of the 11 exchanges owned by household names like NASDAQ, the New York Stock Exchange, and the 40+ Alternative Trading Systems (ATS), or “dark pools”, owned mostly by the big banks. Investors hold the key, and collectively can exert great influence in the markets. They are the clients of the brokerage and technology vendor community. What they say goes.
So far the institutional investment community has shown great support for our mission and our challenge. Recently we were fortunate to have raised an additional $75 million in financing that will be used to pursue registration as a US national exchange and to explore other opportunities to leverage IEX’s unique brand, capabilities and market position. But we have a long way to go – we’ve only run the first few miles of a marathon. We need the investment community to continue to apply pressure and hold their brokers, vendors and trading venues accountable. As we say, investors and issuer companies need to make their voices heard. We’re asking supporters to deploy this message to their friends and networks: #votewithyourtrades.
When our team looks back at everything that we’ve gone through this year, it can be overwhelming and almost unbelievable: Michael Lewis’ book about our company and industry led to an uproar which sparked a much-needed national debate; IEX notched the fastest ATS debut in history, and we gain new allies every day.
But while we’ve served it notice, we haven’t disrupted the market yet. We’ve shown the world a path forward, but it’s up to investors to knock down the first domino. Disruption is actually in their hands as well. Will they help us carry the torch?
John Ramsay is Chief Market Policy and Regulatory Officer of IEX, the first equity trading venue seeded by a consortium of buy-side investors, including mutual funds, hedge funds, and family offices. He has 25 years experience in the public and private sectors in positions that concern the regulation and oversight of securities markets and intermediaries. Most recently, prior to joining IEX, he oversaw the SEC’s Division of Trading and Markets, the group responsible for regulating broker-dealers and self-regulatory organizations, such as securities exchanges and FINRA.