December 15, 2015
Dear SEC,
I am submitting this comment to voice my support for approving the IEX exchange application.
As someone who interacts daily with the U.S. equity markets, it is impossible to avoid noticing the substantial changes automation and computing have brought to the trading environment.
Of these changes, by far the most damaging has been the introduction and proliferation of high speed or high frequency trading (HFT).
This small minority group within the trading community seems to have one focus: profit by capturing opportunities created by speed latency between exchanges - the practice of latency arbitrage.
As a part of establishing this practice deep in our market structure, HFT have introduced several dangerous practices that harm retail investors and endanger the underlying structure and confidence in our markets. These include:
Direct Feeds - The Exchanges have essentially colluded with HFT firms in offering Direct Feeds. This high cost, priveledged access, which is cost prohibitive to the average investor, is faster than the quoting used to price retail orders (the SIP). How this is not illegal is simply mind boggling. It is a license to game retail order flow.
Internalization - Payment for Order flow has created an environment where high speed trading firms aggressively compete for retail orders from mainstream brokerage houses. This allows them to game these orders by using a combination of Direct Feeds and slower prices on the SIP (Reg NMS specifies that this should operate the exact opposite way?).
Quote Fading - This practice can make it difficult to get a complete fill on even a Market order.
Denying Accessible Quotes - Due to the incredibly high speeds and quote/cancel rates, HFT is denying investors in large parts of our country their right to Accessible Quotes. A large percentage of quotes expire before they reach these investors. Why should fairness require not only that I be located in a specific area of the country but that I lay out enormous sums of money for priveleged access?
Phantom Liquidity - HFT firms seek to profit without risk. This is the main goal of Latency Arbitrage. By sending thousands (even millions) of quotes which they have no intention of honoring, they present a false image of the amount of liquidity in the markets. Their speed and priveleged access allows them to get out of the way before your order even arrives for execution (we're talking milliseconds). Not only is this unfair, it introduces events like flash crashes and liquidity vaccums into our markets. Is that what the SEC supports?
By approving the IEX echange application, the majority of investors, who are not seeking risk free trading through latency arbitrage, will finally have access to a venue where these unfair (and possibly illegal) activities cannot take advantage of their orders.
Investors demand this choice and are confident that, in light of the overwhelming support for this new exchange, the SEC will do the right thing and approve the IEX application.
Thank you for your time and allowing me to comment on this important and historic issue before the Commission.
Daniel Morgan