December 16, 2015
Dear Sirs,
As a long-time investor in US equities and having at least some market structure knowledge (I am holding a Ph.D. in Finance from EDHED Business School), I feel very strongly about the apparent attempt from exchange competitors and HFT companies like Citadel to block IEX from becoming a regular US stock exchange for the following reasons:
Over the past years, I personally experiences many occasions, on which my orders--especially in lower volume stocks--clearly to have been front-run, resulting in significantly higher average fill prices than expected (based on the historical price impact the days before relative to my order size). It was only after it was revealed most recently that HFT firms use ultra-high speed connections and, more importantly, secret order types and deliberate, provoked delays of the NBBO to effectively front-run orders like mine, that all of those observations started to make sense.
I want my orders executed on a fair market that does not provide select participants with unfair advantages, for example, by selling order flow, providing secret ordertypes to "cut the order cue", etc., under the pretense of providing liquidity. While I moved most of my orders to the NYSE and NASDAQ closing auctions as a direct result of the market distortions created by firms like Citadel to prevent exploitation as much as possible, I would very much prefer to also be able to trade during the day without fear of my order being front-run.
In this respect, I do not believe that HFTs provide useful liquidity (as opposed to the simple definition of liquidity), as additional liquidity merely to front-run orders and take advantage of spreads does not benefit the overall price discovery and market depth in my view.
I think the innovative and uncompromising exchange model that IEX proposes will be advantageous to almost all investors, except HFTs, which naturally oppose it. I intend to use the IEX router, as I do not want my orders to be taken advantage of by latency arbitrage.
Through my research and following of many blogs discussing market structure and the IEX exchange application, I learnt that passages in the Reg NMS specifically state that when having to choose between the needs of long term traders and short term traders, the SEC is bound to side with the long term investors. In my opinion, this is one of many reasons to provide IEX with exchange status and a protected quote.
It appears that the current market structure is mainly driven by the exchanges' attempts to find loopholes in the regulation in order to sell those (i.e., ways to take advantage of orders) to the highest HFT bidders. While I can see, how this is driven by them being for-profit companies, I deem it the SEC's mandate to create a market place as fair as possible, for which granting IEX regular exchange status and being a protected quote would be an important step. In fact, it might be the most effective way to rid the market place of some inconsistencies through good old-fashioned competition in the best sense of the term.
There is plenty of data available proving that HFT firms like Citadel and Virtu are creating deliberate distortions to increase latency arbitrage, which is why they oppose the IEX "speed bump" with unreasonable arguments: the Chicago exchange has an effective speed bump of 8,000 microsecons (as opposed to around 350 by IEX), yet Chicago has a protected quote and everything is fine. Hence, I do not see any reason, why IEX should not get the same status.
Thank you for all your hard work and let me know if you have any questions.
Seong-Han Kim, Ph.D.
Investor