January 8, 2016
I think it's important to note that Adam Nunes's previous comments regarding IEX need to be examined closely in light of his recent comment letter posted on January 7.
Revealing and important distinctions regarding these comments were released by Eric Hunsader of Nanex, LLC.
Mr. Hunsader's comments are prefixed with the "**" symbol.
From Mr. Nunes giving an example of why IEX should not be approved:
Example 3: IEX BD Router - IEX bypasses the POP allowing it to beat a member to another exchange
-Member C has an order to buy at 10.00 resting at IEX.
**Not mentioned, but implied below is Member C also has orders at many other exchanges, which makes the total amount available "appear" to be greater than it is (fake liquidity). Member C has no intention of allowing all orders to execute. Classic, Dodd-Frank Spoofing.
-IEX has a routable sell order that fully executes Member C's buy interest on IEX.
-When executed, Member C decides to update its buy order prices on another exchange from 10.00 to 9.99.
**Member C's decision to cancel the order and get out of the way (liquidity fade) is automatic - programmed in. A simple code-audit will reveal that Member C never intended for orders on all exchanges to execute. The displayed liquidity was intentionally fake. Spoofing.
-The POP would delay Member C's execution information by 350 microseconds. As a result, although Member C's buy order on IEX has been executed, it does not know this for at least 350 microseconds.
-Before Member C is informed of its buy order execution, the IEX BD Router sends an order to another exchange to execute against Member C's buy order at 10.00 on the other exchange.
-Since Member C was not informed of its execution on IEX, its order at 10.00 on the other exchange is executed by the IEX BD Router before Member C can update the price to 9.99.
**Member C placed the order, and got filled at their order price, and they are complaining?
Because they weren't informed of the investors orders before it completed executing?
Member C isn't market making, adding liquidity, narrowing spreads, or benefiting price discovery - why should they receive special privileges?
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Here you have a high frequency trading firm basically trying to make the case that they should be allowed to cancel orders on other exchanges so that they don't have to honor those quotes. This is spoofing and layering, plain and simple.
And it is ILLEGAL.
In essence, if there's a 350 microsecond delay, they won't be able to break the law for profit.
Here's what your own Sanjay Wadhwa had to say about this type of trading behavior.
“The fair and efficient functioning of the markets requires that prices of securities reflect genuine supply and demand,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office, in a press release. “Traders who pervert these natural forces by engaging in layering or some other form of manipulative trading invite close scrutiny from the SEC.”
HFT strategies like those outlined by Hudson Trading above show deliberate fake liquidity - fake supply and demand - because quotes are presented with the INTENT TO CANCEL. It is written directly into the trading strategy code.
It is behavior like this that the IEX exchange is needed. It is behavior like this that needs to be eliminated from our markets.
Failure to do so and my guess is, sometime in the near future, you will see a true collapse of our markets due to this phantom liquidity and HFT's unwillingness to provide liquidity (which they do not even though they erroneously claim otherwise).
Some hft firms like Virtu however will likely have another record profits day when this happens.
After all, when markets are illiquid and panicked: “Our firm is made for this kind of market" to quote Douglas Cifu Virtu CEO.
IEX must be approved as filed and I add my support to the overwhelming number of investors in favor of the application.