From: Patrick Nicholas
Sent: April 20, 2016
To: rule-comments@sec.gov
Subject: File Number 10-222 Commentary

Dear SEC,

I'm grateful for the opportunity to comment in support of IEX's exchange application, during what I believe to be a pivotal impasse in the evolution of U.S. market structure.

I fully support IEX's exchange application because I personally want the opportunity to send my orders to an Exchange that doesn't provide HFT with an opportunity to consistently trade against my Limit orders in the fraction of a second before I would otherwise be able to buy stock lower or sell stock higher.

Other Exchanges, including NYSE, NASDAQ and BATS, provide HFT with an exclusive opportunity to trade against retail orders. I find it only natural, therefore, that these incumbent exchanges, and the benefitting trading firms, are in the minority in opposing IEX's application currently.

The EDGX exchange, owned and operated by BATS Global Markets, offers retail brokers an opportunity to increase their profits at the expense of retail investors by providing the retail broker with the highest rebate per share in the industry, $0.34 per 100 shares.  As a result and in order to maximize their profits, retail brokers generally send any and all of their retail investor orders that are not immediately eligible for execution (e.g. limit orders) to EDGX.  This is easily apparent by reviewing the Limit Order section of the major retail brokers' Rule 606 reports, which are publicly available for review on a quarterly basis.

BATS further rewards retail brokers that send a minimum number of orders/symbols to EDGX with an opportunity to earn extra income from their retail investor clients through a revenue sharing program -the EDGX Attribution Incentive Program.  

Participating retail brokers can earn a quarter of all the fees that EDGX generates from other participants (HFT firms, as an example), executing against those retail investor orders.  In order to qualify for this EDGX Attribution Incentive Program, the retail broker must agree to uniquely indicate its orders as coming from retail investors.  The retail investor indication is then disseminated via a BATS proprietary market data feed, called EDGX Depth Attributed. I personally dislike having this target painted on the back of my relatively 'uninformed' retail order, ultimately to the benefit of much more technologically savvy market participants.  

BATS earns additional revenue by charging those HFT firms that want to know about investor orders on EDGX for the EDGX Depth Attributed proprietary market data feed that identifies those retail investor orders.  That feed allows HFT to know about the presence of retail investor orders at each price level on EDGX and the relative queue priority of retail investor orders at each price level.

HFT’s that consume that EDGX Depth Attributed feed and the direct feeds from all other exchanges can then identify situations where they know the stock is about to move in favor of the clearly marked retail investor and execute against that retail investor order just before the investor might have otherwise bought the stock for less (or sold it for more).  The HFT can then immediately buy/sell their resulting position for a quick risk-free profit.

In summary, these SRO rules and pricing structures, approved by the SEC, have enabled HFT to find out about the presence of retail investor orders at each price level and the relative queue priority of retail investor orders at each price level.  In the case of BATS, it created the opportunity through its unique pricing incentives and the retail order identifiers.  Retail brokers then reacted to these economic incentives provided by BATS.  HFTs use all of that information to turn an easy profit, resulting in the retail investor buying stock just before the stock becomes cheaper to buy, or selling stock just before the stock becomes higher priced to sell.  Everything described above, in summary, represents a structural and systematic disadvantage to retail investors such as myself.

I want the SEC to approve IEX, an Exchange that doesn't offer any of these perverse incentives.  I just want to execute my order in a fair market.  How is that so difficult for the exchanges, brokers, and HFT's on Wall Street to understand?

Regards,
Pat