The online brokerage company’s defection to IEX is notable because US listings have been dominated by a duopoly—the New York Stock Exchange and Nasdaq—for more than a decade. Interactive Brokers, founded by Thomas Peterffy, has been listed on Nasdaq since 2007. He says the switch will save the company money on listing fees, and investors will potentially get a better deal if they transact on IEX.
A common criticism of the US stock market, which is made up of more than a dozen trading venues, is that it’s too fragmented. That gives high-frequency traders with the fastest microwave radio networks a chance to arbitrage prices between exchanges—an almost-guaranteed money-making advantage over the slower firms.
Even some high-frequency traders lament the expensive arms race to build the fastest trading systems, which has arguably progressed beyond the point of offering value to investors and companies. IEX shot to fame in Michael Lewis’s book Flash Boys, which dramatized the exchange’s team—led by founder Brad Katsuyama—as crusaders against the speed merchants. It sparked a surprisingly passionate debate between critics of high-speed traders who say the modern market is rigged, and those who argue that, thanks to electronic trading, the cost of buying and selling stocks is cheaper than ever.
Peterffy agrees that investors have benefitted from electronic trading, but he’s not a fan of everything that has changed because of it. The Hungarian-born billionaire is sometimes referred to as the father of digital trading, and his career has spanned the era of floors packed with shouting traders, to the digital buying and selling that primarily takes place inside suburban data centers.
“Overall, the transactions costs have diminished greatly,” he says. “However, it could be better.”
Peterffy started out as an options trader on the American Stock Exchange in 1977, and he transitioned the business into electronic market making as exchange rules changed and technology advanced. Market making, in its simplest form, refers to the posting of bids and offers on a market, and profiting from the spread between those prices. He has mostly closed his market-making operations over the years, focusing instead on the brokerage business, a move that helped him climb into Forbes’ rankings of the 20 richest Americans.
He says his experience in the market-making business has given him insight into how modern trading works. “In my view, market structure hasn’t changed much, it’s just been speeded up,” he said. ”That makes it harder to know what’s going on, compared with the floor trading days. It was more visible. Things are the same now, just much faster.”
IEX’s trading platform features a 350-microsecond delay, a speed bump that’s meant to negate the advantage of being the fastest, most-technologically savvy trading firm. Peterffy said IEX’s delay is part of the reason he made the listing switch. The delay has been highly contentious among market-structure experts, and some of its features are now available on rival exchanges NYSE and Cboe. The Interactive Brokers founder said some of the stocks his company has bought and sold on IEX had “very good execution,” meaning the cost of trading was cheaper than elsewhere.
Peterffy is also a critic of payment for order flow, which refers to market makers who pay brokerages to send their trading orders from retail investors. He says retail investors won’t get the best possible price—the price between the best bid and the best offer—in this process. He also argues that paying for order flow has made markets too brittle; in his view, the result is that there are fewer bids and offers available on exchanges.
When market makers began paying for order flow, Peterffy says he realized he “could not make a living” without doing the same. He says that was reason he decided to focus on brokerage instead.
Probably the most amazing thing about Flash Boys is that it turned a tale about US stock market structure into a best-seller. Despite the book’s popularity, six-year-old IEX’s share of the US stock trading is stuck at around 2.5%, according to Rosenblatt Securities. Market operators Nasdaq, NYSE, and Cboe dominate the industry.
Listings are a new business line for the exchange. IEX won approval in 2017 to list stocks, and Wynn Resorts was expected to be the first to switch to the exchange. The plan fell through when CEO Steve Wynn resigned, according to the Wall Street Journal (paywall).
A key question is whether other companies will follow Interactive Brokers to IEX. Some corporate executives favor the marketing bang they get from listing on NYSE, and the recognition and depth of liquidity available on the Nasdaq-NYSE duopoly. Making the switch means the stock will be removed from certain indexes, and some exchange-traded funds will have to sell their shares. Petterfy acknowledged that not every executive is willing to take such risks, but he thinks the longer-term benefits are worth it.