It isn’t often that an SEC decision involves the star of a best seller, a “magic shoe box,” and fundamental questions about the meaning of words like “immediate” and “fair.” The SEC made such a decision on Friday.
Last fall, the trading system IEX applied for designation as a stock exchange. IEX, and its CEO Brad Katsuyama, rose to fame several years ago with the publication of Michael Lewis’s popular book Flash Boys. Lewis, ever the artful storyteller, cast Katsuyama as the likeable underdog, exposing and undermining high-frequency traders (HFTs) through the development of IEX. IEX, an alternative trading system, or in the more colorful industry jargon, a “dark pool,” has allowed investors to trade away from market scrutiny and the HFTs that populate “lit” exchanges. But there are advantages to being an exchange, and IEX wants in.
At issue in determining whether to approve the application was the meaning of the word “immediate” in an SEC regulation known as Regulation NMS. Regulation NMS, approved by the SEC in 2005, was intended to increase competition among trading exchanges, resulting in better execution of trades and better prices for investors. In furtherance of that goal, a part of the regulation requires that trades be made at the best price listed on any exchange and that exchanges make their quotations “immediately” and automatically available. In the past “immediate” has been defined as “immediately and automatically executable, without any programmed delay.” Seems clear enough, right?