IEX gets surprising congratulations from rival Bats

The Investors Exchange is the brainchild of Brad Katsuyama^[1], who gained national fame in a best-selling book called "Flash Boys" by Michael Lewis^[2] for pointing out how high-frequency traders were abusing current stock exchange systems.

Katsuyama was formerly the global head of electronic sales and trading at Royal Bank of Canada. He noticed that high-frequency traders were watching for very large trades to be put into the system, knowing that the order would need to be filled on multiple exchanges. The traders then would use software and super-fast internet connections to insert themselves at the front of the line, buying at the lowest prices and then selling a fraction of a second later at the higher prices. The practice raises the price for the institution or individual making a large stock buy. It works the same way on the sell side.

To combat the situation, Katsuyama began developing the new stock exchange, which features a "speed bump" that winds orders through a large coil of fiber-optic cable to create a 350-microsecond delay. It's a mere blink of an eye but just long enough to create problems for the high-frequency trading strategy.

After IEX filed for approval from the Securities and Exchange Commission^[3], Bats issued a comment letter [PDF]^[4] asking IEX to change the routing of unfilled orders sent through the Bats exchange so they bypass the speed bump. IEX agreed to the change, and Bats was the only major stock exchange to support the application to be registered as a national securities exchange, saying IEX will serve only to enhance competition among exchanges.

"Bats congratulates IEX and appreciates the significant changes they made to their application to address industry concerns," Bats said in an email statement. Unlike the New York Stock Exchange^[5] or the Nasdaq, both of which are in New York, Bats is far from Wall Street; it's based in Lenexa, Kansas.