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In his recent best seller "Flash Boys" (#1 of the NYT best seller list), Michael Lewis tells the fascinating story of an unlikely hero, Brad Katsuyama from RBC. Upon realizing that "the stock market is rigged" -- he was a trader being front-run by high-frequency trading systems -- Brad and his team decide to create a different kind of exchange. One that is simpler, and fairer. An exchange where sellers and buyers meet on a level-playing field without faster predatory HFTs front-running all orders, and injecting themselves as (uninvited) intermediaries.

Having just read the book, I have to say it is very compelling. Yet I feel it leaves many questions unanswered.

As far as I understand, all of the big brokerages already have similar computerized market-making systems in place, which are called "dark pools" (interestingly in a mostly negative connotation) because they aggregate and facilitate trades within the pool without exposing them to main exchanges.

Edit: turns out this is wrong: many (most?) dark pools sell their "Order Flow" in real-time to external firms, especially HFTs which seems like a conflict of interest

The brain-child of Katsuyama is in some ways an inside-out "dark pool" where among other things, all trades are slowed down artificially (by 330 microseconds) in order to blunt the speed advantage of HFTs.

Detractors (mostly from the HFT industry) claim that Katsuyama is talking his book and IEX is standing to benefit greatly from this new model. Interestingly Goldman Sachs is an investor in IEX, and (currently) its biggest client too.

So is IEX really something different that can benefit the small investor? If so how? In what ways does it change an industry that is built on so many perverse incentives where the big guys always win and the small guys always lose?

Edit: Did IEX commit to never sell their order flow in real-time for profit? This is one of the critical prerequisites for fairness.

Please be specific in your responses. Thanks so much.

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You've said what's different in your question. There's 330 microseconds of network latency between IEX and anywhere else, so HFTs can't get information about trades in progress on IEX and use it to jump in ahead of those traders on other exchanges. All exchanges should have artificially induced latency of this kind so that if a trade is submitted simultaneously to all exchanges it reaches the furthest away one before a response can be received from the closest one, thus preventing HFT techniques.

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  • Thanks @Mike Scott, what still bothers me (among many other things, but lets just focus on latency for now) is that the 330 microsec (note this is not millisec, it is a third of a thousandth of a second) means that it mostly benefits the big boys vs the HFTs, my latency to anywhere on the internet is in the order of many milliseconds so by the time a small trader sees a quote - it is ancient history anyway. This 330 microsec delay maybe significant for an HFT but may be far from significant enough for really "leveling the playing field", no?
    – arielf
    Apr 4, 2014 at 3:07

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