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IEX Raises $75M From VCs to Pursue Exchange Status

After tripling its volume in less than a year, the dark-pool operator has gained venture capital backing to apply to become a full-fledged stock exchange.

IEX Group, the alternative stock-trading platform seeking to protect institutional investors from high frequency traders, has raised $75 million in a second round of financing from venture capital firms.

Investors leading the round include Spark Capital, an investor in Twitter; with broad participation from Bain Capital Ventures, MassMutual Ventures, the corporate venture capital arm of Massachusetts Mutual Life Insurance, and the mutual fund manager Franklin Templeton; as well as private investors Jim Clark (founder of Netscape) and Steve Wynn (of Wynn Resorts).

According to a story in today’s New York Times, Spark Capital General Partner Ari Finkelstein first learned about IEX from reading the book Flash Boys. He cold-called the company within days of finishing the book.

The firm will use the funding to register as a full-fledged stock exchange, and reportedly aspires to gain that status within a year.

"Our intention from day one was to challenge the status quo by building a market that prioritizes the needs of traditional investors and issuer companies," said IEX Group CEO and co-founder Brad Katsuyama, in today's announcement. "We are encouraged by our recent growth, which has been driven by both investors and their brokers. This additional capital enables us to build and operate a world-class stock exchange."

Currently IEX operates as a dark pool, but has taken steps to slow down orders from predatory trading firms and has won the attention of buy-side institutional investors.

While most dark pools are owned by Wall Street dealers, IEX raised its first round of funding from institutional investors including hedge funds -- Greenlight Capital, Pershing Square Capital, Maverick Capital, and Third Point Partners -- as well as from mutual fund manager The Capital Group, among others.

Since launching last October, the dark pool’s volume has grown from 1 million shares to average daily volume of 43 million shares in July, according to Valerie Bogard, research analyst with Tabb Group, who manages the firm’s Equities Liquidity Matrix. “One of the bigger jumps has been just after Flash Boys came out. Obviously media attention helped,” said Bogard. However, the growth has been pretty steady, she noted.

In July, IEX’s average daily volume ranked seventh among other ATSs and single-dealer platforms that voluntarily report their volumes to Tabb for its Equity Liquidity Matrix. The top six ATSs and SDPs were: UBS, Citadel Connect, Deutsche Bank SuperX, LavaFlow ECN, Goldman Sachs Sigma X, and Knight Match by KCG.

Since the first quarter, IEX has tripled its daily trading volume, and in recent weeks, participant volume has exceeded 100 million shares per day, the company said in today’s announcement.

IEX will become the first ATS to register as a stock exchange since BATS in 2010, according to a story "IEX to Apply for Exchange Status," in The Wall Street Journal. If it obtains exchange status, IEX will be competing against the likes of the New York Stock Exchange, Nasdaq OMX, and BATS Global Markets, which recently acquired Direct Edge.

However, IEX could face some hurdles in the approval process. The WSJ notes that IEX has an ”unusual trading system, which lets brokers, when executing both sides of an order, trade ahead of other investors, even when those investor orders arrive before the brokers.”

Joe Gawronski, president and COO of Rosenblatt Securities, posted on Twitter today that while “the broker priority aspect of rule book would be controversial, I believe the SEC will approve that feature.”

Meanwhile, IEX has won the approval of venture capital firms that are evidently bullish on its prospects for grabbing market share from the 11 existing exchanges and 40-plus off-exchange venues.

"The best way to truly improve the way that the financial markets work is by giving investors and brokers an opportunity to vote with their trades for a fairer marketplace," said Finkelstein in a statement. "We believe in IEX's vision of next-generation capital markets, and we're confident that the IEX team will successfully change the way that Wall Street operates for the better."

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
9/4/2014 | 6:55:17 AM
Impressive growth
Over 100m shares a day, up from 1m, is outstanding. The SEC will also eventiually approve IEX's exchange bid, but the SEC doesn't like it organizations (especially exchanges) deviate from their rules.
IvySchmerken
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IvySchmerken,
User Rank: Author
9/4/2014 | 9:37:54 AM
Re: Impressive growth
IEX's growth has been impressive. One of the features that has attracted institutions is simpler and fewer order types and it has rejected the maker-taker payment model. IEX doesn't pay rebates to market makers, including HFT firms. It charges a flat fee for both sides of the trade. All of the other exchanges offer rebates to liquidity makers or takers as incentives. This can pose a conflict of interest since the broker routing an order to an exchange is influenced by a rebate when posting liquidity or could be paid to take liquidity.  The SEC is looking at the maker-taker model. But the question is whether IEX can compete against the major exchanges whose volumes are fueled by rebates. There are proposals out there to lower the rebates so they are less enticing.
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