Fireside Friday… with IEX Exchange’s John Ramsay

The TRADE sits down with IEX Exchange’s chief market policy officer, John Ramsay, to explore the new role of a stock exchange, how the SEC’s regulatory overhaul will impact trading venues and how to address issues around data costs.

What role does a stock exchange currently play and how has this changed?

Exchanges are different from other markets in that they are required to provide “fair access” to all participants who want to trade on the market. Through their displayed quotes, they are responsible for the price transparency and price discovery that other markets rely on, and they are subject to comprehensive oversight to make sure they serve the public interest. Our concern is that, over time, exchanges have mainly moved to a system of competing for orders by using an incredibly complicated pricing system with “rebate tiers” that, in practice, mostly benefit a handful of professional trading firms.

How can venues generate more interest in the lit primary markets?

 Venues can generate more interest by making it less expensive to access exchange quotes and relying less on rebates to attract displayed orders, and instead focusing on ways to give investors better executions when they trade on exchanges. IEX has focused a lot of attention on creating order types that protect investors from poor executions when they use displayed orders and making it less expensive to trade with orders that are displayed.

What regulatory changes on the horizon are likely to have the greatest impact on trading venues?

Three things would be helpful in a positive way. First, a targeted change to the tick size to a half-cent for stocks that could benefit from narrower quotes that reflect the prices where participants want to trade. Second, reducing the access fee cap so institutional investors, in particular, have lower costs when they need to trade with exchange quotes. Finally, it would be helpful to have a common minimum trading increment and give exchanges the ability to display the orders willing to trade with retail investors in that increment. Doing those three things in tandem would have a huge and beneficial impact for trading venues, but especially for investors.

How can the divisive issue of data access and cost best be addressed by regulators?

One big step would be to force the exchanges to move forward with implementing the SEC’s market data infrastructure rule, which will allow more entities to compete in providing market data. That rule has been adopted and has been upheld in court, but the large exchanges continue to drag their feet in taking the steps the SEC has required to make it a reality.

With the comment period ended, what feedback have you heard from other market participants on the proposed reforms?

We’ve heard a surprising amount of agreement on some key aspects of the reform, which is very different from the general narrative that the industry is against all these reforms. A careful review of the comment letters and what we hear from others paint a different picture. There seems to be a lot of sentiment in favour of cutting the tick size to a half-cent for many stocks, reducing access fees, setting a common trading increment for retail orders, and moving ahead with new round lot sizes and disclosure of odd-lot quotes, as the SEC proposed. There also seems to be pretty universal approval of the changes to Rule 605. Other proposals are more controversial, but it is simply a distortion to suggest there isn’t significant support for reform in many of the areas outlined in the proposals.

Of the four proposed reforms, which do you think most advances Chairman Gensler’s goal of promoting competition and fairness in the market?

Three very impactful changes would include a targeted reduction in the tick size, a common trading increment for retail orders, and a reduction in the access fee cap to $0.001 for all stocks. Together, those would spur healthy and fair competition among exchanges and other markets and lead to better prices for investors.