IEX eyes Q2 lit market transition

A dark pool launched in November could become a lit market by July as it continues to gain market share, crossing its billionth share last week and setting a daily trading record.

A dark pool launched in November could become a lit market by July as it continues to gain market share, crossing its billionth share last week and setting a daily trading record.

The billion-share milestone was reached on Friday when the venue set a daily trading record of 41.4 million shares (double counted), suggesting support for the dark pool continues to increase. In January, average order size reached 715 shares, with an average daily volume of 18.1 million shares.

Matthew Trudeau, head of product for IEX, told the platform anticipated transitioning to displayed quotations as early as Q2 this year as part of a long-term plan to develop into a lit exchange. It is currently regulated as an alternative trading system (ATS).

“By transitioning to displayed quotations, IEX anticipates further integration into broker algorithms and smart order routers (SORs), as well as high touch order montages resulting in more opportunities for a diversity of order flow to interact on our book,” he said.

This transition could occur in a number of ways, such as publishing a top-of-book feed, or by routing orders through the Financial Industry Regulatory Authority’s Alternative Display Facility, in a similar way to Citi’s LavaFlow platform, which began actively quoting through the system this month as an electronic communication network.

LavaFlow provides automatic matching of national market system securities for the sell-side.

“This is the next step in our plans to become an exchange, although we have no strict timeframe by which to achieve this end goal,” Trudeau said.

Algo tweaking

IEX has gained momentum as a block trading venue in recent months as brokers configure algos and SORs for the pool. Trudeau said buy-side firms were also asking brokers to route directly to the venue to place resting block orders.

“An increasing number of buy-side firms are requesting that their brokers set up direct routes to rest orders directly on IEX and brokers connecting to IEX are increasingly adopting intelligent reallocation functionality into their algos and SORs, which has resulted in more block trades and less opportunity to generate trading signals,” he said. This, in turn, has led to an increase in trade size in recent weeks – a trend he anticipates will continue.

IEX, which is owned by a group of investors that includes buy-side participants, prioritises agency and riskless principal orders ahead of principal orders when a broker is trading with itself, while also providing free internalisation for brokers that match both sides of a trade. It offers no direct buy-side access.

The dark pool has focused on excluding high-frequency trading (HFT) segments of the market to create an environment where institutional investors’ orders can execute in size away from negative gaming activity, but Trudeau said IEX does seek to include some HFT.

“IEX isn’t against HFT because we’ve implemented a combination of pricing, architecture, and market model to reduce predatory aspects of this type of flow while maintaining an opportunity for other beneficial strategies like index arbitrage that help price discovery and can benefit the overall market,” he said.

The dark pool has championed greater transparency in its offering, and was pioneering in the public disclosure of its Form ATS, a document required by the regulator that outlines how orders are matched in the system.

Jamie Corrigan, executive vice president for SunGard’s Valdi suite, told the platform’s focus on efficiency and innovation was well received by the market, likening the firm to a Silicon Valley tech start-up.

“IEX has a transparent and efficient approach to how it operates, which extends to making all documentation required to onboard as a partner freely available on its website,” he said. “From a connectivity standpoint, this has made it very easy to link up with the platform.”