A smart order router (SOR) developed by US equity trading venue IEX lets buy-side traders route to the venue directly from execution management systems (EMSs) and seeks to reduce information leakage before routing to lit markets to achieve best execution.
IEX in recent weeks has captured public attention following its portrayal in Michael Lewis’s ‘Flash Boys’ book, which labels high-frequency trading (HFT) as unfair for end-investors. The venue seeks to eliminate predatory activity linked to low-latency trading by enforcing a 350 microsecond delay on all messages.
Jay Fraser, head of business development for IEX, said initial use by buy-side traders had was positive.
He said the router had executed on average approximately 10 million shares daily, single counted, and had maintained 98.5% fill rate, which he said was rare for a router accessing a dark pool before lit markets because of the propensity for information leakage.
“Because of the point of presence buffer in IEX, the router doesn’t signal intent to other market participants before it routes to lit venues, reducing the information leakage risk that the buy-side or brokers can experience when routing to other off-exchange venues,” he told theTRADEnews.com.
Through the router, IEX offers asset managers data including FIX tag 30, showing the last venue accessed when an order is filled. Now, a buy-side trader can access IEX from his or her EMS by way of brokers, as IEX offers no direct buy-side connectivity.
“Thanks to the router, buy-side traders and brokers can access IEX directly from their EMS taking advantage of the pool’s natural liquidity and enforced latency that excludes predatory behavior, in addition to accessing liquidity across the 13 protected venues,” Fraser said.
The firm has said it does not plan on offering custom strategies within the router, to avoid brokers routing to venues in a way that can create opportunities for information leakage. It said the router's logic will continue to be based primarily on liquidity, with cost a secondary metric. So, the router would access lower cost venues (i.e. based on fees or rebates) if IEX could determine that such venues did not sacrificing access to liquidity.
IEX added that the absence of custom strategies within the router would further reduce system risk and overall complexity of the tool.