I've been watching this story closely, and I think people's reaction to it is hilarious. I would think people would be more skeptical when a man from Wall Street says "hey Wall Street it's rigged, oh btw your should totally use my exchange".
Because at its heart the IEX is designed to help large institutions, not people like you.
Here's how it works: I want to buy a stock. I'm just a small day trader, and can only buy $1,000 worth of stock. Let's say I want to buy 100 shares of ABC for $10. So I put in a limit order. This means it will buy the stock as long as I can get it for $10. If I can't get it for $10 then the order won't fill, and that's what this is all about.
Now I only want 100 shares. The market trades thousands of shares per second so there's plenty of shares to get what I want. The price of the stock just has to stay below $10. Now maybe it's $10.05. That's ok because the market moves around a lot. The more it moves around the more likely I am to get the price that I want, and have the order filled.
Now let's say that I'm a large institution. I'm going to trade a lot more than a few hundred shares. I want to buy millions of dollars in stock. That's not easy to do. There might not be enough shares available, and a move that big is enough to move the price higher. Large institutions have developed all sorts of tricks to get around this. It used to be that you'd split the orders up amongst a bunch of small guys. That way nobody can figure out who is doing the buying. By the time the market realizes someone is buying up stock, the big fish is already fed and on its way. Electronic trading made it even easier. You can see exactly how many shares are available and buy them all before anyone is the wiser, even if the order goes across multiple exchanges.
Enter high frequency trading. They realized what was going on and realized that if they are fast enough they can get ahead of these large orders. A big fish will put in an order that will have to go across multiple exchanges. It will reach bats first because their systems are faster. The high frequency guys will see this activity, and try to beat them to the next exchange. They'll raise the price by a cent, which is still below the big fish's buying threshold, and sell it to the big fish. One cent isn't a lot but it adds up quickly when the fish is buying thousands of shares. Do this every second and you make money.
Now obviously the big fish isn't happy about this. So they try to find ways around it. They'll split the order up and send it to individuals exchanges taking into account the latency so that the order hits all exchanges at the same time. They'll even use dark pools which hide the transaction from the rest of the market.
IEX is just another solution to this problem. They increase the latency so that the HFT's don't have time to make money. And big firms love it. It allows them to do exactly what they want. Finish executing large orders before the market can react and raise prices.
That's the big secret that Wall Street sends to have successfully duped the public on here. They've pulled a reverse psychology. Everyone thinks Wall Street big fish love high frequency trading. It's the opposite. They absolutely hate it.
Now what IEX is doing is great. If it really is better for markets then more and more people will use it. However, realize that what is good for IEX and big fish is not always what is good for you. I feel that the IEX guy is sensationalizing things to push his exchange. Remember, the only one on your side in a free market is yourself. Anyone who says otherwise is trying to sell something.
