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Goldman Sachs Endorses IEX Stock Market Built to Fight Predators
2014-03-22 08:59:46

In a memo today to its equities unit, Goldman Sachs said it’s been one of the most-active brokers on IEX, which opened in October. Markets would be well-served if New York-based IEX achieved “critical mass,” even if that meant Goldman Sachs’s Sigma X dark pool got less volume, according to the document.

“We view IEX’s core mission as simplifying an overly complex market structure through a transparent rule set, minimal number of order types, and most significantly, a speed buffer that intentionally slows down trading on their market,” according to the Goldman Sachs memo, whichBloomberg News obtained. “GS has a similar ideology.”

Michael DuVally, a spokesman for Goldman Sachs, confirmed the memo was authentic and declined to comment further.

IEX was founded by Chief Executive Officer Brad Katsuyama and other former RBC Capital Markets LLC traders to address what they saw as flaws in the structure of the $23 trillion U.S. equity market. Opened for business in October, IEX pitches itself as a haven for long-term investors from predatory practices used by some of the fastest trading firms.

So far, IEX has only captured a small slice of the market. The average number of shares changing hands daily on IEX increased to 14.7 million in February from 9.1 million in January, according to itswebsite. The March average was 18.1 million earlier this week, IEX spokesman Gerald Lam said on March 19. Total U.S. daily volume this year is averaging 6.9 billion shares, according to data compiled by Bloomberg.

Goldman’s Help

Support from New York-based Goldman Sachs could help. It generated $7.17 billion in revenue from equity trading in 2013, excluding accounting charges, the most of any global bank.

IEX doesn’t pay rebates to traders, shirking a practice known as maker-taker that IntercontinentalExchange Group Inc., Nasdaq OMX Group Inc. and Bats Global Markets Inc. use to spur transactions on some of their exchanges.

Critics say maker-taker spurs needless trades and encourages brokers to put their own desire to receive rebates ahead of their duty to get the best prices for clients. Even ICE CEO Jeff Sprecher, who bought the New York Stock Exchange in November, has expressed disdain for the practice.

IEX also mandates a 350-microsecond delay between requests to trade and order executions, applying a break amid investor concern that computer-driven trading firms have made the stock market more vulnerable to mistakes.

Schneiderman’s Review

The debate over the fairness of markets heated up this week when New York Attorney General Eric Schneiderman said he’s looking into whether U.S. exchanges and alternative trading venues give high-frequency traders improper advantages.

The Goldman Sachs memo was presented in a question-and-answer format to discuss the rationale for President and Chief Operating Officer Gary Cohn’s Wall Street Journal opinion piece today calling for changes to the market’s structure in order to reduce trading disruptions.

IEX’s owners include mutual-fund company Capital Group Cos., which is Goldman Sachs’s biggest shareholder with an almost 6 percent stake, according to data compiled by Bloomberg. IEX doesn’t have any brokers among its owners.

Goldman Sachs is an owner of Bats, which runs four U.S. stock exchanges that -- like ICE and Nasdaq’s venues -- collectively account for about 20 percent of volume. IEX has long-term plans to become an exchange, Katsuyama said during an interview with Bloomberg News last year.

To contact the reporters on this story: Michael P. Regan in New York; Sam Mamudi in New York at

To contact the editor responsible for this story: Nick Baker at

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