On Friday, the Investors Exchange, or IEX, launched for a select group of US equities trading. Within two weeks, it will be up and running for all US securities. If the IEX succeeds at its mission, it will level the playing field for retail investors, who have been getting ripped off by high-frequency trading for years. Here’s how retail investors can profit off of the changing landscape.
What is the IEX and how does it work?
About ten years ago, a group of guys working on Wall Street realized that they were not getting the fair price on their trades. Over and over again, the price of the stock would go up the moment they tried to buy, and go down the moment they tried to sell.
The culprit here was a silent predator: High Frequency Trading. By making sure they had the shortest cables to all of the exchanges, HFT firms used microseconds of speed to their advantage. When they saw an investor’s order to buy a stock, they would quickly buy it themselves, temporarily driving up the price, then sell it back to the investor at the higher price. When an investor placed an order to sell, they did just the opposite.
For a small-time investor, this amounts to a few pennies lost every time you place a trade, but these pennies add up to big losses over time. The IEX is a new stock exchange that has a speed limit. By creating a 350 microsecond delay for trade orders, it thwarts the efforts of HFT firms to rip off retail investors without their knowledge.
How do retail investors benefit from the IEX?
There are many conflicting factors that determine which exchange your order is routed to. Your broker is required to seek the best price on your behalf, but HFT firms manipulated the markets. You still got the “best price” at the time your order was executed, it’s just that the best price was lower a few microseconds beforehand.
Retail brokers don’t tell you where your order was executed, and up until now, there wasn’t much reason to know. Now, if your broker routes your order to IEX, you will get a better price: the fair market price.
Want to save money?
Call your broker and ask about direct routing capabilities. While none of the major US brokers advertise this capability, two of them offer it if you pick up the phone and ask. Two others are “looking into it” for the future, and two more show no indication of a plan to offer it. Sounds like they need a nudge from their clients.