IEX, the stock exchange made famous by the Michael Lewis book "Flash Boys," has set its sights on another arena where high frequency traders drive up transaction costs: corporate buybacks.
The firm plans on rolling out a new service geared toward corporate share programs, according to a Securities and Exchange Commission filing.
Buybacks reached a fever pitch last year as U.S. companies announced a record $1 trillion in share repurchases. But the so-called safe harbor rules governing buybacks were created before the advent of electronic trading and the rise of high-frequency trading firms that take advantage of slower players, a business model exposed in Lewis' 2014 book.
That's made corporate buyback trades ripe for being picked off by high-speed firms, effectively siphoning millions of dollars from the companies, market participants have said.
So IEX, founded in 2012 by Brad Katsuyama and Ronan Ryan, aims to tackle that problem with a tweaked version of its core innovation: a speed bump (38 miles of cable that slows down orders by 350 microseconds) coupled with machine learning software that predicts price movements in stocks.
The software, called the IEX Signal, scans the other exchanges for patterns that indicate a stock will move against a client, according to Boris Ilyevsky, IEX's head of market development.
"Say you were willing to pay $100 and our model detected that the price was about to dip lower," Ilyevsky said in a phone interview. "We would prevent you from being a buyer against the seller because we anticipate that a split second later the price would've actually ticked into you, and we'd rather give you the opportunity to trade after that happens."
The firm's machine learning program is effective for infinitesimal bits of time — two milliseconds — and in a typical trading day, is only working for about five to seven seconds in total, according to Ilyevsky. But those few seconds account for roughly a third of aggressive orders from speed traders, he said.
In all, Signal has helped protect clients on 113 billion shares traded so far, according to IEX.
The corporate buyback order type may become available as soon as next month and could help boost volumes on the exchange, Ilyevsky said.
It's all part of a larger war playing out between IEX and its bigger rivals NYSE and Nasdaq.
While IEX is profitable and influential — more than a dozen exchanges are expected to have speed bumps by next year — at about 3% of U.S. trading volumes, it hasn't yet eaten deeply into the share of the big players. The dominant exchanges attract order flow by paying fee rebates to their best customers, which include high-speed firms.