- A modern stock exchange isn't people yelling at each other
to buy and sell things.
It's a matching engine,
a computer system that takes in all the information
of who wants to sell, who wants to buy, and what prices they want,
and then pairs them all up,
and exchanges money and shares automatically as fast as it can.
Over the last couple of decades, though,
something called high-frequency trading appeared:
computers trading on a stock exchange faster than any human ever could,
watching for price fluctuations
and reacting instantly before anyone else can.
The faster they react, the more money they can make,
so companies collectively spent billions
on moving their equipment closer to or even inside the exchange,
or building private microwave and cable links
that send signals faster than anyone else.
One of the strategies
was to see someone else send a trade request
and then get the same offer to the exchange faster,
buy the shares first,
and then sell them on for a tiny, tiny profit
thousands and thousands and thousands of times.
Each microsecond advantage could mean more profits.
These days, though, so many companies have spent so much money
to get those tiny speed gains
that they're all trapped in a stalemate.
They're all as close to the exchanges as they can be,
and the signal routes are as close to light speed
as they can possibly make them.
When everyone's bought the same expensive advantage,
no one's in the lead.
There is another solution, though,
and it's being used by another stock exchange
a couple of blocks that way.
- IEX is now a fully-fledged stock exchange,
so a lot of people obviously know names like New York Stock Exchange and NASDAQ.
We're regulated and established the exact same way as those stock exchanges.
We're one of 13 in the US.
Sometimes, people will take the argument of 'high-frequency trading is bad'.
What we'll tell you is, there's nothing wrong with those strategies,
but different than any other stock exchange,
what we've done is we level the playing field for not only those folk,
but also for the slow traders, the human traders,
and the only way in which you can really do that
is actually, as an exchange, to slow things down.
Generally, in the US,
you're obligated to know what's going on in all markets,
so the only way in which you can do that is
you have to connect to all the other markets,
you have to take in all these super-fast feeds,
and you have to make a determination on the best price at that time.
If someone can take in that information
quicker than the exchange they're trading on,
then they can pick off people trading on that exchange
before the exchange even knows what the new price is.
We can take in all that data,
we can make a determination on what the fairest price is,
and as long as someone is not 350 microseconds faster than us,
we will always have the clearest snapshot on what the true price is in the market,
which is key.
The biggest proponent of delay is something called propagation delay.
Just means the further away you are from the signal,
the longer it takes you to get it,
so we said, why don't we introduce distance?
350 microseconds is 61 kilometres.
We called up a fiber-optic provider, and we asked them to coil cable for us,
and we had them fabricate this box.
This is actually 38 miles of cable.
It looks like three big fishing spools,
so anyone who wants to trade on our exchange
has to come in and traverse this distance.
The high-frequency guys can be fast,
and that's totally fine with them being fast,
but because physics is physics,
they'll never be 350 microseconds faster than us,
so we can always ensure that we give our clients the fairest price.
The filing to become a stock exchange for IEX
was the most controversial filing of any stock exchange ever.
All the negative comments were around
'you can't possibly introduce a speed bump into the market'.
'It's going to cause a calamity in the markets.'
'Everything's going to explode.'
But in any case, we did get approved.
I always found it funny, like in a market
that has billions of dollars of technology invested into it,
the most talked-about thing is IEX's exchange filing
and a piece of equipment worth $27,000,
but this $27,000 literally has billions and billions of dollars
notionally trade through it every day,
and trade at the fair price.
So, it was worth the battle. We did get approval,
and the SEC two years later put out a white paper
saying not only did the calamity not occur in the market,
the market overall, not just IEX,
has been more stable since IEX became a stock exchange.
- Sure, you could do this by having a computer receive every signal,
wait for however long you want, and then send it on.
It would probably be cheaper.
High-grade fiber-optic cable is expensive stuff,
but that would be another system
that could crash, or fail, or be defeated somehow.
It's unnecessarily complicated.
There's a lot to be said for a solution that just uses physics.