When U.S. stock markets open on Friday, there will be one subtle but telling difference.
For the first time, there will be a listing on the upstart exchange headed by Brad Katsuyama, the Canadian innovator profiled in Flash Boys, Michael Lewis’s 2014 bestseller.
Mr. Katsuyama, a former trader at Royal Bank of Canada, has become Wall Street’s best-known rebel and an outspoken critic of trading practices that enrich exchanges and middlemen at the expense of customers.
Yet despite the fame generated by Flash Boys, his IEX Group Inc. has not had an easy time wooing business away from established players such as the New York Stock Exchange and Nasdaq Inc.
IEX, a privately held company based in Manhattan, handles slightly less than 3 per cent of U.S. stock-trading volume. It has been striving for a while to convince companies to list on its exchange instead of on the bigger platforms, but its breakthrough came only last month when Interactive Brokers LLC, the big U.S.-based electronic broker, announced it was ready to make the jump from Nasdaq.
The shift of its listing on Friday amounts to an endorsement of IEX by Thomas Peterffy, Interactive’s billionaire founder. For symbolic value, that seal of approval is tough to beat. Mr. Peterffy is a highly regarded industry pioneer and “in many ways, the father of electronic trading,” Mr. Katsuyama said in an interview. He recalled being stirred by a scathing speech that Mr. Peterffy made to the World Federation of Exchanges in 2010, when Mr. Katsuyama was still at RBC.
The speech confirmed Mr. Katsuyama’s suspicion that exchange customers were being systematically mistreated. “For someone of his stature and prominence to say that … it was a big eye opener that people deeply embedded in the industry fully understand the extent of this issue.”
For his part, Mr. Petterffy noted the two companies have had a long working relationship and have been discussing the listings shift for “maybe three months." Why is he making the move? “I believe IEX is a better exchange from the point of view of providing better execution for my shareholders,” he said in an interview. He’s also attracted to the lower listing fees on IEX.
The question now is whether other companies will follow suit and help bulk up IEX’s presence. Mr. Katsuyama said he is “having pretty substantive discussions” with many companies, including Canadian issuers that are also listed in the United States. He declined to offer any forecast for when future listings will materialize. IEX has been profitable since 2015, he said, so it can afford to take a long-term view of the listings business.
For now, it’s offering early movers the chance to list for free for at least five years. In contrast, the NYSE and Nasdaq typically charge a company more than US$100,000 a year to list 100 million of its shares. “It has been a 45-year duopoly for NYSE and Nasdaq so the fact we can create some competition there is exciting," Mr. Katsuyama said.
One reason IEX is being so generous is that an exchange tends to profit from the trading generated by the companies it lists. While there’s no necessary link between where a company’s shares are listed and where they change hands – a company listed on any one U.S. exchange can also trade on other U.S. bourses – the listing exchange tends to get the largest share of the overall trading volume.
IEX may face an uphill battle in attracting listings, according to James Angel, an associate professor of business at Georgetown University and expert in stock exchanges. “Most corporate issuers have a very high degree of inertia,” he said, because a shift of exchange isn’t going to affect their share price. A move can also raise prestige issues if it involves being dropped from key market benchmarks: “You can’t be a member of the Nasdaq 100 if you’re not listed on Nasdaq.”
However, Mr. Peterffy’s endorsement could help burnish IEX’s reputation, he said. The Interactive Brokers founder “has always been an innovator. By listing on IEX he’s sending a statement that he is endorsing change in U.S. market structure. Since he’s a big man in the industry that has a lot of impact.”