WEBVTT - Trillium's Friedman on IEX's  Business Model (Correct)(Audio)

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<v Speaker 1>You're listening to Taking Stock with Kathleen Hayes and Pim

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<v Speaker 1>Fox on Bloomberg Radio. A new stock exchange with a

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<v Speaker 1>very high minded purpose, and that is to level the

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<v Speaker 1>playing field between hyper fast traders and slower moving ordinary

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<v Speaker 1>traders with a famous speed bump, a three D fifty

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<v Speaker 1>micro second delay on trades. This is what I e

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<v Speaker 1>X is trying to do, and our next guest is

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<v Speaker 1>wondering if they're going to succeed. Michael Friedman is General

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<v Speaker 1>counsel and chief Compliance Officer at Trillium right here in

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<v Speaker 1>New York. Michael, welcome back to the show. Thanks Kathleen

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<v Speaker 1>Cloud to be with you. Well, of course you are.

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<v Speaker 1>You do compliance. You oversee your traders at Trillium who

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<v Speaker 1>tend to be more I guess uh somewhere between high

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<v Speaker 1>frequency and regular. I wouldn't say slowly, just for traditional traders.

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<v Speaker 1>I e X uh remind us the business model and

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<v Speaker 1>how people like you and the traders that your your

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<v Speaker 1>firm reviewing it. So I e X has built kind

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<v Speaker 1>of a narrative for itself that it is. It solves

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<v Speaker 1>a specific problem caused by a certain type of high

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<v Speaker 1>frequency trading called latency. Arbitrage. So what they've created is

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<v Speaker 1>a speed bump that every order message to an offer

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<v Speaker 1>to buy or sell must pass through before it hits

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<v Speaker 1>their matching engine, and then the news of whether it

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<v Speaker 1>actually got filled passes back through that speed bump when

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<v Speaker 1>it goes back out to the rest of the world.

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<v Speaker 1>And it's fifty micro seconds. That's a third of a

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<v Speaker 1>thousandth of a second. But they save up enough to

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<v Speaker 1>disable a certain type of trading strategy that got a

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<v Speaker 1>lot of attention in Michael Lewis's book and in various

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<v Speaker 1>other corners of the world. Um and uh, it probably

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<v Speaker 1>does solve that problem. Give them credits for that. Okay,

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<v Speaker 1>well that's Michael Lewis's famous book Flash Boys. Some people

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<v Speaker 1>with hindsight who know the who are in this industry

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<v Speaker 1>felt that it wasn't maybe a uh, I don't know

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<v Speaker 1>that the view of it was maybe a bit one sided.

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<v Speaker 1>But let's clip let's see the book to one side,

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<v Speaker 1>because the key question is this. I assume that the

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<v Speaker 1>founders of I e X think, boy oh boy, people

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<v Speaker 1>are gonna love this because they don't want these high

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<v Speaker 1>frequency traders stepping in front of them. They started up

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<v Speaker 1>on there gradually on August nineteen or gonna gradually add

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<v Speaker 1>stocks for a couple of weeks. Is their demand? How's

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<v Speaker 1>it going so far? Well, you put your finger on it.

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<v Speaker 1>So the in order for them to be successful, and

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<v Speaker 1>success is a stock exchange means generating a lot of

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<v Speaker 1>volume and competing with the big the big guys Na

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<v Speaker 1>Duck and nivey Um. They need to do a lot

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<v Speaker 1>of trades, and the way they do a lot of

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<v Speaker 1>trades is by encouraging more orders to be routed to

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<v Speaker 1>them UM and their history has shown that when you

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<v Speaker 1>start a new exchange like this, there really isn't enough

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<v Speaker 1>natural traffic is in natural buyers and natural sellers who

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<v Speaker 1>are real investors, both wanting to take the opposite side

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<v Speaker 1>of a of a of a stock at a certain

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<v Speaker 1>price at the same time. That's kind of rare that

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<v Speaker 1>that happens. So the way the markets that you kind

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<v Speaker 1>of grease the skids and make the markets uh were

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<v Speaker 1>a little faster as you have middlemen called market makers

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<v Speaker 1>who stand in the middle and are willing to buy

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<v Speaker 1>when there's a willing seller and sell when there's a

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<v Speaker 1>willing buyer, and that makes it all move a lot

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<v Speaker 1>faster these days. All of those market makers are electronic,

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<v Speaker 1>and they happen to be the very same firms that

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<v Speaker 1>people who are kind of kind of bought into the

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<v Speaker 1>narrative of I e X. Uh don't like. Then we're

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<v Speaker 1>talking Citadel, KCG, Virtue. Those are the major market makers.

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<v Speaker 1>So what I e X have to do is it

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<v Speaker 1>needs to encourage these high frequency trading firms to become

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<v Speaker 1>market makers on their venue and to post a lot

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<v Speaker 1>of quotes so that they'll generate volume. But at the

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<v Speaker 1>same time, they don't want to appear to be catering

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<v Speaker 1>to these h f T for arms, because they're supporters

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<v Speaker 1>who have pushed them this far. Uh really don't like

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<v Speaker 1>h f T firms. Oh boy, it's hard. So what

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<v Speaker 1>do you think is going to happen? I mean, well,

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<v Speaker 1>so it's funny. So Barkley's was in a very similar

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<v Speaker 1>situation with their dark pool a couple of years ago,

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<v Speaker 1>and so there's a model for how not to solve

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<v Speaker 1>this problem, which is what Barkley's did, which is, Uh,

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<v Speaker 1>you basically invite all the high frequency trading firms to

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<v Speaker 1>trade on your venue, but you don't tell your investors

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<v Speaker 1>that you've done that and Barkley's that's what Barkley's did

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<v Speaker 1>on their dark Pool, and the Attorney General investigated and

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<v Speaker 1>found that they were misleading their investors and give them

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<v Speaker 1>a big fine for that. So I think what they

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<v Speaker 1>what I should do. Taking learning the lesson of of

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<v Speaker 1>Barkley's mistake is that they really need to kind of

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<v Speaker 1>dial back on the messaging of how anti h f

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<v Speaker 1>T they are. And to their credit, it's probably been

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<v Speaker 1>outsiders who have kind of taken their narrative that they

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<v Speaker 1>solve one uh specific evil of HFT and turned it

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<v Speaker 1>into this broader message that they're anti HFT in general.

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<v Speaker 1>So if they can kind of dial that back a

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<v Speaker 1>little and say, look, we just care about these specific

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<v Speaker 1>evils that everyone hates, but we still support electronic market

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<v Speaker 1>making generally, I think that's probably the way to go.

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<v Speaker 1>Quick final question, you've got about thirty seconds. If they

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<v Speaker 1>make this work, how lucrative is this going to be

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<v Speaker 1>for them? I mean broadly specific terms, how would you

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<v Speaker 1>describe it? Well, it's it's not what it used to be.

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<v Speaker 1>This industry, UM, it's pretty competitive now, it's extremely competitive.

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<v Speaker 1>It doesn't get more competitive in this tiny spreads UM

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<v Speaker 1>One of the ways that exchanges make money in this

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<v Speaker 1>business is by selling data, and so far e X

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<v Speaker 1>said they're not going to sell that data. If you

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<v Speaker 1>sell data, that kind of insulates you from volume fluctuations,

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<v Speaker 1>which is can have a big impact on your bottom line.

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<v Speaker 1>Selling data is kind of a stable business year in

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<v Speaker 1>and year out. So if they can generate them to

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<v Speaker 1>human move into selling data, I think they'll will succeed.

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<v Speaker 1>All right, Michael Feedan, thank you so very much. He's

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<v Speaker 1>General counsel chief compliance officer at Trillium here in New York.

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<v Speaker 1>I'm Kathleen Hayes. This is Bloomberg. H