Group Co.
Is IEX Selling “Snake Oil” to Retail Investors?
Traders Magazine Online News, April 18, 2017
The average person today equates the term “snake oil salesman” with someone selling a product that they know does not work for the ailments they promote it for. What is less well known is that snake oil is a legitimate cure for some ailments. Snake oil is rich in omega-3 fatty acids, particularly the Chinese water snake, which was what 19th century Chinese immigrants used as a folk remedy.
Interestingly, “Research since the 1980s has demonstrated the necessity—and efficacy—of omega-3 fatty acids. These acids not only reduce inflammation, such as arthritis pain, but also improve cognitive function and reduce blood pressure, cholesterol and even depression[1].” David Weisberger
Snake oil was first popularized by Chinese immigrants, who, while working in the old west, extolled its virtues as a cure. It is interesting to note that the snake oil they brought from home likely did work, as the Chinese water snake contained as much as 20% Omega-3 fatty acids. Unfortunately, the “old west version” was originally based on rattlesnake oil, which only had an 8.5% concentration of Omega-3, and dishonest peddlers sold variations which contained none. As a result, “in time, snake oil became a generic name for many compounds marketed as panaceas or miraculous remedies whose ingredients were usually secret, unidentified, or mischaracterized and mostly inert or ineffective.”[2]
So, why am I comparing IEX to snake oil? To understand, let us review the history and value proposition of IEX.
IEX was started, to incredible fanfare, as the antidote to High Frequency Trading (HFT), which was demonized in Michael Lewis’s book, “Flashboy’s”[3]. In that book, Mr. Lewis weaves together several stories which chronicle issues created by the rapid advance of technology in the equity markets. The main narrative, however, centered on founders of IEX and how they “discovered” that poorly architected routing technology resulted in information leakage and the failure to access displayed liquidity. At the core of their discovery was an understanding of the interplay of physics (the speed of light), routing technology, and network topology connecting the main datacenters housing the NYSE, Nasdaq and BATS exchanges in Mahwah, Carteret and Secaucus NJ, respectively. Some of the claims in the book, (particularly the claim that retail orders were being “front run”) were preposterous[4], but the book did identify two real issues: poor routing, and latency arbitrage.
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