(Bloomberg) — Goldman Sachs Group Inc. is the biggest broker on the upstart U.S. stock platform created by IEX Group Inc., according to a memo IEX sent some clients.
Goldman Sachs said last week that markets would be well- served if the five-month-old venue achieved critical mass. Yesterday, in a memo obtained by Bloomberg News, IEX said the firm has more than double the volume of the No. 2 broker.
Its a bit surprising to see a major broker be such an active and vocal supporter of IEX early on, Justin Schack, partner and managing director for market structure analysis at Rosenblatt Securities Inc., said in a phone interview. Its an important vote of confidence in IEX.
Gerald Lam, a spokesman for New York-based IEX, declined to comment on the memo or the endorsement from Goldman Sachs. Tiffany Galvin, a Goldman Sachs spokeswoman, said the New York- based firm has no comment beyond last weeks memo.
Goldman Sachs has played kingmaker before in the exchange industry. It was an early investor in IntercontinentalExchange Group Inc. and was among the firms largest shareholders when it went public in 2005. Atlanta-based ICE, which now owns the New York Stock Exchange, has grown to become the worlds second- biggest bourse owner by market value at $23 billion. Goldman Sachs was also a shareholder of Direct Edge Holdings LLC, which merged this year with Bats Global Markets Inc. to form an exchange operator with about 20 percent of American volume.
While Goldman Sachs has a board seat at Bats, IEX doesnt let brokers such as Goldman Sachs own stakes in the company.
Better Experience
So far, IEX has captured only a small slice of stock trading. Average daily volume increased to 14.7 million shares in February from 9.1 million in January, and is exceeding 18 million in March. Thats less than 1 percent of the 2014 daily average of 6.9 billion on all U.S. markets.
Support from Goldman Sachs could help. It generated $7.17 billion in revenue from equity trading in 2013, excluding accounting charges, the most of any global bank.
From our very first meeting with Goldman Sachs nearly 9 months ago, they have been aligned with IEXs client-centric philosophy, IEX Chief Strategy Officer Ronan Ryan said in the e-mail sent to asset managers. Their primary interest is to deliver a better experience for clients and to fix issues in market structure that put the overall system at risk.
The $23 trillion U.S. equity market is considered too fast, too opaque and too complex by critics. IEXs business model directly addresses the first two. When a trade is executed, IEX delays broadcasting that fact by 350 millionths of a second. And in a challenge to other dark pools, IEX last year released its normally private regulatory filing that explains how it operates.
Critical Mass
In its memo last week, Goldman Sachs said that it would be best for the overall market if IEX achieved critical mass, even if that results in reduced volumes on Sigma X, the Goldman Sachs dark pool. If IEX took business from Sigma X and other dark pools, it could reduce complexity in the U.S. equity market, where trading is spread across more than 50 venues.
Goldman Sachss endorsement is a big deal for IEX, said Larry Tabb, chief executive officer of market-research firm Tabb Group LLC. Its going to make other people who arent paying attention to IEX think twice about not being connected to them.
New York Attorney General Eric Schneiderman said last week that hes looking into whether U.S. exchanges and alternative trading venues give high-speed traders improper advantages. Two days later, Goldman Sachs President Gary Cohn published a column in the Wall Street Journal calling for changes to the markets structure to reduce trading disruptions. Its support for IEX was also revealed last week.
JPMorgan Chase
Goldman Sachs isnt the only Wall Street broker thats backing IEX.
We have been big supporters of IEX since day one — both in terms of our vocal support and our support with order flow, Daniel Ciment, Americas head of electronic trading solutions at New York-based JPMorgan Chase & Co., said in a phone interview. This goes to our theory of, If its good for the market, then its good for us. We have never cared how much volume goes on in our dark pool beyond the effect it has on giving best execution to our clients.
U.S. Securities and Exchange Commission officials have in recent months spoken of the need to reexamine stock market rules. Meanwhile, ICE CEO Jeff Sprecher and a group of money managers recently met with SEC regulators, encouraging them to abolish the practice of exchanges paying rebates to encourage trading, according to three people familiar with the matter. IEX doesnt use that system, known as maker-taker.
Maybe the tides are turning to try to simplify market structure, Tabb said.
