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Sunday, 13 August 2017 00:13

Critics think IEX’s Yale buds are giving the exchange a boost

Written by  John Aidan Byrne

IEX, the stock exchange meant to level the playing field for smaller investors, is being criticized by Wall Street for having its friends at Yale — a professor and the university’s CIO — grandstand for it in the op-ed pages of the New York Times.

IEX, the stock exchange meant to level the playing field for smaller investors, is being criticized by Wall Street for having its friends at Yale — a professor and the university’s CIO — grandstand for it in the op-ed pages of the New York Times.

The exchange, led by Brad Katsuyama, was launched a year ago amid worldwide fame gained from the best-seller “Flash Boys: A Wall Street Revolt” by Michael Lewis. It is now struggling to get any market share.

The bloodletting comes after the Times last month published the controversial opinion piece by the Yale officials defending IEX.

The op-ed — “Wall Street Profits by Putting Investors in the Slow Lane,” by Jonathan Macey, a professor at Yale Law School, and David Swensen, Yale’s chief investment officer — has critics hot under the collar.

They say it did not sufficiently disclose Yale’s close ties to IEX, and that it also botched arguments that Wall Street’s longstanding practice of paying brokers for orders is bad for investors.

IEX does not pay those “rebates,” calling them “kickbacks” that can result in inferior customer executions.

“Rife with misinformation and incorrect comparisons,” wrote analyst Larry Tabb, founder and research chairman of The Tabb Group, in a blog on his company Web site.

“The authors’ view that routing orders to exchanges offering rebates provides investors with poor execution quality is based on inaccurate examples and incomplete analysis,” he added.

David Weisberger, head of equities at ViableMkts and president of Exquam, called the Times’ piece a “tissue of lies, misleading stats, and inflammatory rhetoric.”

Another critic, who did not want to be named, asked why the New York Times editorial board allowed its pages to be used for “a thinly veiled IEX advertisement.”
Critics say Yale’s ties to IEX run deep.

IEX currently has two members with Yale affiliations on its board: William Donaldson and Jeffrey Sonnenfeld.

Donaldson, a former chairman of the Securities and Exchange Commission, co-founded and was the first dean of the Yale University School of Management, where Sonnenfeld is a currently professor.
IEX is also listed as a sponsor of conferences hosted by Yale.

And this is not the first time the Times opinion pages provided space for Macey and Swensen to discuss IEX. On Dec 24, 2014, the Times published “One Way to Unrig Stock Trading” by the Yale duo, and it, too, was roundly bashed by Tabb and other critics.

On both occasions, perfunctory disclosures about Yale’s interest in IEX are made. In the later one, buried in their piece, the Yale writers disclose: “Yale University, where we work, has a de minimis exposure to IEX through an investment by one of the university’s external managers.”

Critics claim that shouldn’t let Yale off the hook, saying the Ivy League institution and IEX are tied at the hip.

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    “None of this is illegal,” said one critic, “but it certainly begs the question of adequate disclosure — it’s obviously material, and a lot more revealing than the simple ‘we own a little bit of IEX’ disclosure.’ ”

    The flare-up comes at a delicate time for IEX. The exchange has a tiny share of US equities market volume — about 2.4 percent — and is overshadowed by the big guns, NYSE, BATS and Nasdaq, each either hovering just above or just under 20 percent.

    This month, seeking to shore up its volume, IEX made much of a regulatory approval that could see it launch as a listing venue as early as October.
    But it is a tough slog, since IEX is seeing copycat activity. The NYSE added its own speed bump and introduced more competitive pricing in certain categories.
    One person familiar with IEX’s business said the exchange is also facing a challenge persuading the same high-frequency trading firms it once attacked to bring trades to IEX, a former dark pool.

    “I think it is much more difficult to garner market share than what people are aware of,” said Richard Repetto, principal at investment banking firm Sandler O’Neill.
    Spokespersons for the Times and Yale said they believe the disclosure in the article was sufficient when contacted by The Post for comment.


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