Investors Exchange (IEX) Building A Market that Works for Investors. September 9, 2015

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Investors Exchange (IEX)

Building A Market that Works for Investors

September 9, 2015

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FLASH BOYS: A WALL STREET REVOLT

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THE STOCK MARKET HAD BECOME AN ILLUSION

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BUY ORDER

100K shares AMD DISTANCE

NYC

BATS

Weehawken, NJ 25K shares AMD

Direct Edge

Secaucus, NJ 25K shares AMD

NASDAQ

Carteret, NJ 25K shares AMD

NYSE

Mahwah, NJ 25K shares AMD

$

2 milliseconds

LATENCY

DISCOVERY OF A PROBLEM

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LATENCY ARBITRAGE WAS THE CAUSE OF THE PROBLEM

BUY ORDER

100K shares AMD DISTANCE

NYC

BATS

Weehawken, NJ

Direct Edge

Secaucus, NJ

NASDAQ

Carteret, NJ

$

476 microseconds LATENCY

~50-60%

FILL RATES

25K shares AMD

25K shares AMD 12,500 shares AMD

25K shares AMD 15,000 shares AMD

NYSE

Mahwah, NJ

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WE COUNTERED SPEED BY SLOWING THINGS DOWN

BUY ORDER

100K shares AMD DISTANCE

NYC

BATS

Weehawken, NJ 25K shares AMD

Direct Edge

Secaucus, NJ 25K shares AMD

NASDAQ

Carteret, NJ 25K shares AMD

NYSE

Mahwah, NJ 25K shares AMD

$

290 microseconds LATENCY

100%

FILL RATES

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EXCHANGES ARE NOT WHAT YOU THINK THEY ARE

MAHWAH, NJ CARTERET, NJ TIMES SQUARE WALL STREET

REALITY

ILLUSION

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J

ULY

27, 2009

Direct Edge in Crosshairs of “Flash

Orders” Debate

“The practice gives banks, hedge funds, and some dark pools, where orders are matched anonymously, an advanced look at order flow.

The service helped spark Direct Edge's impressive growth, and was closely imitated early last month by formal exchanges Nasdaq Stock Market and BATS Exchange.

Critics…say they provide an unfair advantage to select participants, creating a "two- tiered" market that undermines the confidence of those without lightning-quick computer trading software.”

A

UGUST

9, 2010

NYSE Opens Mahwah Data Center

“The new data center features colocation space for trading firms seeking high-speed access to the matching engines. NYSE

Euronext says it has sold out all the available colocation space in its first phase at Mahwah –

reported to be at least two 20,000 square foot pods. Three additional pods are planned as expansion space, for a total of 100,000 square feet of colocation space.”

CME, Nasdaq Plan High-Speed Network

Venture

M

ARCH

28, 2013

“CME Group Inc. and Nasdaq OMX Group Inc. have detailed plans to launch a wireless network joint venture in May that will beam stock and derivatives prices

between Chicago and New York in fractions of a second.

The service is pitched at high- frequency traders and Wall Street banks seeking a competitive edge using the data to place trades more quickly than rivals.”

WHY DOES A STOCK EXCHANGE EXIST?

Slow Dark Pools Cost Investors,

Study Says

A

UGUST

25, 2015

“The technological shortcomings can cost mutual funds and hedge funds millions of dollars over time, New York research firm Tabb Group plans to say in a release Wednesday.

What they found is the Boston Company’s orders at times were getting filled at prices that were

“suboptimal” in some dark pools, meaning they could potentially have gotten a better result if a trade was carried out more quickly.”

Study Says Broker Rebates Cost Investors Billions

M

AY

6, 2012

“In recent years, though, brokers have had another enticement that can pull them in a different direction: payments from stock exchanges in return for sending them business.

The practice has attracted criticism from several industry participants and former

regulators who say the so-called rebates that the exchanges pay Wall Street firms could give those firms an incentive to profit at the expense of investors.

Now a new study using industry data says that the rebates could be costing mutual funds,

pension funds and ordinary

investors as much as $5 billion

a year.”

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1. Exchanges sell Fast Data

Those who pay will know of a price change before those who don’t pay. The only way to profit from this is to trade quickly before

others get the same information.

2. Exchanges sell Fast Technology That allow fast traders to profit from advanced knowledge.

3. This has enabled the rise of High Frequency Trading from ~25% of market volume to ~50% of volume

WHY DO EXCHANGES SELL FAST DATA AND TECHNOLOGY?

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WE DECIDED TO BUILD OUR OWN STOCK EXCHANGE

- INVESTORS EXCHANGE MISSION STATEMENT:

To become the most trusted and fair market operator in the world

CORE VALUES:

1. Be Committed to the Mission

2. Be willing to challenge the status quo

3. Seek and Share Knowledge with a purpose

4. Act with Integrity

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BUT…WE HAD NO MONEY!

Brokers / Banks

 Good partners x Creates potential

conflicts of interest x Limits Disruption

 Cash rich x Competitor

x Incentive to maintain status quo

 End users

 No Conflicts

x Has Never Been Done

It took 9.5 Months to raise our first round. But we had resolve to do it right, or it wasn’t worth doing at all…..

Exchanges Mutual Funds / Hedge Funds / Public Companies

Potential Sources of Funds:

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OUR RESOLVE PAID OFF: CONFLICT-FREE OWNERSHIP

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IEX CREATES A LEVEL PLAYING FIELD

1. IEX is a seasoned TEAM OF EXPERTS from large banks, asset managers, exchanges, and regulators

2. We SLOW DOWN high- speed traders to make our market safe for investors

3. We AVOID CONFLICTS in pricing and operations of our market.

VS.

FLAT FEE PRICING

&

SIMPLE MARKET

REBATE PRICING

&

COMPLEX MARKET

VS.

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IEX QUARTERLY GROWTH

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HOW TO CHANGE THE COURSE OF HISTORY…

START BY UNDERSTANDING WHY HISTORY REPEATS ITSELF

Regulation

Loophole

Exploitation Scandal

INNOVATION

TALENT

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BREAK THE HISTORICAL CYCLE TO CREATE POSITIVE CHANGE

Regulation

Loophole

Exploitation Scandal

v

Market- Based Solution

TALENT

INNOVATION

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WHAT CAN YOU DO TO CHANGE HISTORY?

Ask Questions

Ask what exchanges and dark pools your orders are trading in and ask WHY you are trading there

Seek Transparency

Work with brokers and exchanges to understand how each market is handling your order and providing a fair marketplace for investors

Vote With Your Feet

Take greater control of your orders and support solutions that are aligned with your interests