Ken Griffin, the billionaire founder and CEO of Chicago-based hedge fund Citadel on Wednesday shot back in the battle over high-frequency trading, telling a room of hedge fund titans that regulators have to "get past the marketing hype" around upstart rival trading venue IEX Group and its anti speed-trader efforts.
"IEX is portraying itself as a firm that levels the playing field against fast-trading firms," Griffin (pictured) said at the annual SALT hedge fund conference. "But what is interesting is the way the market structure works is that the fastest firm still wins the trade. Everyone faces the same delay in execution time - it's a level playing field. The fastest firm wins. What IEX does is they knowingly broadcast stale prices that will influence trading at every other venue in a way that I believe is materially detrimental to the stability to the US trading markets."
Griffin's comments come after Institutional Investor's Alpha Magazine noted that the hedge fund billionaire earned $1.7 billion in 2015, significantly more than CEOs at many of the largest U.S. banks.
Griffin is locked in an intense battle with IEX, which has an application before the Securities and Exchange Commission to become an exchange. IEX, of course, is the firm that was unknown outside of Wall Street offices before best-selling author Michael Lewis wrote a book about it and its war against high-frequency traders, which was published last year. Lewis is set to speak to the SALT conference Thursday and is likely to discuss his thoughts on IEX and Citadel.
IEX, which is current a dark pool trading venue, is seeking to respond to the advent of high-speed traders who regularly jump ahead of big block purchases or large sell orders placed by activist funds or institutional investors. The activity, known as front-running, can take place across multiple venues. Seeking to respond to speed-trades, IEX introduces a 350 microsecond delay or speed limit between orders intended to discourage HFT strategies from interfering with traditional investor trades. A number of activist hedge funds were early funders of IEX.
Citadel has been among the most vocal critics of IEX's exchange application, first criticizing what it said was an unfair trading advantage for IEX between its own router of orders and the proposed exchange. IEX responded by amending its application to put in a 350 microsecond speed bump between its router and its exchange. However, Citadel wrote in a comment letter in November that IEX would drive other exchanges to implement "these types of unhealthy mechanisms."
"What happens in a flash crash like environment where prices are volatile and one exchange [IEX] is consistently behind the tape on their prices?" Griffin asked. He added that even when IEX is behind the tape on their prices under current rules orders have to prioritized to them first even though they 'won't be good for the trade.'"
Critics of Citadel contend that if more exchanges impose speed bumps like IEX then the hedge fund would lose its speed advantage as a so-called "internalizer," which means they execute stock market orders internally instead of sending them to an exchange.
The Financial Institutions Regulatory Authority on Monday issued a study that showed that Citadel executes almost 6% of all exchange-listed stock trades - many of which originate with retail investors whose brokers such as Charles Schwab (SCHW) - Get Reportreceive payments for sending trades to Citadel. All of this has raised the ire of retail investor critics who question why Citadel, a hedge fund, has become essentially an exchange for mom and pop investors.
"I would be delighted to see is IEX be an exchange in the US," Griffin said. "What I don't want to see is IEX as exchange in the US knowingly broadcasting stale prices."