IEX co-founder Ronan Ryan says opponents of Gensler stock-exchange reforms are either 'insane' or talking their book

By Chris Matthews

SEC proposal would lower the fees exchanges can charge to access stock quotes

The financial services industry has been laser-focused on reforms to securities-market plumbing recently proposed by the Securities and Exchange Commission, with many of the sector's most influential leaders and institutions loudly criticizing a proposal that would overhaul how retail trades are executed.

Ronan Ryan, president and co-founder of the equities exchange IEX, argued in an interview with MarketWatch that what's important to most Americans are proposed changes to rules that govern stock exchanges like Intercontinental Exchange Inc.'s (ICE) New York Stock Exchange and the Nasdaq Inc (NDAQ).

Ryan argued that most ordinary people "have way more money in their 401(k) plans than then do sloshing around in their Robinhood accounts," and that this makes it important that institutions that manage that money get a fair shake when they buy and sell stocks.

Read next:Virtu CEO slams Gensler reforms as Democratic plan to curb retail trading

Recent data from Pew shows that while only 14% of Americans own individual stocks, 52% are invested in the market, with the majority of that coming in the form of employer-sponsored retirement plans or individual retirement accounts.

That's why, Ryan said, policy makers and the industry should place more emphasis on the rules that govern stock exchanges and alternative trading systems, called "dark pools," where pension funds and institutional investors do most of their trading.

SEC Chairman Gary Gensler unveiled four market-structure rule proposals last December, one of which could have a profound impact on the prices institutions pay to buy and sell stock and the revenues earned by securities exchanges and market making firms that execute trades on the exchanges.

The proposal to update rules governing the U.S. national market system, known as Reg NMS, would allow exchanges to buy and sell stocks in increments of less than one penny and would lower a cap set on fees that exchanges can charge traders to access their quotes.

The public comment period for the changes ended in March, and the SEC will review that input before voting on a final rule package, though the timeline for such a vote is uncertain.

"In today's markets, exchanges often rebate to one set of traders the access fees paid by another set of traders," Gensler said in December. "This can create conflicts in the market. Such conflicts can benefit high-volume traders over smaller market participants and everyday investors."

These potential conflicts of interest were the subject of Michael Lewis' bestselling 2014 book "Flash Boys," which told Ryan's story as co-founder of IEX, an exchange that markets itself as fairer and more transparent, in part because it does not pay rebates to trading firms.

See:Michael Lewis says 'Flash Boys' wasn't just about protecting rich investors

While brokers are supposed to execute trades on the venue that will provide the best price for their customers, research has shown that exchanges that provide higher rebates earn greater market share.

"Everyone says we don't route for rebates, but every time an exchanges pays a higher rebate, they garner more market share," Ryan said. "So someone is routing for rebates."

The SEC tried to address these potential conflicts directly by launching a pilot program that banned the practice on a portion of trades, but NYSE, Nasdaq and CBOE Global Markets Inc. (CBOE) successfully blocked this efforts in the courts in 2020.

The rule currently under consideration wouldn't directly address rebates, but lowering the fees exchanges can charge for access to quotes would reduce the money they are able to pay traders in rebates, Ryan said.

Now read:The real challenge facing 'Flash Boys' hero is the IEX business model

Ryan admits that the proposed changes would be good for IEX business relative to exchanges that offer rebates, but argues that comment letters to the SEC illustrate that the changes are popular among a wide swath of market participants.

A coalition of pension funds, including the California Public Employees Retirement System (Calpers) and the Teacher Retirement System of Texas (TRS), which collectively have more than $2 trillion in assets, wrote to the SEC last month in strong support of access fee reductions.

"The existing system clearly disadvantages institutional investors," the group wrote, noting the potential for conflicts of interest and that "the burden of high fees falls on them disproportionately" because pensions typically seek access to exchange quotes rather than provide liquidity like trading firms do.

The major exchanges continue to oppose reducing the access fee, with Nasdaq writing in a March comment letter that it would be "arbitrary and capricious" to proceed with a reduction in access fees without evidence that such fees harm markets -- the same argument exchanges successfully made to block the pilot program in 2020.

Nasdaq also argued that the proposal would lead to investors getting worse prices because exchanges would not have the resources to "offer meaningful rebates to encourage more liquidity and tighter spreads."

Ryan argues however that the current cap has been in place for nearly 20 years, a period during which commissions for nearly every other market participant have come down dramatically, and is woefully out of date.

"Years later, where technology costs have gone, it's much cheaper for us as exchanges and the average daily volume is much higher," he said. "How anybody could argue that lowering the cap is anything other than a good idea is either insane or just wants to keep charging high fees."

-Chris Matthews

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04-20-23 0856ET

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