IEX in the Modern Market: An Analysis of Market Quality across US Stock Exchanges

Abstract

In this paper, I examine various market quality across US stock exchanges using a combination of public information from Rule 605 Reports, SEC MIDAS databases, and handcollected information from SEC filings. In particular, I focus on how the Investors Exchanges, or IEX, which differs from other exchanges in its use of intentional ”speed bump” delays, performs relative to other exchanges. I attempt to provide a comprehensive analysis of market quality and therefore look at dimensions involving fill rates, block transactions, practices of execution, routing, and cancellation, speed, and various price metrics measured through spreads. A central market quality metric that I focus on is effective spread, which reflects the actual trading costs to traders. I use three different methodologies to evaluate IEX’s performance relative to other exchanges: one with simple averages, one with weighted averages, and one that controls for selection bias through fixed effects regression analysis. For each methodology, I tend to find that IEX underperforms other exchanges in most metrics. In particular, IEX experiences significantly worse market quality in market orders and in larger orders. Finally, I use a differences-in-differences approach to assess the impact of IEX’s removal of outgoing delays, finding that market quality improved. Thus, my results point to the conclusion that market structures based on imposed speed delays harm market quality.