Nasdaq Wants a Magic Shoebox

There are three main reasons behind Nasdaq's $1.1 billion purchase of the International Securities Exchange, but only one of them is likely to cause widespread gossip and speculation among the market-structure debate club that's been meeting nonstop since "Flash Boys" was published. It also points to a broader problem in the stock-trading world.

First, the purchase will help Nasdaq firmly leapfrog over CBOE Holdings as the biggest owner of U.S. options exchanges by volume. Second, it will also allow Nasdaq to double its stake in the Options Clearing Corp. clearinghouse to 40 percent.

The third reason, however, is where all the intrigue lies. The deal gives Nasdaq licenses to run more stock exchanges, right when IEX Group -- the company profiled in "Flash Boys" as the antidote to suspected high-frequency trading predators -- is waiting for the Securities and Exchange Commission to rule on its application as an exchange. According to an interview with Annie Massa, Nasdaq Chief Executive Officer Robert Greifeld made it clear that he'd consider asking the SEC for permission to also run an exchange with a "speed bump" to delay buy and sell orders by a tiny fraction of a second, one of IEX's main selling points.

Nasdaq, justifiably, will have some sour grapes if the SEC approves IEX as an official exchange with its "magic shoebox," which coils long lengths of computer cables to slow down the speed at which orders reach its matching engine. As Nasdaq stated in its comment letter on IEX's application, the company's PSX exchange applied in 2012 to do something similar using programmed delays instead of cables. However, the exchange withdrew the application after discussions with SEC staff made it clear they probably wouldn't receive approval because delayed orders would not be considered "protected quotations" that are guaranteed to be filled if they are the best bid or offer on any exchange.

However, a lot has happened since that application in 2012. Michael Lewis' "Flash Boys" drew national scrutiny to the fairness of the electronic stock market, which is scattered over 12 official exchanges and dozens of dark pools. IEX and its "magic shoebox" were championed as the best way to thwart the automated high-speed traders who prowl over the various venues looking for profitable trading opportunities that exist for only fractions of a second.

Investors have clearly embraced the IEX model, making it one of the biggest dark pools by volume, even though most of the others are operated by big brokerages: