We focus on changes in laws, representatives and programs to create change and re-balance the scales back even for the rest of us. Yet, sometimes there is an entrepreneurship opportunity to even things up. One entrepreneur, Brad Katsuyama, CEO founded IEX, a private stock exchange is making trading more equitable. His firm offers a service that inserts a short pause for all traders to at the same time seeing the latest bid/ask price. This approach puts all investors on an equal playing field when it comes to trading stocks – whereas today, flash traders with special links to the NY Stock Exchange and NASDAQ can get ahead of regular investors like you and me. These high frequency traders can make thousands and sometimes millions of dollars in a blink of an eye. The exchanges and flash trading firms are fighting the SEC application by IEX to be a fully regulated exchange and thus compete with the major exchanges. Surprise! The IEX application was just approved today after much lobbying by investor groups, pensioners and New York Times editorial. Let the SEC know that you support the IEX approval at the link in the Action section of this post as Wall Street is planning to appeal the decision.
Flash trading provides the Elite the best price, for either selling or buying ahead of the rest of us. Michael Lewis in his 2014 book, Flash Boys: The Wall Street Revolt, outlines in depth how flash trading – dark pool flash exchanges (off premise from the NYSE and NASDAQ) now execute about 60% of all trades. The hedge funds, wealthy investors and major pension funds looking for an edge over the average investor (who does not have access to these flash trading systems) establish the rules of a public stock market in their own favor. However, companies like IEX challenge this unfair system of trading. The trading Elite can’t have this insurgent firm changing the rules of the game so they are fighting to keep their advantage.
This flash trading system is dangerous to trading as well, on May 6, 2010 the markets crashed precipitously for 38 minutes while some shares were forced down to pennies a share with instant losses in the trillions of dollars. A 2015 Department of Justice investigation found that while flash trading may not have started the crash, it was driven down hard by high frequency traders.
The SEC is chartered with ensuring the efficient operation of the markets and fairness for all traders (even small investors) to display bid/ask prices. Exchanges have offered services to provide traders with real time pricing information – readily available to all. However, high frequency traders (HFT) operate private exchanges off the public exchange floors. HFT traders float small orders as signals to other HFT traders that there is a big order waiting, to execute a deal not available to the small or non HFT trader. By executing these ‘hidden’ trades HFT traders were able to skirt SEC regulations on open fair market trading published in 2005.
IEX was founded four years ago, as a private exchange to prove that a ‘speed bump’ to pause HFT would make the market fairer for all yet executing trades efficiently. Last year, IEX applied to the SEC to be a national regulated market. Their application was supported by some major market players like T Price Rowe, the Texas Teachers Association, California Teachers Association, Franklin Templeton and others. The IEX application posed a threat to the established partnership of HFTs and the NYSE, NASDAQ and the fees that the exchanges receive.
The Elite still want the playing field tipped their way:
“Allowing IEX to become an exchange would create additional complexity in a marketplace that is already criticized — rightly — as too complex,” said Bill Harts, President, Modern Markets Initiative, that represents HFTs. They say it is inefficient – for them! What about the rest of the trading community!
Today’s SEC decision is a win by tipping the scales back toward fairness and equity. We can’t let our guard down.
IEX is a good example for us to learn from: entrepreneurship in inequitable situations where there is a good opportunity for both making money and balancing the scales can challenge Wall Street. Eric Ries, Silicon Valley entrepreneur and author of The Lean Startup, has proposed a Long Term Stock Exchange where the long term perspective is the focus, not short term IPO stock flipping or quarterly earnings results used as hammers by Wall Street on CEOs. Maybe Eric would consider adding employee partnership as a principle, as he notes that management would like to see employees take a long term perspective. One idea is we recruit CEOs and founders who have a progressive corporate perspective. Where it is not feasible to create for-profit firms then social entrepreneurship can offer great results as well.
- Let the SEC know that you support the IEX application and open fair markets, write a comment on their regulations
- Join or follow Progressive Business Owners at their FB site.
Update: Other Entrepreneurial Initiatives – Inequality
Startup Helps Teachers Afford Homes – Landed founded in 2015, by Stanford grads Alex Lofton and Jonathan Asmis to help all types of home buyers, by bringing together investors who want to help out and potential home buyers. They plan to operate throughout California, though for the last five months they have focused their efforts on SF Bay Area school districts and teachers.