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Trillium's Friedman on IEX's Business Model (Correct)(Audio) · Bloomberg Intelligence

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  Speaker 1: You're listening to Taking Stock with Kathleen Hayes and Pim
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  Speaker 1: Fox on Bloomberg Radio. A new stock exchange with a
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  Speaker 1: very high minded purpose, and that is to level the
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  Speaker 1: playing field between hyper fast traders and slower moving ordinary
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  Speaker 1: traders with a famous speed bump, a three D fifty
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  Speaker 1: micro second delay on trades. This is what I e
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  Speaker 1: X is trying to do, and our next guest is
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  Speaker 1: wondering if they're going to succeed. Michael Friedman is General
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  Speaker 1: counsel and chief Compliance Officer at Trillium right here in
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  Speaker 1: New York. Michael, welcome back to the show. Thanks Kathleen
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  Speaker 1: Cloud to be with you. Well, of course you are.
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  Speaker 1: You do compliance. You oversee your traders at Trillium who
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  Speaker 1: tend to be more I guess uh somewhere between high
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  Speaker 1: frequency and regular. I wouldn't say slowly, just for traditional traders.
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  Speaker 1: I e X uh remind us the business model and
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  Speaker 1: how people like you and the traders that your your
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  Speaker 1: firm reviewing it. So I e X has built kind
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  Speaker 1: of a narrative for itself that it is. It solves
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  Speaker 1: a specific problem caused by a certain type of high
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  Speaker 1: frequency trading called latency. Arbitrage. So what they've created is
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  Speaker 1: a speed bump that every order message to an offer
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  Speaker 1: to buy or sell must pass through before it hits
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  Speaker 1: their matching engine, and then the news of whether it
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  Speaker 1: actually got filled passes back through that speed bump when
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  Speaker 1: it goes back out to the rest of the world.
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  Speaker 1: And it's fifty micro seconds. That's a third of a
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  Speaker 1: thousandth of a second. But they save up enough to
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  Speaker 1: disable a certain type of trading strategy that got a
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  Speaker 1: lot of attention in Michael Lewis's book and in various
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  Speaker 1: other corners of the world. Um and uh, it probably
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  Speaker 1: does solve that problem. Give them credits for that. Okay,
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  Speaker 1: well that's Michael Lewis's famous book Flash Boys. Some people
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  Speaker 1: with hindsight who know the who are in this industry
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  Speaker 1: felt that it wasn't maybe a uh, I don't know
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  Speaker 1: that the view of it was maybe a bit one sided.
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  Speaker 1: But let's clip let's see the book to one side,
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  Speaker 1: because the key question is this. I assume that the
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  Speaker 1: founders of I e X think, boy oh boy, people
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  Speaker 1: are gonna love this because they don't want these high
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  Speaker 1: frequency traders stepping in front of them. They started up
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  Speaker 1: on there gradually on August nineteen or gonna gradually add
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  Speaker 1: stocks for a couple of weeks. Is their demand? How's
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  Speaker 1: it going so far? Well, you put your finger on it.
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  Speaker 1: So the in order for them to be successful, and
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  Speaker 1: success is a stock exchange means generating a lot of
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  Speaker 1: volume and competing with the big the big guys Na
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  Speaker 1: Duck and nivey Um. They need to do a lot
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  Speaker 1: of trades, and the way they do a lot of
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  Speaker 1: trades is by encouraging more orders to be routed to
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  Speaker 1: them UM and their history has shown that when you
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  Speaker 1: start a new exchange like this, there really isn't enough
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  Speaker 1: natural traffic is in natural buyers and natural sellers who
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  Speaker 1: are real investors, both wanting to take the opposite side
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  Speaker 1: of a of a of a stock at a certain
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  Speaker 1: price at the same time. That's kind of rare that
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  Speaker 1: that happens. So the way the markets that you kind
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  Speaker 1: of grease the skids and make the markets uh were
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  Speaker 1: a little faster as you have middlemen called market makers
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  Speaker 1: who stand in the middle and are willing to buy
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  Speaker 1: when there's a willing seller and sell when there's a
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  Speaker 1: willing buyer, and that makes it all move a lot
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  Speaker 1: faster these days. All of those market makers are electronic,
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  Speaker 1: and they happen to be the very same firms that
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  Speaker 1: people who are kind of kind of bought into the
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  Speaker 1: narrative of I e X. Uh don't like. Then we're
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  Speaker 1: talking Citadel, KCG, Virtue. Those are the major market makers.
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  Speaker 1: So what I e X have to do is it
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  Speaker 1: needs to encourage these high frequency trading firms to become
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  Speaker 1: market makers on their venue and to post a lot
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  Speaker 1: of quotes so that they'll generate volume. But at the
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  Speaker 1: same time, they don't want to appear to be catering
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  Speaker 1: to these h f T for arms, because they're supporters
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  Speaker 1: who have pushed them this far. Uh really don't like
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  Speaker 1: h f T firms. Oh boy, it's hard. So what
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  Speaker 1: do you think is going to happen? I mean, well,
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  Speaker 1: so it's funny. So Barkley's was in a very similar
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  Speaker 1: situation with their dark pool a couple of years ago,
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  Speaker 1: and so there's a model for how not to solve
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  Speaker 1: this problem, which is what Barkley's did, which is, Uh,
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  Speaker 1: you basically invite all the high frequency trading firms to
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  Speaker 1: trade on your venue, but you don't tell your investors
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  Speaker 1: that you've done that and Barkley's that's what Barkley's did
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  Speaker 1: on their dark Pool, and the Attorney General investigated and
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  Speaker 1: found that they were misleading their investors and give them
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  Speaker 1: a big fine for that. So I think what they
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  Speaker 1: what I should do. Taking learning the lesson of of
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  Speaker 1: Barkley's mistake is that they really need to kind of
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  Speaker 1: dial back on the messaging of how anti h f
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  Speaker 1: T they are. And to their credit, it's probably been
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  Speaker 1: outsiders who have kind of taken their narrative that they
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  Speaker 1: solve one uh specific evil of HFT and turned it
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  Speaker 1: into this broader message that they're anti HFT in general.
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  Speaker 1: So if they can kind of dial that back a
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  Speaker 1: little and say, look, we just care about these specific
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  Speaker 1: evils that everyone hates, but we still support electronic market
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  Speaker 1: making generally, I think that's probably the way to go.
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  Speaker 1: Quick final question, you've got about thirty seconds. If they
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  Speaker 1: make this work, how lucrative is this going to be
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  Speaker 1: for them? I mean broadly specific terms, how would you
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  Speaker 1: describe it? Well, it's it's not what it used to be.
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  Speaker 1: This industry, UM, it's pretty competitive now, it's extremely competitive.
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  Speaker 1: It doesn't get more competitive in this tiny spreads UM
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  Speaker 1: One of the ways that exchanges make money in this
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  Speaker 1: business is by selling data, and so far e X
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  Speaker 1: said they're not going to sell that data. If you
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  Speaker 1: sell data, that kind of insulates you from volume fluctuations,
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  Speaker 1: which is can have a big impact on your bottom line.
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  Speaker 1: Selling data is kind of a stable business year in
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  Speaker 1: and year out. So if they can generate them to
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  Speaker 1: human move into selling data, I think they'll will succeed.
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  Speaker 1: All right, Michael Feedan, thank you so very much. He's
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  Speaker 1: General counsel chief compliance officer at Trillium here in New York.
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  Speaker 1: I'm Kathleen Hayes. This is Bloomberg. H