IEX Group is pushing back on the latest round of criticism that its planned options exchange would harm retail investors.
At issue is IEX’s Options Risk Parameter, a mechanism that would cancel or adjust certain price quotes in certain market conditions. IEX says the aim is to reduce latency arbitrage – a strategy used by some speed-oriented market participants to take advantage of stale quotes – and thus improve market quality and help end-user investors; critics such as Citadel Securities say it would result in more retail orders either going unfilled or being executed at worse prices.
“The debate is around this particular tool that we want to offer market makers to provide targeted protection against latency arbitrage costs,” said John Ramsay, Chief Market Policy Officer at IEX. “There are firms that may want to continue with the ability to earn money from latency arbitrage, who have a natural incentive to not want a lot more competition in the market.”
In a June 19 letter to the US Securities and Exchange Commission, IEX addressed criticisms of its options exchange by rival exchange operators MEMX, Nasdaq, and New York Stock Exchange, as well as FIA Principal Traders Group, and Citadel Securities, Charles Schwab, and IMC jointly.
Citadel Securities followed up with an 11-page letter to the SEC dated June 23, in which it criticized IEX’s “unprecedented quote canceling scheme in the U.S. options market to enrich its shareholders and its select cadre of market makers – all at the expense of millions of American investors.”
Options market makers All Options USA and HAP Trading have written to the SEC in support of the IEX options exchange, as has GMU Scalia Law School Associate Professor J.W. Verret.
IEX was founded in 2012 as an alternative trading system for US equities, and it became a registered exchange in 2016. From its inception, IEX’s differentiating factor has been a so-called speed bump designed to protect investors from predatory trading behavior of certain high-speed market participants. The firm has grown its market share to about 2.5% of US equity trading volume, and it plans to launch an options exchange in Q1 2026.
IEX Rebuttal
In a June 27 interview with Traders Magazine, Ramsay and Ivan Brown, Head of IEX Options, rebutted Citadel Securities’ June 23 letter to the SEC.
Latency arbitrage is effectively a tax on liquidity, Ramsay said, and it’s a particular problem in the options market, where the market-maker universe has shrunk over the years and those remaining need to maintain quotes on thousands of contracts.
“There’s a concentration of market power and there is inefficiency priced into options spreads,” Ramsay said. IEX’s Options Risk Parameter “will encourage more people to participate and compete as market makers.”
IEX is developing the Options Risk Parameter “in a very specific way that closely tracks what we do with D-Limit in equities,” Ramsay said. “We look at incoming market data as fast as we can get it, and if we detect that a particular quote is on the verge of being picked off, if the market maker wants it repriced or canceled, we do that for them.”
Ramsay said a primary objection to IEX Options is that it will make price quotes inaccessible or unreliable; however, IEX has run data that shows this risk would exist less than 0.001% of the time.
Ramsay added that D-Limit in equities was affirmed by the SEC and stood up to court challenges. “We’re doing essentially the same thing here, by using data to determine when an option quote is substantially disconnected from the underlying stocks, to determine when it’s in danger of being picked off,” he said. “To any claims about inaccessibility in the context of options markets being different from equities, we think those differences mean that this is needed even more in options.”
Options market makers have a unique set of risks in maintaining and updating price quotes across a broad universe, and there is precedent for the Options Risk Parameter, according to Brown.
“The options industry has, collectively for many years, provided market makers with tools that allow them to better manage those risks,” with one of those tools being activity-based risk controls that enable quote cancellation if certain trading-volume breaches are triggered.
“So the notion of quote cancellation already exists today, from a risk point of view,” Brown said. “We view the options risk parameter simply as an incremental step in providing tools to market makers reflecting the unique risks that they face, this one specifically addressing price dislocation.”
Ramsay addressed Citadel Securities’ specific criticisms of IEX Options by saying: “We have demonstrated our quotes are fully accessible, and we’re also promoting competition, so there will be better liquidity available to investors. We are providing access to investors to better quotes, and they will be as accessible as quotes on any other market.”
He added: “The only people who won’t be able to access them are latency arbitrageurs, and that’s the point.”
When contacted by Traders Magazine, a Citadel Securities spokesperson on June 30 declined comment beyond its letters to the SEC.
The full set of comments to the SEC regarding IEX options can be found here.
