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