Philadelphia Chapter Event: Exchanges Not Always an Example of Brotherly Love

by FEI Daily Staff

Financial Executive International's Philadelphia Chapter welcomed Patrick Healy to their November 18 meeting at Maggiano’s Little Italy. Healy’s story begins well before the birth of IEX, but his passion for what he calls a “fairer market for consumers” might convince you this is his life’s work. And in some ways, it is.

Considered an expert on stock markets, Healy served as CEO of The Issuer Advisory Group, LLC for the past 20 years, and during his tenure, he listed more stocks on the NYSE and NASDAQ than anyone.

After watching a 60 Minutes special on the best-selling Flash Boys written by Michael Lewis and featuring, among others, Bradley Katsuyama, the founder of IEX, Healy was forced to ask himself, “How did I never understand this before?”

Struck by the unfairness of the current market practices, Healy joined IEX in April of 2015 as the head of listings. Though Lewis clearly asserts that the broader stock market is rigged, Healy takes a gentler approach.

“We don’t think the market is rigged. And we’re not here to take shots at the NYSE or NASDAQ or to tell people that the emperor has no clothes. But if you go out to Wall and Broad, you might see a guy standing in his boxers.”

As Healy points out, the motives of the exchanges have changed over the years. “It used to be that the exchanges had a bond of trust with the public and were much more like a utility. Now they’re publicly owned entities and increasingly resemble technology vendors more than exchanges, which is at the heart of the problem.”

The exchanges have switched their roles and enable an unfair market, selling fast data and fast technology. High-frequency traders are able to jump in front of the consumer, buy the same stock, and drive the price up before the buyer’s order even arrives. This high-frequency computerized stock trading now controls more than half the market.

To explain this practice, Katsuyama uses a StubHub analogy: a family searching for four tickets to a concert, putting in an order to purchase those tickets and seeing that they’ve only bought two tickets at $20 each and the remaining 2 tickets have now gone up to $25 each.

Healy stresses the importance of “real liquidity,” the ability to buy and sell stock (usually in large quantities) with very limited price movement. “Phony liquidity” results in increased volatility for shareholders and increased profits for the exchanges. Healy argues, “Exchanges should be a place where buyers and sellers can find each other. Isn’t that the purpose? Not to sell data or technology.”

Healy went on to educate the audience on volumes, explaining that most trading is no longer taking place on the trading floor. Of the trading floor “illusion,” Healy remarked, “at 10 o’clock you could turn it into a bowling alley.”

Overall, Healy’s presentation was well received and generated lots of questions from the chapter members.

When asked by a member why he should switch to IEX? “Because I’m going to give you four tickets for $20.”