mushroom cloud

Nasdaq just went nuclear.

In a letter to the US Securities and Exchange Commission, Nasdaq’s law firm, Gibson Dunn, said the Securities and Exchange Commission could be sued if it approves IEX’s application to become an exchange. 

IEX, the upstart trading venue made famous by Michael Lewis’ book “Flash Boys,” filed with the SEC in September to become a stock exchange, kicking off a heated debate of the merits of its application.

The debate has at times gotten ugly, with IEX and the New York Stock Exchange in particular trading barbs.

For its part, the SEC has delayed its decision on the application until mid-June. 

At issue is the IEX speed bump, which IEX says levels the playing field between high-speed traders and the rest of the field.

IEX’s rivals have questioned whether the speed-bump is consistent with Regulation NMS, the rule which governs stock exchanges. That rule requires that a public exchanges response to an incoming order be “immediate.” 

The SEC has hinted that the 350-microsecond delay built in to the IEX delay could be permissible, as it is under one millisecond. Nasdaq disagrees. 

Here is the Gibson Dunn letter:

This supplemental letter explains our view that the Commission’s proposed Interpretation of the term “immediate” as permitting an intentional delay of less than one millisecond would conflict with the plain language of Regulation NMS, with the requirements of reasoned decision-making under the Administrative Procedure Act (“APA”), and with the Commission’s statutory duty to consider the effect of its actions on efficiency, competition, and capital formation.

Here are the references to judicial scrutiny:

To be sure, courts often afford deference to an agency’s interpretation of its own regulations, including to reinterpretations of existing provisions. But that deference is hardly boundless and would not shield the proposed Interpretation from judicial scrutiny. Deference to an agency’s interpretation of a regulation is not warranted unless “the language of the regulation is ambiguous.”


In addition, the proposed Interpretation would be unlikely to survive judicial scrutiny because this de facto rewriting of Rule 600(b)(3) would impermissibly circumvent the Commission’s statutory obligation to consider whether changes to Regulation NMS are justified on the basis of cost-benefit considerations.

And here is the closing paragraph:

For all of these reasons, Nasdaq urges the Commission not to depart from its existing interpretation of Regulation NMS by authorizing artificially delayed response times for protected quotations, and further submits that the Commission lacks the authority to approve IEX’s application and to treat its intentionally delayed quotations as protected.

This isn’t the first time that Nasdaq has spoken out about IEX. 

IEX team

Business Insider sat down with Nasdaq CEO Bob Greifeld in April, and asked him then about IEX. He said then that IEX was trying to “violate the core principle of Reg NMS. 

He said: 

So, in the latest SEC guidance they’re requesting comment on, we’re actually more happy because it says, okay we’re going to make a millisecond de minimis, but make that a policy statement. So this is not the IEX application, but we’re saying if you’re a millisecond or less, because now they call it millisecond de minimis, then you’re still reg NMS compliant. So okay, at least now we’re in a field where it’s not just about trying to give advantage to one exchange. And if they do that, we’re fine, but it’s going to be horrible.

And as I said, it introduces another dimension to orders– that’s time.

So right now, if you want to buy Apple, you say I want to buy 1,000 shares of Apple, $190 or whatever it’s trading at, and I say I want to buy 1,000 shares of Apple at this price, and I want you to wait a millisecond — I’ll have that order. Then I’ll have another order — not milli, micro, two microseconds… I can go every microsecond up to a millisecond. So, probably what will start is IEX is a 300 millisecond, somebody thinks it’s going to be better to go 301, somebody thinks it’s better to go 299, then it’ll go 298, 302, and you know, it’s going to be pretty interesting. So we’ll see.

That said, the letter marks an escalation in the entire IEX exchange application saga.

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