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The Fight Against “Really Crooked Sh-t” — IEX One Year Later

It’s been nearly a year since we invested in IEX, the public equities trading venue chronicled in Michael Lewis’ best-selling book Flash Boys. While some things at IEX have remained constant (the company’s mission, its market traction and the strength of its team), the fight for fairness in the markets has grown more ferocious. And IEX isn’t backing down.

The company still believes in the massive opportunity to provide a level playing field for all investors by keeping things fair, simple and transparent. In other words, by simply making its money from trading revenue (as exchanges used to do) and by choosing not to sell privileged access to its exchange.

Much of this was discussed at a Sapphire Ventures-sponsored event on January 21 featuring Lewis and IEX CEO Brad Katsuyama, and so we wanted to take this opportunity to look back at the past 12 months to see what’s gone as planned and what unanticipated circumstances have come up.


At a high level, IEX is doing the same thing it has since Katsuyama first identified trading anomalies while at RBC: bringing fairness to the public exchanges. Or as Lewis described it, putting an end to “really smart people doing really crooked shit.” And in this process, IEX is increasingly gaining momentum and market share.

But what’s been surprising, to IEX and its supporters alike, is the magnitude of attention and debate about IEX becoming a registered national securities exchange. This debate is far from over, but our excitement has only increased as IEX continues on its path to becoming one of the largest exchanges in the world.

What’s Gone As Expected

We believe IEX’s progress since its October 2013 launch has been nothing less than remarkable. On the first day of trading as an ATS, IEX processed 286k shares. On January 20, 2016 IEX traded over 233 million shares, a new daily record. In doing so, the company, still operating as a dark pool pending formal exchange approval, has grown market share from zero to 1.9 percent, quickly forging a path to becoming a major national exchange and gaining adoption across investors, brokers and market makers along the way. As reference, NYSE and NASDAQ have market shares of 23 and 20 percent, respectively.

The company has launched additional products including the discretionary peg order, which protects investors from trading with those with an unfair advantage. In increasing adoption of new functionality, IEX has captured additional volume in the face of market volatility and during events like NYSE’s July trading halt.

Holding all of this together is the same team that we invested in a year ago, albeit with the addition of some senior hires from the New York Stock Exchange, BlackRock and KCG. Brad, his co-founders and the rest of the 67-person team have never been more laser-focused on correcting this billion dollar problem.

What’s Been Unexpected

The IEX vision has always been to become a formal exchange to extend its protective technology to more trading moments, including the opening and closing auctions, to further help protect individual investors that are also being taken advantage of by high-speed traders. In early 2015, we understood that becoming a formal exchange would not be an easy task, but we all underestimated just how long and contested that approval process would be.

IEX officially submitted its exchange application to the SEC in September 2015, starting a 90-day application process. The company just granted the SEC a 90-day extension that now sets the decision date at March 21, 2016. The reason for this is because IEX has received over 330 comment letters, most of which are supportive but not without a number of critical comments.

To put this in perspective, this is more comment letters than all other exchange applicants have received in the history of the market, combined. This gives you a sense of just how impactful IEX is to the status quo. Check out IEX’s response here and here. Constituents have billions of dollars riding on keeping the corrupt system in place. But that hasn’t stopped people like Yale Endowment, Norges Bank, T. Rowe Price, Teacher Retirement Systems of Texas, Jefferies, Goldman Sachs, Oppenheimer and others from lobbying in support.

What’s In Store Over The Next 12 Months
As Lewis and Katsuyama highlighted on stage last week, we’re at a critically important point in our financial history, and market-based reform has to be the way forward. The next year will undoubtedly be exciting. We will know whether the SEC has approved IEX’s application to become a formal exchange. We will see continued adoption of current products and the release of additional ones to continue to protect investors and maintain transparency in the markets.

At the Churchill Club event, Lewis commented, “Brad was never looking for a fight. The fight found him. And he chose to fight back.” The remark couldn’t have been more apropos.

We are excited to fight alongside Katsuyama and the rest of the IEX team and believe they will continue to do great things for the financial markets, growing market share and providing a fair trading environment for all constituents — brokers, issuers and investors alike. Sapphire is proud to be part of this journey and looks forward to helping create a successful company.

The information set forth herein is not intended to constitute investment advice and under no circumstances should any information provided herein be used or considered as an offer to sell or a solicitation of an offer to buy an interest in any investment fund managed by Sapphire Ventures. Sapphire Ventures does not solicit or make its services available to the public and none of the funds are currently open to new investors. Past performance is not indicative of future performance.

The portfolio company referred to above does not necessarily represent all of the investments made or recommended by Sapphire Ventures, and was not selected based on the return on Sapphire Ventures’ investment in the company. It should not be assumed that the specific investments identified and discussed herein were or will be profitable. Not all investments made by Sapphire Ventures will be profitable or will equal the performance of the companies identified above.