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Capitol Report

‘Flash boys’ exchange IEX hits back at Nasdaq lawsuit

IEX said timing of Nasdaq’s attack is no coincidence as it plans to sell companies on switching listings

IEX Group Inc., the nascent exchange known for its attacks on high-frequency trading made famous by Michael Lewis’s book “Flash Boys,” hit back at Nasdaq Inc. on Wednesday, asking a federal court in New Jersey to dismiss a lawsuit alleging it infringed on Nasdaq’s patented processes to support stock exchange operations.

In Wednesday’s court filing IEX argues Nasdaq’s NDAQ-2.91% lawsuit is “baseless” and that it has failed to identify where or how key elements of its patents appear in IEX’s exchange, or to provide evidence of its claims of willful infringement.

In a press release, IEX General Counsel Sophia Lee said, “We built our own technology with the explicit purpose of being a fundamentally different kind of exchange. As we emphasize in our motion to dismiss, IEX is a threat to Nasdaq’s conflicted and lucrative sale of systemic data and technology advantages to high-speed trading firms,” said Lee.

Nasdaq claims that IEX is infringing on seven patents that relate to “closing auction processes, multi-parallel order processing, matching engine performance, and data feed optimizations,” according to Nasdaq’s announcement of the suit in March.

A spokesman for Nasdaq declined comment.

IEX became an official stock exchange in 2016 despite ongoing significant resistance from Nasdaq and the New York Stock Exchange. Nasdaq said it would sue the SEC at one point if the IEX application was approved, but never followed through on the threat.

Last October the Securities and Exchange Commission approved IEX’s plans to launch its U.S. listing business for publicly traded companies. IEX plans to focus initially on attracting listings from Nasdaq and the New York Stock Exchange rather than listing initial public offerings.

IEX had hoped to start with Wynn Resorts Ltd. WYNN-3.72% , the Nevada-based hotel and casino developer that trades on Nasdaq. The company’s former chairman and chief executive Steve Wynn is an investor in IEX and had previously stated publicly he was considering switching to IEX. Those plans were scuttled when Wynn stepped down as chairman in February after sexual misconduct allegations.

Companies will be able to list for free on IEX during the first five years, then pay a flat rate of $50,000 a year afterward. That contrasts with the sliding fee scales based on shares outstanding at NYSE where listing fees which can reach $500,000 a year and Nasdaq where charges can reach $155,000.

Read: What investors can expect when IEX launches on Friday

Read also: ‘Flash Boys’ pass: IEX exchange approved by SEC

IEX said on Wednesday that the timing of Nasdaq’s suit is no coincidence. “The timing of Nasdaq’s claims also coincides with IEX’s approval and announced intention to launch a corporate listing business, a business in which Nasdaq has enjoyed a 40+ year duopoly,” according to Lee.

NYSE and Nasdaq actively compete with each other for new listings and switches but the lack of competition has previously protected their listing revenues. Nasdaq’s revenues from listings fees increased 44% from 2007 to 2017, from $188 million to $270 million, according to SEC filings, even though the number of Nasdaq-listed companies declined 6%, from 3,135 to 2,949 over the same period.

IEX stoked competitive flames further last year when it teamed up with 24 firms including Citadel Securities and The Vanguard Group against Nasdaq and the New York Stock Exchange in a debate about conflicts over the exchanges’ market data business. The firms asked the SEC to investigate the way the stock exchanges charge investors for trades, then profit from selling the data about those transactions to banks, investment managers and high-speed trading firms.

See also: Trading firms press SEC on fees stock exchanges charge for market data

IEX doesn’t sell market data and does not permit high-speed firms to put their servers closer to its trade “matching engine” to gain an advantage in trading ahead of everyone else.

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