Citadel Securities and its allies are desperate to stop IEX Options’ market launch, but academics and industry experts who spoke to Global Trading dismiss Citadel’s arguments as self-serving, and are coming down on IEX’s side. While free riding on other venues’ quotes and on the legal plumbing of the US options market, the launch would benefit investors and market quality, they say.
IEX wants to launch a new US options exchange built around two components: a 350-microsecond delay applied symmetrically to all inbound messages, and an exchange-side options risk parameter (ORP) that cancels or reprices a registered market maker’s quotes when the underlying stock moves beyond parameters the market maker sets.
The fiercest objections focus on free riding and forced interactions. Critics, chief amongst them Citadel Securities, argue the ORP’s default “firmness” means that when IEX shows the best price, brokers are legally compelled by the Order Protection Rule (OPR) to route there – even though the quote is about to be cancelled or repriced. They add that the ORP itself keys off changes in the underlying stock— quotes produced mostly by exchanges IEX does not operate—and so IEX is leaning on price discovery created elsewhere to promote its own top-of-book.
Opponents also say the combination will create “maybe quotations,” degrade NBBO reliability and shift risk onto investors who chase fleeting prints. Citadel’s filings framed it starkly: IEX is proposing an “unprecedented quote cancelling scheme… at the expense of millions of American investors.” MEMX warned about “maybe quotations” and routing complexity. Nasdaq argued the delay could make the displayed NBBO less dependable in options than in equities.
That case lands in a fragmented market dominated at key pressure points by a handful of firms, IMC, Susquehanna, Wolverine and Citadel Securities that have access to retail flows. According to SEC Rule 606 filings, the monthly volume of options trades directed to these firms from retail brokers is approaching 50% of the total market, as measured by the Options Clearing Corporation.
Another choke point is the concentration of Designated market-maker (DMM) appointments. For example, on CBOE, DMMs ownership is concentrated amongst a handful of firms who also control much of the wholesale retail flows: Citadel Securities had 1245 DMM spots, Susquehanna 1686, Belvedere Trading 906 and IMC 117.
Cementing its dominance, Citadel Securities recently took over Morgan Stanley’s option market making business.
Read more: Morgan Stanley paid US$275m for options flow before Citadel sale
The free-riding charge
In options, quotes are functions of the underliers’ quoted bids and offers and their movement. IEX’s ORP tunes in to these underlier quotes, derived from consolidated and direct feeds sourced from non-IEX equities exchanges, and then atomically cancels or reprices a market maker’s displayed option quotes. If the ORP allows IEX to light up best-priced quotes more often while using reference prices formed elsewhere, critics say, IEX is harvesting other venues’ price discovery function and then forcing everyone to interact with it whenever IEX is at the NBBO.
The most persuasive defence against this argument is practical: if the payoff is fewer pickoffs (when market maker quote gets latency arbitrage against underlier ticks, especially in larger delta equivalent options), the market gets tighter spreads and deeper size quoted. Also, the “free riding” is self-limiting because an options venue can only grow so far if its signals depend on price discovery outside its walls.
Two academic experts who study retail internalisation and the DMM regime are Thomas Ernst at the University of Maryland, and Chester Spatt at Carnegie Mellon University.
The latter served as Chief Economist of the U.S. Securities and Exchange Commission from 2004 to 2007 and, amongst other positions, was on the equity market structure advisory committee of the SEC from 2015 to 2019.
As Ernst told Global Trading: “High level, IEX really is free-riding off other quotes—but that free-riding is worth it to reduce pick-off risk. It is also self-limiting: IEX can only grow so big because it needs other quotes to reference.” Ernst adds that in his view, “I
do not see major downsides to the IEX proposal. Options are complex, and changes to market share will take time—just like it did in equities—but the direction is pro-competitive.”
“Forced interaction” and NBBO reliability
IEX opponents say the ORP’s cancels/reprices will make top-of-book prints elusive but market makers and traders who do not own a majority of DMM seats fiercely disagree.
An industry expert told Global Trading: “Market makers refresh quotes multiple times a second in busy markets. What IEX is proposing is doing that refresh for their liquidity providers. The 350-microsecond speed bump basically protects them from the people that can get to those options prices a little bit faster than IEX would be able to cancel them. What they’re proposing is just allowing others to participate in the same way the big guys do today.”
He also quantified the status quo: “What is costly is the frequency of the pickoffs in the more liquid names—five trades out of every six are pick-offs because the underlying just ticked. You collect the spread, but you’ve got to price wider because you’re losing so much on those two-tick moves.”
All Options’ Matthieu Boivin Carrier told Global Trading that the IEX options debate needs to be viewed through the lens of empirical evidence from Eurex European’s passive liquidity protection (PLP): “They are slightly different, but the effects are the same… The end result is largely similar: you allow market makers to offer the best price without being scared of being picked off by latency arbitrageurs.”
On the criticism that retail would miss out on opportunities as presented by Citadel Securities, he said: “If you can find me a retail trader sophisticated enough to take advantage of a 350-microsecond tick… I will shut up and never talk again.”
Ernst and Spatt, from the academic side, reach a similar conclusion: “There’s one person—and only one person—this really hurts, and that’s latency-arbitrage folks. Retail is incredibly unlikely to hit those microsecond windows, and institutions broadly won’t either.” And on routing risk: “The risk of routing to IEX and not being filled is manageable; arguments that investors forced to trade at IEX will risk missing liquidity at other exchanges don’t hold weight, as investors always have an ability to use ISO flags when trading.”
What IEX itself says (and what the law already said)
IEX argues the delay is de minimis and, crucially, symmetric at the gateway: all inbound messages—making or taking—take the same 350µs path to the matching engine.
John Ramsay, chief market policy officer at IEX, told us: “The SEC and then the DC Circuit upheld the idea that a speed bump of the duration that we have contemplated—350 microseconds, which is identical to the speed bump that we’ve implemented in equities—doesn’t implicate firm quote, as it is within the natural, occurring geographic and processing latencies of each exchange. As both have affirmed, IEX quotes are as accessible as any other exchange.”
On the charge that ORP gives market makers a bespoke advantage, Ivan Brown, head of IEX options, points out that exchanges already give market makers special tooling because they carry disproportionate quote risk: “Activity-based risk controls, which effectively cancel quotes once a parameter is triggered, are just one… What IEX is proposing is merely an incremental addition to the existing toolkit available to market makers, aimed at protecting them from specific risks.”
To support his claim, Brown cites a paper published by option market maker Jane Street titled ‘Dead man’s switch’ which argues that markets would benefit in giving market makers more protection: “Market makers play a central role in options markets, where they account for 99.9% of open orders. Providing liquidity at this scale is only possible because of quote protection (QP) mechanisms that limit how quickly open orders can be filled — say, in the event of a market crash or system failure.”
On the forced interaction argument of opponents, Ramsay contended that: “Any argument that suggests that participants are burdened by being forced to interact with IEX is based on the flawed premise that our quotes will be inaccessible… IEX quotes have proven as accessible as any other quotes to all participants other than those looking to conduct latency arbitrage.”
IEX option launch is likely to be pro competitive
According to experts, the IEX proposal remedies three factors that currently enshrine options market making as quasi oligopolistic: designated market-maker seats, retail internalisation, and the arms-race cost of speed.
Optiver, one of the newer entrants in the US option market making landscape, pointed to these flaws in a 2021 paper: “Price improvement mechanisms provide an opportunity for retail orders to receive a better execution price than the displayed NBBO. However, the current model is overly complicated, anti-competitive and often results in a better price but not the best price.”
Ernst and Spatt note a simple boundary condition for retail economics: “Payment for order flow and internaliser profits are bounded by the spread. If IEX helps bring quoted spreads down, that’s terrific—it lowers the bound on PFOF; if that limit binds, it directly benefits retail investors.”
Opponents to the new exchange also argued that smaller market makers would just piggyback the quotes of their bigger rivals.
CTC’s ex head trader, and in charge of business development, Steve Crutchfield explained to Global Trading why “free riding” cannot replace active quoting in practice and why competition should sharpen, not dull, displayed prices:
“As a market maker, while prevailing market quotes are of course an input into our valuation and trading logic, we can’t simply free-ride on quotes from other market participants, for many reasons… Based on their market share, different firms qualify for various fee or rebate incentives across exchanges, which factor into their pricing. It would be uneconomical (and incorrect) for us to assume we pay the same exchange fees as a much larger competitor… When volatility is heightened… markets naturally tend to be wider. We have a powerful incentive to gain market share by showing better prices than the competition when possible.”
That incentive structure matters across a fragmented venue landscape:
As for the market makers’ complaint of phantom orders, IEX proponents say that the ORP is already engineered so cancel/reprice events are rare. Regarding the argument that brokers need enough transparency to model routing and Intermarket Sweep Order (ISO) usage, experts respond that the equities record on IEX’s D-Limit—approved by the SEC and upheld by the D.C. Circuit—already tested the core legal questions around “accessibility” and de minimis delay.
The threat to latency arbs and market-making incumbents
One industry expert was blunt about the self-interest of opponents: the firms most opposed are those “really good at low latency.” The economics explain why. He recounted spending 2 to 3 million dollars million per month on low-latency infrastructure and still “falling behind.”
Ernst and Spatt’s structural point is that the largest wholesalers also own most DMM seats, so the private return to speed is highest for them. If an exchange can standardise a narrow defensive layer, being the absolute fastest becomes less decisive; more firms can quote tighter; spreads compress, and the book deepens; finally, the rent pool that funds PFOF shrinks.
In a comment to the SEC, Select Vantage’s Daniel Schlaepfer
offered the sharpest version of what mid-tier liquidity providers believe this fight is about: “Citadel’s intensely orchestrated campaign against IEX’s option market proposal has nothing to do with supposed concerns about fading liquidity or inaccessible quotes, or the welfare of retail investors. It has everything to do with seeking to protect Citadel’s dominant position in the listed options space and fending off any changes that threaten it. To do that Citadel relies on a cynical and tired playbook it has tried before, which is rife with deception and hypocrisy.”
The outcome of the debate will be testable in public data if the exchange gets the go ahead. If spreads tighten with more posted size and fill rates hold up, and if more market makers get to trade, the market will have delivered its verdict. On 27 August, IEX sent its prospective participants membership forms and instructions while planning to launch its test environment 1 October.
Citadel Securities, Jane Street, Optiver, Wolverine, IMC, and Susquehanna had not responded to request for comments at the time of publishing.
