IEX, the “anti-establishment” stock trading venue made famous by author Michael Lewis, is seeking additional working capital from venture capital and private equity firms, the Wall Street Journal is reporting.

Dark Pools IEX

Regulatory scrutiny of dark pools, which don’t publish exchange trading rules, precedes IEX funding and exchange move

As trading in “dark pools” falls under regulatory scrutiny in light of the the Lewis book Flash Boys, IEX, which had the starring role in the book as foil to high frequency trading, seeks to move into the more regulated and transparent exchange environment.

Dark Pools are generally opaque trading venues used by large institutional investors such as hedge funds, who believe their trading intentions can be better hidden.  The book Flash Boys, howeverexposed the fact that high frequency traders can identify a trader’s order intention and then trade in the blink of an eye ahead of the trader to skim fractions of pennies off each trade.

In the book Dark Pools: The Rise of the Machine Traders and The Rigging of the US Stock Market, which preceded Flash Boys by almost two years, Wall Street Journal reporter Scott Patterson, who also co-authored the article on IEX funding, was among the first to note in detail the unseemly sausage factory that is considered high frequency trading’s dark side.  The book is described as revealing a stock exchange model that “had turned upside down, birthing secretive exchanges called dark pools and a new species of trading machines that could think, and that seemed, ominously, to be slipping the control of their human masters.”  It is this environment from which IEX is emerging and attempting to offer a better mousetrap as a fully regulated and transparent exchange.

Valuations for the exchange between $200 & $300 million

Valuations for stock exchanges had been slipping ever since dark pools entered the scene, grabbing market share from iconic institutions such as the more tightly regulated New York Stock Exchange.  The result of this move away from the central exchange to dark pools led to significant fragmentation of trading venue and the ability of high speed traders to game differentials between markets by using a speed advantage.  IEX, however, could be on the path to turn the tide of this trend and use transparency and the leveling of the playing field between high speed traders and investors as a unique selling proposition.

IEX is valuing their business model at between $200 and $300 million. The exchange recently turned down a buyout offer at $200 million. The investment capital is required to fund the move to becoming a more regulated stock exchange as well as potentially opening a European trading venue, the report noted.

IEX currently accounts for a slight 0.438% of stock market volume. The exchange’s average matched volume in April was 57,928,785. The exchange’s financial break even point is said to be near 50,000 daily share volume. The exchange is said to be working with Goldman Sachs Group Inc (NYSE:GS) on migrating the investment bank’s dark pool business onto the IEX platform.