FTX.US backs 'Flash Boys' exchange IEX as firm maps out crypto strategy

Nearly a decade ago, IEX Group set out to transform markets by launching a new kind of trading venue to topple traditional equity venues. Now, the firm made famous by Michael Lewis' "Flash Boys" is partnering with FTX in an attempt to put crypto on an equal footing with traditional finance.

In an announcement Tuesday, the New York-based firm — which gained securities exchange status in 2016 — said that Sam Bankman-Fried's FTX.US has agreed to make a strategic investment in the firm. The investment partnership will help IEX, which has struggled to take market share from US equity behemoths like New York Stock Exchange and Nasdaq in US stock trading, work towards creating a framework for crypto market structure. 

The firms did not disclose terms, but the transaction is subject to regulatory approvals under the so-called HSR Act, which suggests that it is larger than $100 million.

Similarly to FTX, IEX gate-crashed US equities as a relative newbie. It vied to topple the NYSE and Nasdaq with a new market structure and speed-bump that would slow the access high-speed traders had to the market, while also offering market data feeds with zero cost. FTX also entered a market — albeit an unregulated one — dominated by incumbents like Binance and BitMEX.

IEX hopes that the partnership with FTX.US will set the foundation for a regulated, well-defined crypto market structure. Though it remains unclear what concrete steps the two will take to accomplish this.

"A mutual investor of IEX and FTX put us together," IEX CEO Brad Katsuyama told The Block. "Sam and I met last year and we saw eye to eye on how important it is to help get regulation right. We decided we wanted to work together and find a way to make that happen and develop a clear market structure."

Katsuyama said that he will play a big part in shaping its crypto efforts, noting that it is a "big priority" for the firm. For FTX.US' part, Brett Harrison told The Block that "a collaboration with IEX could help position FTX US as a proactive leader in the US crypto regulatory landscape."

IEX could also a play a role in FTX.US's launch of stock trading, he said. 

"When we’re ready to launch stocks, the door is open for IEX to be a possible route for customer orders," Harrison said. 

Still, it's not exactly clear what IEX could build as it scales its crypto team, but Katsuyama noted that it could seek to serve as a bridge between the world of cryptocurrencies and digital asset securities. In Katsuyama's view, there are not proper on-ramps for individuals to trade cryptocurrencies that could be deemed securities by regulators. 

"Being a digital asset security renders you illiquid," he said. "That on-ramp needs to be built... This is an ongoing regulatory discussion but it is one that IEX will be part of in the next number of years."

Notably, XRP — the cryptocurrency most closely affiliated with fintech firm Ripple — has found itself in the crossfire of regulatory uncertainty, triggering its delisting from a number of exchanges as well as a suspension of trading among the industry's brokers. 

"It's ultimately the SEC's decision to determine what is and what isn't a security," Katsuyama said. 

But IEX could help serve as a technology partner to help address that gap, according to Katsuyama. In a sense, IEX is a kindred spirit to crypto exchanges, which operate in a relative murky regulatory environment. The firm drew the ire of its peers in the market structure ecosystem when it sought out its exchange license and unique speed bump. 

In the near-term IEX will focus on working with FTX.US on developing market structure principles for crypto. 

On the general practice of crypto exchanges offering crypto market data for free, Katsuyama said that this is an example of a crypto practice that is superior to trading exchanges in stocks.

"You want to make the market accessible, you want to make the price affordable," he said.

That's not common in equity markets, where IEX has long stood as a sole exchange offer free data, but recently changed its position to offer data at what it views as reasonable prices. 

FTX.US recently made headlines for nabbing a multi-billion dollar valuation in a deal backed by firms like Temasek and Paradigm. IEX counts Georgian Partners, CDPQ, Bain Capital and IVP as current investors. The firm to declined to shared its valuation under the upcoming deal with FTX. 

Correction: This story has been edited to correct the list of firms that IEX counts as current investors.