IEX Dark Pool Raises $75M for Exchange Status

Trading platform newcomer IEX has received financing from numerous investors amid regulators’ increased probing of dark pools.

Investor-owned equity trading platform IEX has raised $75 million in funding to help it become a registered stock exchange.

A variety of investors, led by venture firm Spark Capital, participated in the financing, including Bain Capital, MassMutual Ventures, Franklin Resources, private investment firms Cleveland Capital Management and TDF Ventures, and prominent entrepreneurs Jim Clark and Steve Wynn.

“Our intention from day one was to challenge the status quo by building a market that prioritizes the needs of traditional investors and issuer companies,” Brad Katsuyama, IEX’s CEO and co-founder, said. “We are encouraged by our recent growth, which has been driven by both investors and their brokers. This additional capital enables us to build and operate a world-class stock exchange.”

The dark pool was made famous by Michael Lewis’ Flash Boys: A Wall Street Revolt as the first exchange owned by buy-side investors. Lauded for battling against high-frequency traders “rigging” the stock market, it has grown quickly since inception last October.

For more stories like this, sign up for the CIO Alert newsletter.

According to IEX, its daily trading volume has tripled since the first quarter of 2014, and in recent weeks, it experienced more than 100 million shares handled per day. As of September 2, its market share was 0.813%.

IEX’s newest funding comes amid numerous investigations into dark pools by US regulators.

In July, Barclays’ dark pool trading volume plummeted 37% following New York Attorney General Eric Schneiderman’s lawsuit against the bank for alleged “systematic fraud and deceit.” UBS and Deutsche Bank also announced they are facing dark pool-related inquiries by Schneiderman, the US Securities and Exchange Commission, and the Financial Industry Regulatory Authority.

Alex Finkelstein, Spark Capitals’ general partner and soon-to-be IEX board member, said the financing supports the exchange’s “vision of next-generation capital markets.”

“The best way to truly improve the way the financial markets work is by giving investors and brokers an opportunity to vote with their trades for a fairer marketplace,” he said. “We’re confident that the IEX team will successfully change the way that Wall Street operates for the better.”

Related Content: Book Review: Flash Boys, A Wall Street Revolt, Dark Pool Inquiry Spreads to UBS, Deutsche Bank

NC Pension Accused of Pay-to-Play Violations

An employee union filed a whistleblower complaint with the SEC regarding the pension system’s sole fiduciary: State Treasurer Janet Cowell.

The State Employees Association of North Carolina (SEANC) has filed a complaint with the US Securities and Exchange Commission (SEC), urging an investigation into possible pay-for-play violations by the state treasurer and the former White House Chief of Staff Erskine Bowles.

According to the document, Bowles—co-founder and now-senior advisor to Charlotte-based private equity firm Carousel Capital—had hosted a fundraiser for Treasurer Janet Cowell at his home in June 2011. A few weeks later, SEANC said Carousel was selected to invest an “undisclosed portion” of the $230 million NC Innovation Fund, which was funded by the state’s retirement system.

“This is the type of abuse we were afraid we would find when we investigated the fees associated with our retirement system,” SEANC Executive Director Dana Cope said. “We won’t stand for our members’ retirement security and hard-earned money being used as a bargaining chip in a political game.”

Treasurer Cowell is the sole fiduciary of the state’s $90 billion retirement system.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

A spokesperson for Treasurer Cowell refuted all allegations and argued that her work with the pension fund have been done with “transparency, accountability, and ethics.”

“Political issues have no role in investment decision-making—none, both by policy and practice,” spokesman Schorr Johnson said.

The SEC’s 2010 regulations against pay-to-play practices prohibit campaign contributions or other political contributions to influence awarding of contracts for managing government investments including public pension plan assets. It also bans investment advisers from managing these funds for two years after a contribution is made.  

“This is the type of abuse we were afraid we would find when we investigated the fees associated with our retirement system,” –SEANC.

“The selection of investment advisers to manage public plans should be based on the best interests of the plans and their beneficiaries, not kickbacks and favors,” former SEC chairman Mary Schapiro said at the time these rules were passed.

SEANC said Bowles’ wife Crandall, who has been on the board of directors of JP Morgan since 2006, also hosted the fundraiser, adding to the “seemingly obvious breach” of the pay-to-play rule.

“SEANC has a particular concern about a JP Morgan board member as well connected as Crandall Bowles holding a fundraiser in her home for Treasurer Cowell because of the inadequate performance of REITs in the North Carolina system and the unknown amount of fees Cowell is paying in a traditionally high fee industry,” the complaint said.

Johnson stated that the treasurer had “verified with outside legal counsel” and found the Bowles did not qualify as “investment counsel” as defined by SEC regulations. “The department then took it a step further by ensuring contractually with Carousel that they were compliant with this SEC rule,” he said. “If Carousel failed to comply with the rule, the investment would likely end.”

Related Content: North Carolina Treasurer Proposes Limited Pension Reforms, North Carolina Pension Faces Forensic Investigation

«