The heroes of 'Flash Boys' are being attacked by their biggest rivals

IEX Group, the stock-trading venue at the center of Michael Lewis' book "Flash Boys," is applying to become a stock exchange, and its rivals are taking shots at it.

Hedge fund and market making firm Citadel and the big stock three trading venues - New York Stock Exchange, BATS Global Markets and Nasdaq -
have sent letters to the Securities and Exchange Commission questioning some of IEX's central features.

IEX, led by Brad Katsuyama, uses a 350-microsecond "speed bump" designed to level the playing field between hyper-fast traders and ordinary traders.

The venue filed to become a stock exchange in September, and firms have been posting their feedback to the SEC since then. All of the feedback is available here.

In a letter published by the SEC on Thursday, the New York Stock Exchange said:

The nature of the IEX application is concerning to us, however. Like the "non-fat yogurt" shop on Seinfeld, which actually serves tastier, full-fat yogurt to increase its sales, IEX advertises that it is "A Fair, Simple, Transparent Market," whereas it proposes rules that would make IEX an unfair, complex, and opaque exchange.

Several of the issues raised are particularly technical, and focus on the finer details of the IEX application. One recurring issue however is the very thing that gained IEX notoriety: the speed bump.

NYSE said that the IEX speed bump would "result in the investors receiving stale and misleading quote information." That echoed earlier feedback from Citadel, which said that some of IEX's unique features would negatively impact the wider market.

Citadel is a big market-maker, accounting for over 14% of US listed share trading volume, and over 20% of all US listed equity options volume.

Speed bump

In its letter, Citadel said share prices can move during the 700-microseconds it takes for a bid or offer to hit the IEX system and come back. And when prices are changing that fast the IEX's quotes for a stock would be "stale," which could keep people from trading at other exchanges too.

It also said that IEX wants to allow some people to circumvent the speedbump. It said:

It is ironic that IEX-a company supposedly founded to protect investors from various types of latency arbitrage-now proposes to offer pegged orders and IEX Router services that can and will be used by sophisticated trading firms to arbitrage the latency that IEX itself would create.

To make matters worse, although IEX markets itself as a bastion of transparency and fairness, IEX has chosen to remain opaque with respect to critical information about how it will operate. The Application does not explicitly and clearly describe either of these important and selective speed advantages, and other important aspects of IEX's planned operation.

It added later in the filing:

We are deeply concerned about the negative impact that the proposed IEX structure would have on retail and institutional execution quality, and overall market quality.

The feedback is in contrast to investor responses to IEX's filing. Business Insider reported in October that some of the biggest investors in the business have endorsed the application.

Since then, fund manager OppenheimerFunds has supported the application, while Virtu, a leading marketmaker and liquidity provider, said that IEX's "speed bump" had no impact on its market making on the platform.

A spokesman for IEX said: ""We are reviewing all letters submitted on our Form 1 and look forward to submitting our response letters to material comments, including clearing up any confusion about how our market works, during the review period.

"Our first response letter will address material comments received by the submission deadline of November 6th, and we will submit a follow-on response letter to address material comments received thereafter."