1 00:00:03,240 --> 00:00:07,560 Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio. 2 00:00:08,360 --> 00:00:12,040 Speaker 1: This week on the podcast, I'm thrilled to have Brad Katsuyama. 3 00:00:12,240 --> 00:00:16,560 Speaker 1: He is the founder and chairman of I e x UH. 4 00:00:16,640 --> 00:00:21,760 Speaker 1: He's the gentleman who was immortalized in Michael Lewis's book Flashboys, 5 00:00:21,800 --> 00:00:24,440 Speaker 1: and he tells us the story of what it was 6 00:00:24,520 --> 00:00:28,080 Speaker 1: like really to be the guy that Lewis went to 7 00:00:29,000 --> 00:00:34,199 Speaker 1: just for some background information on what high frequency trading was, 8 00:00:34,720 --> 00:00:39,360 Speaker 1: how things were getting driven, about what's what's happening, etcetera, etcetera. 9 00:00:39,800 --> 00:00:44,760 Speaker 1: And it's really a fascinating, um fascinating tale. You know, 10 00:00:44,800 --> 00:00:46,760 Speaker 1: stop and think about what it's like to leave a 11 00:00:46,800 --> 00:00:50,240 Speaker 1: million and a half dollar a year job in order 12 00:00:50,320 --> 00:00:55,320 Speaker 1: to take up something that essentially was a cause. He 13 00:00:55,440 --> 00:00:59,000 Speaker 1: started doing this because there were only a handful of 14 00:00:59,040 --> 00:01:02,760 Speaker 1: people in the world Alds who knew what he knew. 15 00:01:02,880 --> 00:01:08,040 Speaker 1: He figured out what was actually driving markets and market 16 00:01:08,080 --> 00:01:13,040 Speaker 1: structure a little kookie and basically said, I have this knowledge, 17 00:01:13,040 --> 00:01:16,880 Speaker 1: and I have an ethical obligation to use this knowledge 18 00:01:17,920 --> 00:01:22,040 Speaker 1: for the betterment of markets and the broader economy. And 19 00:01:22,360 --> 00:01:26,039 Speaker 1: you know, lots of other people had figured out the 20 00:01:26,200 --> 00:01:29,720 Speaker 1: structural issues and some of the loopholes that were out 21 00:01:29,760 --> 00:01:35,160 Speaker 1: there in in the world and in the markets, and 22 00:01:35,240 --> 00:01:37,920 Speaker 1: they were taking advantage of it by running al go 23 00:01:38,120 --> 00:01:42,160 Speaker 1: driven high frequency shops and quite bluntly making hundreds of 24 00:01:42,200 --> 00:01:46,200 Speaker 1: millions of dollars a year for themselves. But but Brad, 25 00:01:46,440 --> 00:01:49,360 Speaker 1: who is as as nice and down to earth the 26 00:01:49,440 --> 00:01:52,120 Speaker 1: person as you would ever want to meet. In the book, 27 00:01:52,160 --> 00:01:55,320 Speaker 1: he's described as RBC nice. He works at Royal Bank 28 00:01:55,360 --> 00:01:58,720 Speaker 1: of Canada, and as any American will tell you, Canadians 29 00:01:58,720 --> 00:02:02,680 Speaker 1: are just terribly nice people. They're delightful and Brad is 30 00:02:02,960 --> 00:02:06,080 Speaker 1: you know, part for the course. He's just a real person, 31 00:02:07,360 --> 00:02:12,680 Speaker 1: very very open, very transparent, totally ethical. I couldn't imagine 32 00:02:12,760 --> 00:02:18,040 Speaker 1: a better person to set up a market based response 33 00:02:18,639 --> 00:02:21,160 Speaker 1: to some of the abuses and problems that we've seen 34 00:02:21,200 --> 00:02:26,600 Speaker 1: in high frequency trading. He's absolutely um just a fascinating, 35 00:02:26,639 --> 00:02:30,480 Speaker 1: fascinating guy. The story he tells is just amazing how 36 00:02:30,520 --> 00:02:34,440 Speaker 1: he figured all these things out, Uh, just all around terrific. 37 00:02:34,560 --> 00:02:37,840 Speaker 1: So I'm gonna tell you, Uh, sit back, relax and 38 00:02:37,880 --> 00:02:41,600 Speaker 1: get ready for a fascinating story. Our interview with Brad 39 00:02:41,680 --> 00:02:48,920 Speaker 1: Katsuyama of i X. This is Masters in Business with 40 00:02:49,000 --> 00:02:55,639 Speaker 1: Barry Ridholts on Bloomberg Radio. My guest today is Brad Katsuyama. 41 00:02:55,720 --> 00:02:58,760 Speaker 1: You may be familiar with the name if you either 42 00:02:58,919 --> 00:03:04,679 Speaker 1: a Michael Lewis's best selling book Flashboys, all about how 43 00:03:04,720 --> 00:03:08,360 Speaker 1: the market structure has changed in light of high frequency trading, 44 00:03:08,960 --> 00:03:12,760 Speaker 1: or if you saw an infamous segment of sixty Minutes 45 00:03:13,400 --> 00:03:16,440 Speaker 1: where actually it was Michael Lewis who said the markets 46 00:03:16,440 --> 00:03:19,440 Speaker 1: were rigged and that caused all sorts of mayhem over 47 00:03:19,480 --> 00:03:23,320 Speaker 1: the next couple of days and weeks. Brad, Welcome to Bloomberg. 48 00:03:24,240 --> 00:03:27,960 Speaker 1: So little background on your history. You grew up in 49 00:03:28,040 --> 00:03:33,360 Speaker 1: Ontario and are a graduate of Wilfred Laurier University in Waterloo. 50 00:03:33,400 --> 00:03:36,240 Speaker 1: Is that correct? Came to New York City as an 51 00:03:36,320 --> 00:03:39,680 Speaker 1: intern at the Royal Bank of Canada in two thousand two. 52 00:03:40,480 --> 00:03:42,760 Speaker 1: I was here. I came as a full time employee, 53 00:03:42,760 --> 00:03:45,040 Speaker 1: but I interned in Toronto, but I moved here. I 54 00:03:45,240 --> 00:03:47,440 Speaker 1: moved here in two thousand two. Yes, and eventually you 55 00:03:47,520 --> 00:03:50,600 Speaker 1: became the global head of Electronics Sales and Trading, which 56 00:03:50,640 --> 00:03:55,119 Speaker 1: is quite a responsible position. So being a kid from 57 00:03:55,120 --> 00:03:59,000 Speaker 1: a relatively I don't want to say small town, because 58 00:03:59,080 --> 00:04:03,000 Speaker 1: some Ontario is in such a small region, but Waterloo 59 00:04:03,080 --> 00:04:07,440 Speaker 1: certainly is a relatively small town, as is Markham. What 60 00:04:07,480 --> 00:04:09,720 Speaker 1: was it like coming to New York City and and 61 00:04:09,840 --> 00:04:12,080 Speaker 1: landing on Wall Street? Yeah, so, I mean it was 62 00:04:12,200 --> 00:04:15,480 Speaker 1: it was a bit of a culture shock, I'll be honest. Um. 63 00:04:15,600 --> 00:04:18,240 Speaker 1: I remember driving through the first time through New York 64 00:04:18,400 --> 00:04:20,960 Speaker 1: and looking at all of the buildings and it seemed 65 00:04:21,000 --> 00:04:23,120 Speaker 1: like every single building was as tall as the tallest 66 00:04:23,160 --> 00:04:25,560 Speaker 1: building in Toronto. It was. It was. It was, you know, 67 00:04:25,760 --> 00:04:27,279 Speaker 1: outside of the Sea In Tower that you know, the 68 00:04:27,279 --> 00:04:30,760 Speaker 1: downtown core of Toronto was very pretty small. Um. New 69 00:04:30,839 --> 00:04:33,560 Speaker 1: York just seemed massive on every scale. Uh so it 70 00:04:33,600 --> 00:04:36,839 Speaker 1: was pretty overwhelming. Um, but you know, again adjusted and 71 00:04:37,400 --> 00:04:39,440 Speaker 1: I got used to it. And when you start working 72 00:04:39,600 --> 00:04:41,920 Speaker 1: on Wall Street, what did you how did you find? 73 00:04:41,960 --> 00:04:45,000 Speaker 1: You know, they talked about people from Canada being nice, 74 00:04:45,040 --> 00:04:48,760 Speaker 1: the expression about Royal Bank Accounada is there there RBC nice? Yeah? 75 00:04:48,960 --> 00:04:51,560 Speaker 1: How was Wall Street as an adjustment? Um? You know, 76 00:04:51,600 --> 00:04:53,200 Speaker 1: I think I got really lucky you know when I 77 00:04:53,200 --> 00:04:56,039 Speaker 1: when I worked at RBC in Toronto, in Canada, you know, 78 00:04:56,080 --> 00:04:58,600 Speaker 1: they they're the number one bank there. Um. And when 79 00:04:58,640 --> 00:05:00,440 Speaker 1: I moved down, when I got offered a job to 80 00:05:00,480 --> 00:05:02,719 Speaker 1: come to New York. RBC had just bought a bank, 81 00:05:02,800 --> 00:05:05,120 Speaker 1: Dane Rousher, and they were ranked twenty three in the 82 00:05:05,200 --> 00:05:08,200 Speaker 1: United States. I jumped at it just simply because you know, 83 00:05:08,240 --> 00:05:10,720 Speaker 1: there's there's nowhere to go but up, and I felt like, 84 00:05:11,040 --> 00:05:12,240 Speaker 1: you know, it was kind of a it was a 85 00:05:12,320 --> 00:05:16,560 Speaker 1: very underdog mentality. UM. My mentor in the business was 86 00:05:16,560 --> 00:05:19,159 Speaker 1: this guy Bobby Grubert, who was my boss for eleven 87 00:05:19,200 --> 00:05:22,200 Speaker 1: and a half years in in in UH in the US. UH. 88 00:05:22,200 --> 00:05:23,800 Speaker 1: And he was just a great role model, just kind 89 00:05:23,800 --> 00:05:25,280 Speaker 1: of kept me on the straight and arrow. Was a 90 00:05:25,279 --> 00:05:26,680 Speaker 1: twenty three year old kid, and I could have gone 91 00:05:26,680 --> 00:05:28,880 Speaker 1: a lot of different ways probably, and uh, you know, 92 00:05:28,960 --> 00:05:30,320 Speaker 1: I owe a lot to him to kind of keep 93 00:05:30,320 --> 00:05:32,279 Speaker 1: me on the on the right path. So so you 94 00:05:32,320 --> 00:05:35,920 Speaker 1: began in the early two thousand's, and let's let's go 95 00:05:36,000 --> 00:05:39,200 Speaker 1: back a decade and change what was trading like in 96 00:05:39,240 --> 00:05:42,000 Speaker 1: those days? What was the execution like back? Sure? I mean, 97 00:05:42,040 --> 00:05:43,720 Speaker 1: my you know, it was funny because I went from 98 00:05:43,880 --> 00:05:48,000 Speaker 1: trading in Toronto, UM, where the market was entirely electronic. 99 00:05:48,600 --> 00:05:50,279 Speaker 1: My first job in the US was I was trading 100 00:05:50,320 --> 00:05:52,360 Speaker 1: listed energy stocks, which meant I was dealing with the 101 00:05:52,400 --> 00:05:54,640 Speaker 1: New York Stock exchange floor, so it was calling an 102 00:05:54,720 --> 00:05:57,119 Speaker 1: order down to a floor broker. UM. And I remember 103 00:05:57,200 --> 00:05:59,520 Speaker 1: being informed of the three minute rule, which meant if 104 00:05:59,560 --> 00:06:01,320 Speaker 1: I give an order the floor and I saw print 105 00:06:01,800 --> 00:06:03,800 Speaker 1: hit the tape, I saw trade hit the tape. If 106 00:06:03,800 --> 00:06:06,440 Speaker 1: it happened within three minutes, it might not be my trade. 107 00:06:06,440 --> 00:06:09,120 Speaker 1: And I was completely mind boggling to me. Um, I said, well, 108 00:06:09,160 --> 00:06:11,440 Speaker 1: why does the guy just get out to the post faster? Um. 109 00:06:11,520 --> 00:06:13,320 Speaker 1: You know, I was the first trader at RBC to 110 00:06:13,440 --> 00:06:17,440 Speaker 1: trade both listed and over the counterstocks. I was trading technology. 111 00:06:17,480 --> 00:06:20,479 Speaker 1: They they promoted me to run technology UM Trading, and 112 00:06:20,640 --> 00:06:22,480 Speaker 1: I traded NASDAC and I traded New York. And I 113 00:06:22,520 --> 00:06:25,080 Speaker 1: could never understand why anyone would want to trade with 114 00:06:25,200 --> 00:06:27,479 Speaker 1: the floor, because it was so much more efficient to 115 00:06:27,520 --> 00:06:33,080 Speaker 1: trade electronically over the NASDACK terminal. Um, what you wish for? Well, 116 00:06:33,120 --> 00:06:36,280 Speaker 1: you know, it's funny because it's it's always um. You know, 117 00:06:36,560 --> 00:06:40,440 Speaker 1: electronic trading has always been a more efficient way to 118 00:06:40,480 --> 00:06:43,920 Speaker 1: trade than to trade through middlemen per se. UM. I 119 00:06:43,960 --> 00:06:45,960 Speaker 1: think the evolution of that technology has gotten a little 120 00:06:45,960 --> 00:06:48,800 Speaker 1: bit perverse. But I was always of the inclination that, 121 00:06:48,839 --> 00:06:51,240 Speaker 1: you know, technology was was a good thing for the markets. 122 00:06:51,279 --> 00:06:53,839 Speaker 1: It has been so so. Now let's fast forward to 123 00:06:53,920 --> 00:06:58,000 Speaker 1: around two thousand seven, when you notice the market was 124 00:06:58,120 --> 00:07:01,039 Speaker 1: acting a little squirrelly, that every time you went to 125 00:07:01,160 --> 00:07:03,599 Speaker 1: buy a stock, the market would run away from you. 126 00:07:03,839 --> 00:07:07,960 Speaker 1: Just describe that early sensation of hey, something's a little 127 00:07:07,960 --> 00:07:11,160 Speaker 1: funky over here. I mean, it was incredibly frustrating. UM 128 00:07:11,280 --> 00:07:13,640 Speaker 1: two thousand and six. If I saw a hundred thousand 129 00:07:13,680 --> 00:07:16,480 Speaker 1: shares of Intel on the offer, I'd buy. I'd buy 130 00:07:16,480 --> 00:07:18,280 Speaker 1: a hundred thousand shares of Intel if I wanted to, 131 00:07:18,360 --> 00:07:21,600 Speaker 1: and U two thousand seven, I could buy eighty thousand 132 00:07:21,720 --> 00:07:24,880 Speaker 1: and two thousand and eight, I could buy seventy thousand 133 00:07:24,880 --> 00:07:27,000 Speaker 1: and two thousand and nine, I could buy fifty two thousand. 134 00:07:27,080 --> 00:07:29,880 Speaker 1: The number kept going down, and when I would try 135 00:07:29,920 --> 00:07:33,240 Speaker 1: to buy the next level of stock two, I would 136 00:07:33,280 --> 00:07:36,680 Speaker 1: get a smaller percentage than I got the time before. UM. 137 00:07:36,760 --> 00:07:38,360 Speaker 1: It drove me crazy. And the funny part is I 138 00:07:38,360 --> 00:07:40,520 Speaker 1: would I would call my tech team and I'd say, hey, guys, 139 00:07:40,680 --> 00:07:42,840 Speaker 1: what is happening like? Watch the screens, look at what 140 00:07:42,880 --> 00:07:45,960 Speaker 1: I'm looking at. UM. The most common answer I would 141 00:07:45,960 --> 00:07:48,280 Speaker 1: get is it's a coincidence. You know, many people want 142 00:07:48,280 --> 00:07:50,120 Speaker 1: to buy Intel at the same time you do, and 143 00:07:50,120 --> 00:07:52,040 Speaker 1: I'd say, Okay, I'll prove you wrong. I'll cant to 144 00:07:52,120 --> 00:07:55,240 Speaker 1: five and nothing's gonna happen until I press this button. 145 00:07:55,360 --> 00:07:57,400 Speaker 1: And I can't to three or five or seven whatever. 146 00:07:57,760 --> 00:07:59,520 Speaker 1: Nothing would happen until I press the button. I'd blow 147 00:07:59,560 --> 00:08:02,800 Speaker 1: the stock and um, meaning the offers would just all disappear, 148 00:08:02,840 --> 00:08:05,000 Speaker 1: they would run away. I would get a fraction, most 149 00:08:05,000 --> 00:08:06,840 Speaker 1: of it would disappear, some of it would trade, and 150 00:08:06,840 --> 00:08:09,080 Speaker 1: then I would be forced with two choices. Right, you 151 00:08:09,120 --> 00:08:11,440 Speaker 1: either wait and the stock might never come back to 152 00:08:11,480 --> 00:08:13,960 Speaker 1: your price, or you have to chase it higher. And 153 00:08:14,000 --> 00:08:16,360 Speaker 1: every time I chased, I got a smaller fraction and 154 00:08:16,400 --> 00:08:18,960 Speaker 1: I'd be left with the same decision the next time. So, UM, 155 00:08:19,000 --> 00:08:21,600 Speaker 1: it became incredibly frustrating. And this at the time in 156 00:08:21,640 --> 00:08:23,320 Speaker 1: O seven, I was running all of you as trading 157 00:08:23,320 --> 00:08:26,760 Speaker 1: for RBC. UM. It was happening to every single person 158 00:08:26,800 --> 00:08:29,280 Speaker 1: on my team. UM, so that that kind of was 159 00:08:29,520 --> 00:08:31,320 Speaker 1: It was obviously a very frustrating time, and it was 160 00:08:31,360 --> 00:08:34,240 Speaker 1: the financial crisis. So not only are we dealing with 161 00:08:34,240 --> 00:08:35,960 Speaker 1: this market, that's kind of an illusion of what we 162 00:08:36,000 --> 00:08:38,880 Speaker 1: thought the market was. Um. The world was melting down 163 00:08:38,920 --> 00:08:40,679 Speaker 1: around us. It was. It was a pretty it was 164 00:08:40,679 --> 00:08:43,800 Speaker 1: pretty unbelievable time. Actually, I'm Barry rid Hults. You're listening 165 00:08:43,840 --> 00:08:47,240 Speaker 1: to Masters in Business on Bloomberg Radio today. My guest 166 00:08:47,320 --> 00:08:50,439 Speaker 1: is Brad Katsuyama, made famous in the book by Michael 167 00:08:50,520 --> 00:08:55,200 Speaker 1: Lewis called Flashboys. He is the founder and CEO of 168 00:08:55,360 --> 00:08:58,880 Speaker 1: i e X, essentially an exchange, you know, like the 169 00:08:58,920 --> 00:09:01,760 Speaker 1: New York Stocktor Exchange or NAZDAK. You are a full 170 00:09:01,880 --> 00:09:06,720 Speaker 1: on exchange at this point. We're called or classified an 171 00:09:06,760 --> 00:09:10,720 Speaker 1: alternative trading system. Hopefully will be an official exchange by 172 00:09:10,720 --> 00:09:13,400 Speaker 1: the end of this year. Okay, that'd be great. And 173 00:09:13,520 --> 00:09:16,600 Speaker 1: so you were made famous in the book Flash Boys 174 00:09:16,640 --> 00:09:18,840 Speaker 1: because you were one of the people who had noticed 175 00:09:19,200 --> 00:09:22,800 Speaker 1: that the market had gotten a little funky and weird 176 00:09:22,840 --> 00:09:26,960 Speaker 1: and you couldn't execute orders. You're firm authorized you to 177 00:09:27,080 --> 00:09:31,760 Speaker 1: lose up to ten thousand dollars a day experimenting. Tell 178 00:09:31,840 --> 00:09:34,640 Speaker 1: us about that, well, I think once we started to 179 00:09:34,760 --> 00:09:37,360 Speaker 1: learn more about the exchanges and how they were set 180 00:09:37,440 --> 00:09:39,760 Speaker 1: up uh and the things that they were selling to 181 00:09:39,840 --> 00:09:43,440 Speaker 1: certain participants high high speed traders, we started to realize 182 00:09:43,440 --> 00:09:45,439 Speaker 1: that the exchanges had a lot to do with the 183 00:09:45,880 --> 00:09:48,680 Speaker 1: experience that we were having. UH. In order to test 184 00:09:48,679 --> 00:09:50,560 Speaker 1: these theories out, we had to set up a series 185 00:09:50,559 --> 00:09:54,880 Speaker 1: of experiments interacting with different exchanges in different ways. Um 186 00:09:54,920 --> 00:09:57,400 Speaker 1: And when I brought this proposal to RBC, I think 187 00:09:57,400 --> 00:10:00,120 Speaker 1: it was very fortunate that I had run risk trading before, 188 00:10:00,400 --> 00:10:02,840 Speaker 1: because they knew I could be responsible with capital. But 189 00:10:02,880 --> 00:10:05,679 Speaker 1: I said, we need data points. We're running an experiment, 190 00:10:05,760 --> 00:10:08,000 Speaker 1: and we can't use client orders to do it, which 191 00:10:08,000 --> 00:10:09,560 Speaker 1: means that we're gonna have to spend a bit of 192 00:10:09,559 --> 00:10:11,640 Speaker 1: our own money. But I'm not. It's not going to 193 00:10:11,720 --> 00:10:14,640 Speaker 1: get egregious here. You know, my limit is ten thousand, 194 00:10:14,679 --> 00:10:17,240 Speaker 1: and that that limit might sound large, but in my 195 00:10:17,360 --> 00:10:20,079 Speaker 1: prior job, we were managing millions of dollars of capital, 196 00:10:20,160 --> 00:10:24,360 Speaker 1: so it wasn't really a lot between friends. Well, the 197 00:10:24,440 --> 00:10:26,560 Speaker 1: interesting part is we didn't actually end up losing hardly 198 00:10:26,600 --> 00:10:29,160 Speaker 1: any money. Because I would I would we buy stock 199 00:10:29,200 --> 00:10:31,280 Speaker 1: on the offer, it would disappear, and you know, stock 200 00:10:31,280 --> 00:10:33,199 Speaker 1: would move higher, and then I turned around and sell 201 00:10:33,400 --> 00:10:35,320 Speaker 1: on the bid and the stock would take again. So 202 00:10:35,360 --> 00:10:37,400 Speaker 1: you're actually buying and selling that kind of the same price, 203 00:10:37,520 --> 00:10:40,120 Speaker 1: and you get to data points for almost nothing, right, 204 00:10:40,120 --> 00:10:43,000 Speaker 1: So so we did that we traded hundreds of millions 205 00:10:43,000 --> 00:10:45,679 Speaker 1: of shares, testing out various series. Yeah, absolutely, we and 206 00:10:45,720 --> 00:10:48,040 Speaker 1: it really it almost ended up a wash. So the 207 00:10:48,160 --> 00:10:50,320 Speaker 1: part of the book that was fascinating, and it was 208 00:10:50,400 --> 00:10:53,720 Speaker 1: also excerpted trying to remember where I saw the Wolves 209 00:10:53,720 --> 00:10:56,040 Speaker 1: of wool Street New York Times magazine was it was 210 00:10:56,080 --> 00:10:59,240 Speaker 1: The Times magazine. Was the description. You hire a guy 211 00:10:59,280 --> 00:11:03,920 Speaker 1: you know who's about this fantastic telecom backgrounds, and he 212 00:11:03,960 --> 00:11:09,440 Speaker 1: explains how the physical distances from from Wall Street out 213 00:11:09,480 --> 00:11:13,280 Speaker 1: the Holland Tunnel that BATS was located, the exchange. BATS 214 00:11:13,400 --> 00:11:17,080 Speaker 1: is located closest to the Holland Tunnel, and literally you 215 00:11:17,120 --> 00:11:20,280 Speaker 1: could track the cell line I'm sorry, the fiber lines 216 00:11:20,960 --> 00:11:24,440 Speaker 1: out the tunnel and to each of these exchanges, and 217 00:11:24,520 --> 00:11:27,520 Speaker 1: that time difference is what affected execution. Yeah. We we 218 00:11:27,600 --> 00:11:30,640 Speaker 1: had a lot of theories, and uh, Ronan Ryan is 219 00:11:30,640 --> 00:11:32,600 Speaker 1: the guy you're describing who's a partner of mine at 220 00:11:32,600 --> 00:11:36,280 Speaker 1: I X and and Ronan Ryan, you know, kind of 221 00:11:36,320 --> 00:11:39,079 Speaker 1: just by a stroke another stroke of luck, we ended 222 00:11:39,160 --> 00:11:43,000 Speaker 1: up meeting and he explained a lot of the missing pieces. 223 00:11:43,000 --> 00:11:45,920 Speaker 1: He turned it into physical geography, he turned it into 224 00:11:46,400 --> 00:11:49,280 Speaker 1: architecture and networking and the things that he had built 225 00:11:49,600 --> 00:11:53,040 Speaker 1: for high frequency trading clients at the different exchanges, and um, 226 00:11:53,200 --> 00:11:55,080 Speaker 1: you know, everyone came to the you know, we hired 227 00:11:55,080 --> 00:11:56,920 Speaker 1: a lot of people at RBC, and everyone came with 228 00:11:56,920 --> 00:11:59,960 Speaker 1: a little bit of information. No one knew the whole picture. 229 00:12:00,040 --> 00:12:02,240 Speaker 1: We kind of like put the jig saw together. Speaking 230 00:12:02,280 --> 00:12:04,200 Speaker 1: of which you hire, you have a guy working for 231 00:12:04,240 --> 00:12:10,280 Speaker 1: you called Puzz one the Microsoft Puzzle Solving Championship. That's right, 232 00:12:10,280 --> 00:12:12,880 Speaker 1: it was a team event. Uh, and we hired Puzz 233 00:12:12,960 --> 00:12:15,439 Speaker 1: and his nickname is because he won that championship, Puzz. 234 00:12:15,600 --> 00:12:18,120 Speaker 1: And And now at i X we have three people 235 00:12:18,320 --> 00:12:21,640 Speaker 1: that have won that same championship in different years. But uh, 236 00:12:21,640 --> 00:12:23,360 Speaker 1: it's it seems to be a you know, it's probably 237 00:12:23,360 --> 00:12:26,000 Speaker 1: a good recruiting ground for people. It's we found some 238 00:12:26,120 --> 00:12:29,200 Speaker 1: very bright, uh you know, talented people from from that competition. 239 00:12:29,559 --> 00:12:32,120 Speaker 1: So so you're not losing ten thousand a day, but 240 00:12:32,200 --> 00:12:37,240 Speaker 1: you're experimenting. You're figuring out physically where all the exchanges were. 241 00:12:37,240 --> 00:12:39,200 Speaker 1: And one of the things you discovered that when you 242 00:12:39,400 --> 00:12:44,480 Speaker 1: routed orders to specific exchanges that were very different results. 243 00:12:45,040 --> 00:12:48,600 Speaker 1: That's probably being most notable. The first one out of 244 00:12:48,640 --> 00:12:50,720 Speaker 1: the Holland Tunnel and and for people who are listening 245 00:12:50,960 --> 00:12:53,920 Speaker 1: who may not be familiar with New York City, you 246 00:12:53,960 --> 00:12:57,440 Speaker 1: could get out of Midtown to New Jersey and when 247 00:12:57,440 --> 00:13:01,080 Speaker 1: you literally see daylight, the BATS building is not that 248 00:13:01,240 --> 00:13:04,439 Speaker 1: far from the opening of the tunnel on the Jersey side. 249 00:13:04,480 --> 00:13:07,160 Speaker 1: That's right. It was physically the closest to RBC, and 250 00:13:07,200 --> 00:13:09,560 Speaker 1: hence we would always arrive there first. And the interesting 251 00:13:09,600 --> 00:13:13,040 Speaker 1: thing about Bats, meaning the orders would physically arrive. And 252 00:13:13,040 --> 00:13:18,040 Speaker 1: we're talking about milliseconds between orders. Milliseconds, yes, um, and 253 00:13:18,120 --> 00:13:20,880 Speaker 1: actually we we were looking at the world in milliseconds 254 00:13:21,040 --> 00:13:24,160 Speaker 1: and Ronan was looking at the world in microseconds. Uh. 255 00:13:24,200 --> 00:13:26,840 Speaker 1: And it just happened that Ronan could get an order 256 00:13:26,880 --> 00:13:31,280 Speaker 1: from BATS to various other exchanges. Um, and about four 257 00:13:31,520 --> 00:13:34,040 Speaker 1: d seventy six micro seconds at the time is what 258 00:13:34,160 --> 00:13:35,680 Speaker 1: is what he draw it drew out and said, here's 259 00:13:35,720 --> 00:13:39,400 Speaker 1: the inn exchange latency between these buildings and RBC's was 260 00:13:39,440 --> 00:13:42,120 Speaker 1: about four or five times greater than that, which meant 261 00:13:42,120 --> 00:13:43,760 Speaker 1: that he could pick up a signal at BATS and 262 00:13:43,880 --> 00:13:46,080 Speaker 1: race us. Now he didn't know that, you know, we 263 00:13:46,160 --> 00:13:48,160 Speaker 1: had a hundred thousand shares to buy. But what he 264 00:13:48,200 --> 00:13:51,400 Speaker 1: would know is that the entire offering at BATS just disappeared, 265 00:13:52,200 --> 00:13:55,680 Speaker 1: which gives me a very high statistical probability that this 266 00:13:55,800 --> 00:13:57,880 Speaker 1: big buyer is going to try to buy stock in 267 00:13:57,920 --> 00:13:59,960 Speaker 1: other exchanges. So you're out there running to cancel stock, 268 00:14:00,040 --> 00:14:02,280 Speaker 1: or you're already out there to buy stock to turn around, 269 00:14:02,280 --> 00:14:04,480 Speaker 1: and seldom me at higher prices. So so he was 270 00:14:04,520 --> 00:14:06,920 Speaker 1: the guy doing the telecom side of Yeah, he didn't know. 271 00:14:06,960 --> 00:14:09,640 Speaker 1: He Ronan did not know a thing about trading nothing, 272 00:14:10,280 --> 00:14:12,760 Speaker 1: which was amazing, right because you know, he came at 273 00:14:12,760 --> 00:14:14,760 Speaker 1: this with a huge amount of knowledge, but he didn't 274 00:14:14,840 --> 00:14:18,000 Speaker 1: understand the value of that knowledge. Um and it does 275 00:14:18,080 --> 00:14:21,440 Speaker 1: now he does absolutely. You know, Ronan is probably one 276 00:14:21,480 --> 00:14:24,720 Speaker 1: of the greatest assets anyone could have found. I feel 277 00:14:24,800 --> 00:14:26,160 Speaker 1: very lucky that I that I was the one that 278 00:14:26,160 --> 00:14:28,280 Speaker 1: found That's amazing. Now, when you used to send, and 279 00:14:28,560 --> 00:14:31,080 Speaker 1: when you say you arrived first, or you arrived at 280 00:14:31,080 --> 00:14:36,000 Speaker 1: BATS first, your order electronically would arrive that message through 281 00:14:36,040 --> 00:14:39,160 Speaker 1: the fiber in the ground would actually just arrive there first. 282 00:14:39,200 --> 00:14:41,560 Speaker 1: So when you would route and order just to BATS, 283 00:14:41,840 --> 00:14:45,400 Speaker 1: you would get filled. But if we would route in order, 284 00:14:45,440 --> 00:14:48,520 Speaker 1: let's say to BATS in New York Stock Exchange, concurrently 285 00:14:49,000 --> 00:14:51,240 Speaker 1: we get filled on BATS and we would miss it 286 00:14:51,280 --> 00:14:54,680 Speaker 1: on New York, which is amazing. Yeah, So the very 287 00:14:54,720 --> 00:14:58,320 Speaker 1: first sequence of experiments was going to each exchange in isolation, 288 00:14:58,520 --> 00:15:00,160 Speaker 1: and what you would find is you would always get 289 00:15:00,160 --> 00:15:03,000 Speaker 1: a percent of what was offered if you only went 290 00:15:03,040 --> 00:15:05,400 Speaker 1: to one exchange. And now they may be offered at 291 00:15:05,400 --> 00:15:08,240 Speaker 1: different prices, so you're not exactly going to the best price. 292 00:15:08,320 --> 00:15:10,120 Speaker 1: Now it's all it's always at the same price. It is, 293 00:15:10,520 --> 00:15:12,000 Speaker 1: but if you pull up and offer in Intel, you'll 294 00:15:12,000 --> 00:15:13,720 Speaker 1: see it at multiple different places, or if you pull 295 00:15:13,760 --> 00:15:15,960 Speaker 1: up an offer in forward stock, you'll see a multiple places. 296 00:15:16,000 --> 00:15:18,400 Speaker 1: But we said, okay, we'll just pick one exchange, one amount. 297 00:15:18,560 --> 00:15:20,640 Speaker 1: We'd always get a hundred percent. But as you started 298 00:15:20,680 --> 00:15:23,520 Speaker 1: to add exchanges to exchanges three, four or five at 299 00:15:23,560 --> 00:15:26,520 Speaker 1: the same time, the PHIL rates started to drop, but 300 00:15:26,680 --> 00:15:29,040 Speaker 1: you were always getting a percent at bats you were 301 00:15:29,080 --> 00:15:32,880 Speaker 1: completely missing stock in other exchanges. So if if traders 302 00:15:32,920 --> 00:15:35,920 Speaker 1: want to defeat high frequency trading and they only and 303 00:15:35,960 --> 00:15:39,640 Speaker 1: they only routed orders to a single exchange, would they 304 00:15:39,640 --> 00:15:42,760 Speaker 1: get filled that way? Well no, because not one exchange 305 00:15:42,800 --> 00:15:46,080 Speaker 1: typically can satisfy your entire order. So when I pulled 306 00:15:46,120 --> 00:15:48,000 Speaker 1: up my screen and I saw a hundred thousand shares 307 00:15:48,040 --> 00:15:51,800 Speaker 1: of Intel, offered. It was typically spread across multiple exchanges. 308 00:15:52,200 --> 00:15:55,680 Speaker 1: Ten right, Um, if I only went to one, I'd 309 00:15:55,720 --> 00:15:58,120 Speaker 1: probably get you know, five thousand or whatever was offered 310 00:15:58,160 --> 00:16:01,120 Speaker 1: at that one. But you want to get what you saw. 311 00:16:01,440 --> 00:16:03,240 Speaker 1: And and the interesting part it was in two thousands 312 00:16:03,240 --> 00:16:04,680 Speaker 1: and six you could actually buy or sell what you 313 00:16:04,680 --> 00:16:06,840 Speaker 1: saw on your screens. In two thousands seven that wasn't 314 00:16:06,880 --> 00:16:09,600 Speaker 1: the case. I'm Barry rit Helps. You're listening to Masters 315 00:16:09,600 --> 00:16:13,400 Speaker 1: in Business on Bloomberg Radio. My guest today is Brad Katsuyama. 316 00:16:13,560 --> 00:16:16,680 Speaker 1: He is the founder of I e X, which is 317 00:16:16,760 --> 00:16:20,680 Speaker 1: a alternative trading system and soon to be in exchange hopefully, 318 00:16:20,720 --> 00:16:24,440 Speaker 1: and the star of Michael Lewis's book Flashboys. Lewis was 319 00:16:24,520 --> 00:16:29,400 Speaker 1: looking for research on an article for Vanity Fair and 320 00:16:29,440 --> 00:16:31,800 Speaker 1: how did he end up finding you? So he he 321 00:16:31,920 --> 00:16:33,920 Speaker 1: talked to a couple of people, a couple of characters 322 00:16:33,920 --> 00:16:37,080 Speaker 1: in the Big Short who just happened to be clients 323 00:16:37,080 --> 00:16:40,680 Speaker 1: of mind and Um. When he asked them, you know, 324 00:16:40,720 --> 00:16:42,920 Speaker 1: I'm looking to do research on high freakncy trading. Who 325 00:16:42,960 --> 00:16:45,920 Speaker 1: should I talk to? They pointed him to to me, UM, 326 00:16:45,960 --> 00:16:48,040 Speaker 1: a lot of people same name a couple of times. 327 00:16:48,040 --> 00:16:51,040 Speaker 1: Eventually get some curious Yeah, I get you know, it's 328 00:16:51,080 --> 00:16:54,360 Speaker 1: it's the most interesting part about it was really it 329 00:16:54,440 --> 00:16:56,960 Speaker 1: was just about giving him background. He didn't ask a 330 00:16:56,960 --> 00:16:59,840 Speaker 1: ton of questions about what we were doing, in particular 331 00:16:59,920 --> 00:17:02,200 Speaker 1: I X. But when he came to New York, he 332 00:17:02,240 --> 00:17:04,520 Speaker 1: has to drop by our office and he walked in 333 00:17:04,680 --> 00:17:07,400 Speaker 1: um to meet with Ronan and I and uh, there 334 00:17:07,480 --> 00:17:10,480 Speaker 1: was twelve I think twelve or fourteen. I can't remember 335 00:17:10,480 --> 00:17:12,200 Speaker 1: how many at the time, maybe twelve or fourteen people. 336 00:17:12,359 --> 00:17:14,359 Speaker 1: We were in a two hundred square foot office with 337 00:17:14,440 --> 00:17:16,720 Speaker 1: no windows. It was it was it looked it must 338 00:17:16,720 --> 00:17:21,360 Speaker 1: have looked ridiculous to him. Absolutely closet. That's right. So 339 00:17:21,640 --> 00:17:23,720 Speaker 1: we're there and all of a sudden, I can see 340 00:17:23,720 --> 00:17:25,520 Speaker 1: the wheels turning his head is what are you guys 341 00:17:25,520 --> 00:17:27,480 Speaker 1: doing here? And and then and then at that point 342 00:17:27,680 --> 00:17:29,480 Speaker 1: kind of it went to I got to write an 343 00:17:29,560 --> 00:17:32,280 Speaker 1: article about I X two. Maybe I'll take these two 344 00:17:32,359 --> 00:17:34,480 Speaker 1: articles and make him in a short book. And by 345 00:17:34,480 --> 00:17:36,439 Speaker 1: the end he had done a lot of research, he 346 00:17:36,440 --> 00:17:37,880 Speaker 1: had talked to a lot of people, and he came 347 00:17:37,880 --> 00:17:42,240 Speaker 1: back and said, this is gonna be explosive. And to 348 00:17:42,280 --> 00:17:45,000 Speaker 1: say the least, it was so speaking of explosive. You 349 00:17:45,040 --> 00:17:48,920 Speaker 1: guys were on uh an episode of sixty Minutes where 350 00:17:48,960 --> 00:17:52,560 Speaker 1: Michael Lewis famously said the markets are rigged and that 351 00:17:52,720 --> 00:17:55,879 Speaker 1: caused a huge explosion. You know the next days and 352 00:17:55,920 --> 00:17:59,119 Speaker 1: weeks it's resonated to this day. What was the sixty 353 00:17:59,160 --> 00:18:02,639 Speaker 1: Minutes experienced? Like? First, how tell us? What what was 354 00:18:02,680 --> 00:18:05,520 Speaker 1: that it? Like? I mean, it's it's kind of you know, 355 00:18:05,960 --> 00:18:09,160 Speaker 1: it was the first time I've ever been on television. Um, 356 00:18:09,200 --> 00:18:11,399 Speaker 1: it's kind of amazing. Uh, you know, to be a 357 00:18:11,440 --> 00:18:13,480 Speaker 1: part of that, and you know, it was nerve racking 358 00:18:13,480 --> 00:18:15,920 Speaker 1: because we got we interviewed for hours, and we knew 359 00:18:15,960 --> 00:18:18,119 Speaker 1: the segment was twelve and a half minutes, so you know, 360 00:18:18,160 --> 00:18:20,280 Speaker 1: it could go a variety of different ways. But when 361 00:18:20,359 --> 00:18:23,000 Speaker 1: one funny thing is that, um, we were the first 362 00:18:23,040 --> 00:18:25,520 Speaker 1: segment of three on sixty Minutes. By the end of 363 00:18:25,560 --> 00:18:28,159 Speaker 1: the hour, I had more linked in requests than I 364 00:18:28,200 --> 00:18:30,760 Speaker 1: had connections. Yeah, it was it was pretty amazing. I 365 00:18:30,800 --> 00:18:33,040 Speaker 1: just said, I turned my wife and I said, holy caah, 366 00:18:33,160 --> 00:18:36,200 Speaker 1: this is this is real. Right, that's astonishing. What what 367 00:18:36,240 --> 00:18:38,600 Speaker 1: was the fallout over the next couple of days and weeks? 368 00:18:38,840 --> 00:18:41,119 Speaker 1: I mean, I think you know, again, it's it's people 369 00:18:41,160 --> 00:18:43,080 Speaker 1: were reading the book at that because the book just 370 00:18:43,119 --> 00:18:46,640 Speaker 1: came out the next day. So it was just phenomenally well, 371 00:18:46,680 --> 00:18:50,520 Speaker 1: it exploded, It did well. Um, like there was just 372 00:18:50,640 --> 00:18:52,800 Speaker 1: there was a huge amount. It was it was it 373 00:18:52,880 --> 00:18:55,639 Speaker 1: was crazy. Our phone was ringing off the hook. Uh, 374 00:18:55,680 --> 00:18:58,600 Speaker 1: tens of thousands of people reached out to us, and um, 375 00:18:58,640 --> 00:19:00,600 Speaker 1: you know in a positive way. You know, the industry 376 00:19:00,640 --> 00:19:03,760 Speaker 1: was upset. Um and uh you know that was to 377 00:19:03,800 --> 00:19:08,159 Speaker 1: be expected, but again it was for all. There were 378 00:19:08,200 --> 00:19:10,600 Speaker 1: so many great things that happened as a result of that. 379 00:19:10,640 --> 00:19:12,959 Speaker 1: It's just you know that that's we knew that there 380 00:19:13,080 --> 00:19:15,439 Speaker 1: was gonna be a little bit of that. Um. You 381 00:19:15,480 --> 00:19:17,680 Speaker 1: know again, when you talk about things people don't want 382 00:19:17,680 --> 00:19:19,919 Speaker 1: you to talk about, that's kind of the fallout. So 383 00:19:20,000 --> 00:19:24,080 Speaker 1: now let's do a follow up to that. Subsequently, on CNBC, 384 00:19:24,200 --> 00:19:29,120 Speaker 1: you're on with the head of the Bats Exchange and 385 00:19:29,200 --> 00:19:33,000 Speaker 1: Michael Lewis and a few other people, and that exchange 386 00:19:33,160 --> 00:19:37,199 Speaker 1: turns surreal. He starts saying stuff that turns out to 387 00:19:37,280 --> 00:19:41,840 Speaker 1: be not true. He challenges you. You were almost you know, 388 00:19:41,880 --> 00:19:44,240 Speaker 1: I know you don't want to say this personally, but 389 00:19:44,320 --> 00:19:46,600 Speaker 1: it looked like you were holding back because you don't 390 00:19:46,640 --> 00:19:49,760 Speaker 1: want to beat down this poor guy who's only the 391 00:19:49,760 --> 00:19:53,760 Speaker 1: president of of the biggest exchange at the time. What 392 00:19:53,800 --> 00:19:57,399 Speaker 1: was that about? That? Uh? That was that was an 393 00:19:57,440 --> 00:20:00,399 Speaker 1: interesting experience. That was my first time on live to levision. 394 00:20:00,440 --> 00:20:02,760 Speaker 1: I've never actually been on live TV. And you look 395 00:20:02,840 --> 00:20:05,760 Speaker 1: like a pro. You were just so smooth and in 396 00:20:05,800 --> 00:20:08,520 Speaker 1: the middle of it. Um. I just remember saying to myself, like, 397 00:20:08,600 --> 00:20:11,000 Speaker 1: is this is this actually happening? It's just it was, 398 00:20:11,119 --> 00:20:12,840 Speaker 1: it was, it was. It was kind of crazy. What 399 00:20:13,000 --> 00:20:15,480 Speaker 1: what stood out was you turned him and said you 400 00:20:15,560 --> 00:20:18,199 Speaker 1: really want to do this, Let's do this. That That 401 00:20:18,280 --> 00:20:20,680 Speaker 1: was the quote. It's like, I'm giving you an out 402 00:20:20,880 --> 00:20:23,440 Speaker 1: and you're not taking it. So for those people who 403 00:20:23,440 --> 00:20:26,000 Speaker 1: may not have seen this exchange, he made a number 404 00:20:26,080 --> 00:20:29,119 Speaker 1: of statements that turned out to be patently false. The 405 00:20:29,280 --> 00:20:34,960 Speaker 1: New York State Attorney General General Eric Schneiderman forced Bats 406 00:20:35,320 --> 00:20:38,879 Speaker 1: to issue a I didn't want to call it a clarification, 407 00:20:38,920 --> 00:20:42,960 Speaker 1: it was a retraction and basically said we were wrong. 408 00:20:43,720 --> 00:20:45,520 Speaker 1: I was referring to what we're gonna do in the 409 00:20:45,560 --> 00:20:49,040 Speaker 1: future or some nonsense like that, And a few months 410 00:20:49,160 --> 00:20:53,480 Speaker 1: later he's out of a job. Any correlation between that 411 00:20:53,560 --> 00:20:57,000 Speaker 1: incident and it wasn't like he announced his retirement. He 412 00:20:57,119 --> 00:20:59,840 Speaker 1: was gone and they announced he was no longer with them. 413 00:20:59,880 --> 00:21:02,239 Speaker 1: It's hard to say, Um, you know, I think what 414 00:21:02,320 --> 00:21:05,760 Speaker 1: was important about that is that, um that the Attorney 415 00:21:05,760 --> 00:21:08,639 Speaker 1: General made him correct his statements. And what you have 416 00:21:08,840 --> 00:21:11,080 Speaker 1: a lot of times is you have what what we're 417 00:21:11,160 --> 00:21:15,520 Speaker 1: arguing about is completely unknown to the to the general public. 418 00:21:15,560 --> 00:21:17,880 Speaker 1: Anyone watching that. Very few people, i'm sure, understood even 419 00:21:17,880 --> 00:21:20,040 Speaker 1: what we were fighting about. And we're fighting about a 420 00:21:20,160 --> 00:21:23,600 Speaker 1: very important part of the market, meaning there are multiple 421 00:21:23,640 --> 00:21:27,480 Speaker 1: ways market datas distributed. And essentially, are you using a 422 00:21:27,560 --> 00:21:30,760 Speaker 1: slow feed to price trades for all of your participants, 423 00:21:31,320 --> 00:21:33,399 Speaker 1: knowing that some people who trade on your exchange have 424 00:21:33,400 --> 00:21:35,760 Speaker 1: a very fast feed and that that that was the argument, 425 00:21:35,760 --> 00:21:39,160 Speaker 1: and that's what yes, And I think without that level 426 00:21:39,200 --> 00:21:41,679 Speaker 1: of accountability, no one would have known who was saying what. 427 00:21:41,760 --> 00:21:43,160 Speaker 1: It just would have looked like, you know, a bunch 428 00:21:43,200 --> 00:21:45,840 Speaker 1: of crazy people yelling at on television. Um. So, I 429 00:21:45,840 --> 00:21:49,639 Speaker 1: think holding people accountable is extremely important. It's the way 430 00:21:49,680 --> 00:21:51,399 Speaker 1: to make the markets better. Everyone says that they want 431 00:21:51,440 --> 00:21:54,280 Speaker 1: the markets to improve, gonna start holding people accountable. That's 432 00:21:54,280 --> 00:21:56,040 Speaker 1: the way to make them mark. If there's if there's 433 00:21:56,080 --> 00:21:59,199 Speaker 1: no recourse for saying whatever you want, UM, you know, 434 00:21:59,240 --> 00:22:01,000 Speaker 1: at some point the more it's just not going to improve. 435 00:22:01,040 --> 00:22:03,480 Speaker 1: And I think that, you know, that was an important step. 436 00:22:03,520 --> 00:22:06,199 Speaker 1: At least somebody took charge there and said, you know, 437 00:22:06,280 --> 00:22:08,280 Speaker 1: you have to own up to what you said. I'm 438 00:22:08,320 --> 00:22:11,879 Speaker 1: Barry Ridhults. You're listening to Masters and Business on Bloomberg Radio. 439 00:22:12,480 --> 00:22:16,119 Speaker 1: My guest today Brad Katsuyama. He was featured in Michael 440 00:22:16,200 --> 00:22:19,440 Speaker 1: Lewis's book Flash Boys, and he is the co founder 441 00:22:19,560 --> 00:22:24,240 Speaker 1: of the I e x alternative training platform, hopefully soon 442 00:22:24,280 --> 00:22:27,760 Speaker 1: to be a major exchange. Let's talk a little bit 443 00:22:27,800 --> 00:22:31,720 Speaker 1: about I e x um dark pools, something that was 444 00:22:31,760 --> 00:22:36,720 Speaker 1: commonly used by big firms. Explain exactly what dark pools are. So. 445 00:22:36,840 --> 00:22:38,959 Speaker 1: Dark pool is kind of the the you know, the 446 00:22:39,000 --> 00:22:42,159 Speaker 1: street lingo for alternative trading system. And really what it 447 00:22:42,200 --> 00:22:46,399 Speaker 1: means is that, um, they're slightly less regulated um than exchanges. 448 00:22:46,800 --> 00:22:49,320 Speaker 1: And what they can't do is they can't publish bids 449 00:22:49,320 --> 00:22:51,840 Speaker 1: and offers, which means everything that happens in them is 450 00:22:51,960 --> 00:22:56,240 Speaker 1: essentially dark um. But but you know, they're good guys. 451 00:22:56,240 --> 00:22:59,000 Speaker 1: They're not gonna hurt anybody. They're not gonna scalp a 452 00:22:59,080 --> 00:23:01,360 Speaker 1: quarter from everybody who comes in there and not tell 453 00:23:01,440 --> 00:23:03,159 Speaker 1: them about it, right. I think, you know, the interesting 454 00:23:03,359 --> 00:23:06,760 Speaker 1: thing about dark pools is they were started with good intentions. Um, 455 00:23:06,800 --> 00:23:09,000 Speaker 1: you know, if a bank has a buyer and a seller, 456 00:23:09,119 --> 00:23:10,920 Speaker 1: they shouldn't have to go on the exchange and trade 457 00:23:10,920 --> 00:23:13,080 Speaker 1: that and pay the exchange to do so. They should 458 00:23:13,080 --> 00:23:15,840 Speaker 1: be able to do that internally. And um, they ended up. 459 00:23:15,840 --> 00:23:18,440 Speaker 1: I think the competition was so fierce, many of them 460 00:23:18,520 --> 00:23:22,000 Speaker 1: ended up morphing into something that, um, that was not intended. 461 00:23:22,119 --> 00:23:24,479 Speaker 1: And uh, you know, over the course of you know, 462 00:23:24,520 --> 00:23:27,800 Speaker 1: the past decade. Um, that's kind of what's happened. And 463 00:23:27,840 --> 00:23:31,080 Speaker 1: I think we have forty over forty dark pools in 464 00:23:31,080 --> 00:23:33,679 Speaker 1: the United States. That number probably comes down over the 465 00:23:33,680 --> 00:23:35,800 Speaker 1: next couple of years. So I began my career as 466 00:23:35,840 --> 00:23:37,960 Speaker 1: a trader, and the question was always, hey, do you 467 00:23:38,000 --> 00:23:40,879 Speaker 1: put the order out on instantet? I know, you know, 468 00:23:41,080 --> 00:23:46,439 Speaker 1: uh salar nuk and is trading. Those guys started an 469 00:23:46,480 --> 00:23:48,720 Speaker 1: instantt or at least we're there for a long time 470 00:23:48,760 --> 00:23:51,560 Speaker 1: before they decided to launch their own own farm. Also 471 00:23:51,680 --> 00:23:56,000 Speaker 1: critics of of high frequency trading, So the thought of 472 00:23:56,040 --> 00:23:58,920 Speaker 1: these dark pools where nobody really knows what's going on 473 00:23:59,080 --> 00:24:02,879 Speaker 1: and which just relying on brokerage firms to uh, you know, 474 00:24:03,000 --> 00:24:04,920 Speaker 1: do the right thing and be on their best behavior 475 00:24:05,480 --> 00:24:08,120 Speaker 1: wasn't very satisfying to you as someone trying to get 476 00:24:08,240 --> 00:24:11,520 Speaker 1: orders executed. Well, I think, you know, there there are 477 00:24:11,640 --> 00:24:13,720 Speaker 1: some dark pools I think that serve a very good 478 00:24:13,720 --> 00:24:16,520 Speaker 1: purpose um and there are others that I think have 479 00:24:16,880 --> 00:24:21,040 Speaker 1: sacrificed quality for trading more volume and um you know 480 00:24:21,119 --> 00:24:24,560 Speaker 1: it's there. There's there's a direct correlation between the quality 481 00:24:24,600 --> 00:24:27,400 Speaker 1: of trades and the and the frequency of trades. Um 482 00:24:27,520 --> 00:24:29,400 Speaker 1: So I think that again it's you know, you look 483 00:24:29,440 --> 00:24:32,159 Speaker 1: back to the days of instant net um. You know 484 00:24:32,240 --> 00:24:34,359 Speaker 1: there was a purpose. If if someone has a million 485 00:24:34,400 --> 00:24:36,560 Speaker 1: shares to buy, you can't just force them to put 486 00:24:36,600 --> 00:24:39,119 Speaker 1: that all out on on the exchange and display it. 487 00:24:39,119 --> 00:24:41,520 Speaker 1: It's gonna have a very adverse impact on the ability 488 00:24:41,600 --> 00:24:44,160 Speaker 1: to you know, to complete that order. Um So, there 489 00:24:44,240 --> 00:24:47,800 Speaker 1: is a home for large orders in dark pools. I 490 00:24:47,840 --> 00:24:50,199 Speaker 1: do feel like, you know, we need more disclosure, We 491 00:24:50,240 --> 00:24:53,520 Speaker 1: need much more transparency and how dark pools operate um 492 00:24:53,600 --> 00:24:55,840 Speaker 1: And I think as we get more transparency and disclosure, 493 00:24:55,840 --> 00:24:57,480 Speaker 1: you're gonna see a lot of dark pools you know, 494 00:24:57,560 --> 00:25:00,480 Speaker 1: shut down um, but the ones that are left, you know, 495 00:25:00,520 --> 00:25:03,240 Speaker 1: will serve a purpose because there there definitely is. A 496 00:25:03,280 --> 00:25:07,439 Speaker 1: stock exchange can't solve every problem that every investor has 497 00:25:07,800 --> 00:25:09,560 Speaker 1: because a lot of times their orders are too big 498 00:25:09,600 --> 00:25:12,320 Speaker 1: for the markets themselves. So now let's talk a little 499 00:25:12,320 --> 00:25:14,920 Speaker 1: bit about I e X. And in the process of 500 00:25:15,720 --> 00:25:19,880 Speaker 1: setting up or trying to execute orders, you came up 501 00:25:19,880 --> 00:25:22,600 Speaker 1: with a few insights which had to do with, hey, 502 00:25:22,640 --> 00:25:24,960 Speaker 1: if we can find a way to get the orders 503 00:25:25,040 --> 00:25:28,439 Speaker 1: to arrive at all the exchanges at the same time, 504 00:25:29,119 --> 00:25:31,040 Speaker 1: we're not going to be scalped or picked off by 505 00:25:31,119 --> 00:25:34,760 Speaker 1: high frequency traders. Uh. That was originally the Thor product 506 00:25:34,840 --> 00:25:37,160 Speaker 1: that you have developed at RBC. That was the Thor 507 00:25:37,280 --> 00:25:39,840 Speaker 1: router at RBC. Was was really to say, if there 508 00:25:39,920 --> 00:25:44,000 Speaker 1: is this geographical disparity, meaning you know, our order arrives 509 00:25:44,040 --> 00:25:47,399 Speaker 1: at the exchange closest to us first, why not you know, 510 00:25:47,480 --> 00:25:49,439 Speaker 1: stagger when you send out the orders to try to 511 00:25:49,520 --> 00:25:51,280 Speaker 1: arrive at all places at the same time. And it 512 00:25:51,320 --> 00:25:53,719 Speaker 1: was it's a lot harder than it sounds because latency 513 00:25:53,840 --> 00:25:56,880 Speaker 1: changes throughout the day, and it's milliseconds we're describing now. 514 00:25:57,000 --> 00:25:59,199 Speaker 1: Now we get down into microseconds, so you have to 515 00:25:59,240 --> 00:26:02,120 Speaker 1: be within a few microsoft few millions of a second 516 00:26:02,480 --> 00:26:05,640 Speaker 1: have the order arrived at a dozen exchanges. Our goal 517 00:26:05,800 --> 00:26:08,920 Speaker 1: was to have it done under four hundred micro seconds, 518 00:26:09,280 --> 00:26:11,159 Speaker 1: and we got it down to about two d and 519 00:26:11,240 --> 00:26:14,320 Speaker 1: ninety microseconds. But when we did that, our phil rate 520 00:26:14,320 --> 00:26:17,640 Speaker 1: went to a d um. That product could actually now 521 00:26:17,720 --> 00:26:20,760 Speaker 1: buy or sell what people saw on their screens. Uh. 522 00:26:20,800 --> 00:26:22,879 Speaker 1: And it was the easiest product to sell because you 523 00:26:22,960 --> 00:26:24,920 Speaker 1: were just walking to a client's office and mutual fund 524 00:26:24,960 --> 00:26:27,200 Speaker 1: or hedge fund and say, if you see a million 525 00:26:27,200 --> 00:26:28,720 Speaker 1: Bank of America on the offer and you try to 526 00:26:28,760 --> 00:26:30,520 Speaker 1: buy that, what percentage do you get And they're gonna 527 00:26:30,520 --> 00:26:35,560 Speaker 1: say anything from I'll get you a hundred percent. They'll say, 528 00:26:35,760 --> 00:26:37,159 Speaker 1: give me the product. I mean, it was it was 529 00:26:37,200 --> 00:26:39,840 Speaker 1: really that. It was pretty simple. The challenge was this 530 00:26:39,880 --> 00:26:42,040 Speaker 1: is that our our our revenues took off and then 531 00:26:42,040 --> 00:26:45,560 Speaker 1: they started the flatline um And one client put it 532 00:26:45,800 --> 00:26:48,440 Speaker 1: put it the best when he said to me, Brad, 533 00:26:48,480 --> 00:26:50,159 Speaker 1: we love what you've done, we love your team, we 534 00:26:50,200 --> 00:26:54,200 Speaker 1: love RBC. You've only solved three percent of my problem 535 00:26:54,320 --> 00:26:56,720 Speaker 1: because that's the amount of commissions, that's how much I 536 00:26:56,720 --> 00:26:59,280 Speaker 1: can trade with RBC, I have to trade with all 537 00:26:59,359 --> 00:27:05,600 Speaker 1: these other banks for for legitimate reasons banking, etcetera. So UM, 538 00:27:05,640 --> 00:27:08,040 Speaker 1: that was kind of the moment when we decided to 539 00:27:08,119 --> 00:27:11,800 Speaker 1: leave OURBC and start i X, because we realized, number one, 540 00:27:11,840 --> 00:27:14,080 Speaker 1: no broker can solve this problem. Even the biggest broker. 541 00:27:14,080 --> 00:27:17,879 Speaker 1: If I'm Goldman Sachs twent of market share, what does 542 00:27:17,920 --> 00:27:22,040 Speaker 1: that mean? UM still leaves absolutely the way to solve 543 00:27:22,080 --> 00:27:24,359 Speaker 1: this was to actually be a stock exchange, because the 544 00:27:24,359 --> 00:27:27,720 Speaker 1: stock exchanges have enabled what's really happened. You know, I 545 00:27:27,760 --> 00:27:30,600 Speaker 1: think that that in a way there was a responsibility 546 00:27:30,680 --> 00:27:33,480 Speaker 1: by the exchanges to prevent some of what's happened, and 547 00:27:33,520 --> 00:27:37,000 Speaker 1: they they've kind of enabled it. Were speaking with Brad Katsuyama, 548 00:27:37,160 --> 00:27:39,879 Speaker 1: co founder of i e X, so let's talk a 549 00:27:39,920 --> 00:27:42,480 Speaker 1: little bit about the shoe box. You came up with 550 00:27:42,520 --> 00:27:46,280 Speaker 1: the insight that said, hey, everybody is racing to go 551 00:27:46,400 --> 00:27:50,080 Speaker 1: faster and faster. What would happen if we forced everybody 552 00:27:50,119 --> 00:27:52,719 Speaker 1: to slow down? Yes, and the original idea was, well, 553 00:27:52,760 --> 00:27:55,639 Speaker 1: let's put our exchange in Omaha, ne Brasta and not 554 00:27:55,760 --> 00:27:59,480 Speaker 1: let anybody co locate their servers there. But then UM, 555 00:27:59,600 --> 00:28:02,280 Speaker 1: one of the guys came up with a suggestion you 556 00:28:02,280 --> 00:28:06,560 Speaker 1: don't need physically miles, you just need a spooled fiber optics, 557 00:28:06,560 --> 00:28:09,840 Speaker 1: which is essentially a shoe box with thirty eight miles 558 00:28:09,840 --> 00:28:13,120 Speaker 1: worth the fiber optics of coil cable of coil cables, 559 00:28:13,200 --> 00:28:17,000 Speaker 1: and and explain what the shoebox of coiled cable does 560 00:28:17,119 --> 00:28:19,560 Speaker 1: to orders that come into And it's interesting because the 561 00:28:19,600 --> 00:28:21,480 Speaker 1: guy who came up with the idea worked at a 562 00:28:21,560 --> 00:28:25,240 Speaker 1: high freakin see trading firms previously, absolutely and worked at 563 00:28:25,280 --> 00:28:27,800 Speaker 1: I And what they do is they use these spools 564 00:28:28,440 --> 00:28:32,760 Speaker 1: to recreate geographical distances. So like in Europe when you're 565 00:28:32,760 --> 00:28:36,400 Speaker 1: looking at the difference between different exchanges, it's all done 566 00:28:36,440 --> 00:28:39,280 Speaker 1: in the same room. There's just different levels of spooling happening, 567 00:28:39,440 --> 00:28:43,160 Speaker 1: and you can recreate quote, physical distance in a single 568 00:28:43,240 --> 00:28:45,400 Speaker 1: room right as they're testing strategies. But so he came 569 00:28:45,480 --> 00:28:47,880 Speaker 1: up with the idea. The premise behind the idea was 570 00:28:47,920 --> 00:28:50,960 Speaker 1: that we never wanted anyone to be able to execute 571 00:28:50,960 --> 00:28:55,880 Speaker 1: a trade on I X with advanced information. Right, Um, 572 00:28:55,960 --> 00:28:58,960 Speaker 1: there's this. There There's two things exchange is really look 573 00:28:59,040 --> 00:29:01,560 Speaker 1: to sell. One is they all very fast data. Right, 574 00:29:01,840 --> 00:29:03,720 Speaker 1: so if you want high speed data, you gotta pay 575 00:29:03,720 --> 00:29:07,200 Speaker 1: for it. Um, there's nothing inherently wrong with someone buying 576 00:29:07,240 --> 00:29:09,560 Speaker 1: fast data because someone will always get it first, and 577 00:29:09,560 --> 00:29:12,400 Speaker 1: someone will always get it last. Right. Um, someone in 578 00:29:12,440 --> 00:29:14,440 Speaker 1: New Jersey will get it before someone in London, just 579 00:29:14,480 --> 00:29:16,960 Speaker 1: basically based on the speed of light. Right, So the 580 00:29:17,040 --> 00:29:19,600 Speaker 1: sylgical distances how long it takes that message to go 581 00:29:19,720 --> 00:29:22,840 Speaker 1: to from from the exchange New Jersey or the exchange 582 00:29:22,920 --> 00:29:26,360 Speaker 1: across the Atlanta absolutely right. So, so fast data is 583 00:29:26,400 --> 00:29:29,400 Speaker 1: one thing, but the notion of co location place your 584 00:29:29,440 --> 00:29:31,760 Speaker 1: server right next to the exchange matching engine, buy this 585 00:29:31,840 --> 00:29:34,440 Speaker 1: high speed cable. What that allows is the person that's 586 00:29:34,480 --> 00:29:38,320 Speaker 1: buying the fast information to trade hundreds and thousands of 587 00:29:38,400 --> 00:29:41,000 Speaker 1: times before that information makes its way to the end 588 00:29:41,160 --> 00:29:45,000 Speaker 1: the last person. Right. Um, we inherently see a problem 589 00:29:45,000 --> 00:29:47,160 Speaker 1: with fairness in that. So we've done is we take 590 00:29:47,280 --> 00:29:49,800 Speaker 1: very fast data into i X, we buy all the 591 00:29:49,840 --> 00:29:52,280 Speaker 1: direct feeds. We've spent a lot of time, uh and 592 00:29:52,360 --> 00:29:55,280 Speaker 1: money and effort and getting very fast data to i X, 593 00:29:55,280 --> 00:29:58,360 Speaker 1: but we we realize will never be as fast as 594 00:29:58,400 --> 00:30:02,640 Speaker 1: the fastest high frequency trader. The shoebox. Essentially, that coiled 595 00:30:02,680 --> 00:30:05,760 Speaker 1: cable is to say that's that's our heads start. So 596 00:30:05,800 --> 00:30:07,840 Speaker 1: if they get information that the stock has gone from 597 00:30:07,880 --> 00:30:09,880 Speaker 1: ten to nine, and they want to come in here 598 00:30:09,880 --> 00:30:12,400 Speaker 1: and sell stock at ten against a buyer who doesn't 599 00:30:12,400 --> 00:30:14,760 Speaker 1: know that the stock has moved lower. Right, Um, they 600 00:30:14,760 --> 00:30:16,480 Speaker 1: send that order to I X and it starts to 601 00:30:16,520 --> 00:30:18,960 Speaker 1: go around the shoebox and it goes around the coil. 602 00:30:19,000 --> 00:30:21,040 Speaker 1: And as it's going around the coil, I X will 603 00:30:21,040 --> 00:30:23,680 Speaker 1: get the update the prices changed from ten to nine, 604 00:30:24,200 --> 00:30:26,280 Speaker 1: and we will not let that trade take place at ten. 605 00:30:26,800 --> 00:30:28,960 Speaker 1: That's the whole thing, right. The exchange's job is kind 606 00:30:28,960 --> 00:30:31,560 Speaker 1: of like the referee in a way. Um, you have 607 00:30:31,600 --> 00:30:34,920 Speaker 1: to understand what the conditions for fair trade is. It's 608 00:30:34,960 --> 00:30:39,760 Speaker 1: both parties having equal relative information the prices nine, don't 609 00:30:39,840 --> 00:30:42,280 Speaker 1: let the stock trade at ten. The issue is that 610 00:30:42,360 --> 00:30:46,480 Speaker 1: high speed traders have faster information than the exchanges, which 611 00:30:46,520 --> 00:30:48,240 Speaker 1: means that they always know about a price before the 612 00:30:48,280 --> 00:30:50,880 Speaker 1: exchange actually understands this is the market wide price. And 613 00:30:50,920 --> 00:30:54,600 Speaker 1: I think that's that's the shoe boxes about us slowing 614 00:30:54,680 --> 00:30:57,920 Speaker 1: them down. How much does the shoebox actually slow h 615 00:30:58,000 --> 00:31:01,040 Speaker 1: f T It's fifty micro seconds is the total. So 616 00:31:01,080 --> 00:31:03,280 Speaker 1: the shoe box is located in a different data center. 617 00:31:03,600 --> 00:31:06,880 Speaker 1: That data centers about five miles away, plus the shoebox 618 00:31:06,880 --> 00:31:09,840 Speaker 1: adds another thirty eight miles. In total, it's three fifty 619 00:31:09,840 --> 00:31:13,200 Speaker 1: micro seconds millions of a second, one one thousand of 620 00:31:13,240 --> 00:31:16,000 Speaker 1: the blink of an eye. Um. But it's enough time 621 00:31:16,040 --> 00:31:19,320 Speaker 1: for i X to always ensure that we know the 622 00:31:19,360 --> 00:31:21,520 Speaker 1: most up to date market information so that we can 623 00:31:21,560 --> 00:31:25,800 Speaker 1: fairly and consistently fairly priced trades. So their orders can't 624 00:31:25,880 --> 00:31:29,080 Speaker 1: front front run anybody else's inform, they can't pick someone 625 00:31:29,120 --> 00:31:33,120 Speaker 1: off who doesn't have information that they have, Yes, milliseconds 626 00:31:33,200 --> 00:31:40,560 Speaker 1: ahead of them, milliseconds thousands of a second. That's too slow. Yeah, 627 00:31:40,600 --> 00:31:43,240 Speaker 1: I mean it's we now measure everything in microseconds. That 628 00:31:43,240 --> 00:31:48,360 Speaker 1: that's just absolutely astonishing. So there was a conversation the 629 00:31:48,480 --> 00:31:52,000 Speaker 1: part of of the book where i X launches and flashboys, 630 00:31:52,440 --> 00:31:54,800 Speaker 1: and you were concerned, Hey, you know, is anybody going 631 00:31:54,840 --> 00:31:56,920 Speaker 1: to come to this party? We we just built this 632 00:31:57,320 --> 00:32:01,080 Speaker 1: whole exchange on the theory that people want fair pricing. 633 00:32:01,080 --> 00:32:03,680 Speaker 1: They didn't want to give anybody an advantage. And you 634 00:32:03,760 --> 00:32:06,760 Speaker 1: had no idea if anybody was going to show up. 635 00:32:07,080 --> 00:32:10,560 Speaker 1: What what was it like launching into that circumstance. It 636 00:32:10,600 --> 00:32:13,600 Speaker 1: was nerve racking, to say the least, because because if 637 00:32:14,680 --> 00:32:17,360 Speaker 1: there was this kind of chicken and egg problem, UM 638 00:32:17,440 --> 00:32:21,000 Speaker 1: brokers would say, well, you have no volume, so why 639 00:32:21,000 --> 00:32:24,320 Speaker 1: would I send you any volume? Meaning liquidity begets liquidity. 640 00:32:24,800 --> 00:32:27,200 Speaker 1: If everyone takes that approach, you'll never trade a single 641 00:32:27,240 --> 00:32:29,640 Speaker 1: share because everyone's waiting for someone else to trade a share, 642 00:32:29,680 --> 00:32:33,040 Speaker 1: So you need someone to go first. And fifty million 643 00:32:33,120 --> 00:32:36,000 Speaker 1: shares was your number that you thought, all right, if 644 00:32:36,040 --> 00:32:38,400 Speaker 1: we get at least fifty million a day, maybe we 645 00:32:38,480 --> 00:32:40,880 Speaker 1: can survive. Fifty million was kind of yeah, it was. 646 00:32:40,960 --> 00:32:43,880 Speaker 1: It was a survival number UM, and we ended up 647 00:32:43,880 --> 00:32:47,040 Speaker 1: doing five hundred and sixty thousand our first day. Uh. 648 00:32:47,080 --> 00:32:49,680 Speaker 1: Some people were predicting we do shares the first day, 649 00:32:49,680 --> 00:32:52,120 Speaker 1: so nobody, nobody had. The guy with the most experienced 650 00:32:52,200 --> 00:32:54,360 Speaker 1: launching markets is the guy Matt Trudeau. He runs, he 651 00:32:54,440 --> 00:32:57,600 Speaker 1: runs our products. He's launched seven different markets globally. His 652 00:32:57,680 --> 00:33:01,200 Speaker 1: prediction the first day was share is UM and what 653 00:33:01,240 --> 00:33:03,880 Speaker 1: are you doing now? Well, our record a few weeks 654 00:33:03,880 --> 00:33:06,800 Speaker 1: ago was a two million shares. That's fantastic. So yeah, 655 00:33:06,800 --> 00:33:09,440 Speaker 1: the the growth has been nice. Can you stick around 656 00:33:09,440 --> 00:33:11,200 Speaker 1: a little bit. We'll throw the rest of this on 657 00:33:11,240 --> 00:33:15,240 Speaker 1: the podcast portion so I've been speaking with Brad Katsuyama. 658 00:33:15,320 --> 00:33:18,120 Speaker 1: He is the co founder of i e x Exchange. 659 00:33:18,600 --> 00:33:21,440 Speaker 1: If you like this conversation, be sure and check out 660 00:33:21,800 --> 00:33:25,280 Speaker 1: the rest of our chat that'll be on Bloomberg SoundCloud 661 00:33:25,320 --> 00:33:28,160 Speaker 1: and of course Apple iTunes. Be sure and check out 662 00:33:28,240 --> 00:33:31,640 Speaker 1: my daily column on Bloomberg View or follow me on 663 00:33:31,680 --> 00:33:35,120 Speaker 1: Twitter at Rid Halts. I'm Barry Rihults. You're listening to 664 00:33:35,240 --> 00:33:39,600 Speaker 1: Masters in Business on Bloomberg Radio. Welcome to the podcast 665 00:33:39,680 --> 00:33:43,000 Speaker 1: portion of our show. Now I could uh throw my 666 00:33:43,080 --> 00:33:45,920 Speaker 1: papers away and just kind of cut back. Rad. Thank 667 00:33:45,920 --> 00:33:48,560 Speaker 1: you so much for doing this. You know, I've been 668 00:33:49,000 --> 00:33:52,880 Speaker 1: somewhat of a critic of high frequency trading for a while. UM. 669 00:33:52,960 --> 00:33:56,600 Speaker 1: One of the interesting things that Joe Saluzzi had said 670 00:33:56,640 --> 00:34:00,200 Speaker 1: not too long ago was on a SCAE all of 671 00:34:00,320 --> 00:34:03,120 Speaker 1: zero to ten, where where are we in the process 672 00:34:03,160 --> 00:34:07,120 Speaker 1: getting better? And he said we're out of four, um, 673 00:34:07,160 --> 00:34:10,759 Speaker 1: which was kind of surprising. You know, the pushback that 674 00:34:10,800 --> 00:34:14,960 Speaker 1: I've gotten from people, um who I don't want to 675 00:34:14,960 --> 00:34:19,760 Speaker 1: say or pro h f T but just aren't as critical, 676 00:34:19,840 --> 00:34:24,000 Speaker 1: let's say. UM. Jack Brennan is chairman of Vanguard. He 677 00:34:24,080 --> 00:34:27,960 Speaker 1: says h f T has lowered costs lowered expenses for 678 00:34:28,040 --> 00:34:31,640 Speaker 1: them Titan spreads. Um cliff astness of a q R 679 00:34:31,800 --> 00:34:34,919 Speaker 1: is a huge shop runs a hundred plus billion dollars. 680 00:34:35,000 --> 00:34:39,160 Speaker 1: He thinks his comment was, Hey, listen, look, you guys 681 00:34:39,160 --> 00:34:42,800 Speaker 1: complained that liquidly disappears when h f T guys unplug 682 00:34:42,880 --> 00:34:45,560 Speaker 1: their machines. How is that any different than what specialists 683 00:34:45,640 --> 00:34:47,759 Speaker 1: used to do. If they don't like the price, you 684 00:34:47,800 --> 00:34:50,440 Speaker 1: don't get executed. They just dropped their bid further and further. 685 00:34:51,120 --> 00:34:53,640 Speaker 1: How do you respond to those sort of comments? I 686 00:34:53,640 --> 00:34:57,520 Speaker 1: think a lot of times, Um, you could interchange h 687 00:34:57,600 --> 00:35:02,040 Speaker 1: f T with just technology. Technology has made things cheaper, 688 00:35:02,480 --> 00:35:06,480 Speaker 1: has allowed spreads to titan. Decimalization helps press titans as well. 689 00:35:06,560 --> 00:35:08,680 Speaker 1: But you know, I think a lot of the benefits 690 00:35:08,719 --> 00:35:12,400 Speaker 1: people bestow on the general category of high frequency trading 691 00:35:12,800 --> 00:35:15,080 Speaker 1: have more to do with technology than it does to 692 00:35:15,120 --> 00:35:18,960 Speaker 1: do with anything. UM. The difficult part about the debate 693 00:35:19,080 --> 00:35:21,080 Speaker 1: around high frequency trading, which is why it's still a 694 00:35:21,120 --> 00:35:23,279 Speaker 1: debate five years later, we're still talking about a lot 695 00:35:23,280 --> 00:35:26,040 Speaker 1: of the same things, UM, is that we haven't even 696 00:35:26,040 --> 00:35:29,399 Speaker 1: talked about the flash crash, which there's still disagreements as 697 00:35:29,440 --> 00:35:32,440 Speaker 1: to what the unsaying. Absolutely, you know, that the toughest 698 00:35:32,480 --> 00:35:35,480 Speaker 1: part is is that not everyone who uses a computer 699 00:35:35,600 --> 00:35:38,960 Speaker 1: to trade is doing harm to the market, and not 700 00:35:39,080 --> 00:35:41,279 Speaker 1: everyone who's using a computer to trade is doing it 701 00:35:41,320 --> 00:35:44,120 Speaker 1: for the benefit of society. Right. It's people are doing 702 00:35:44,239 --> 00:35:46,960 Speaker 1: both and I feel like, you know, the one the 703 00:35:47,000 --> 00:35:49,680 Speaker 1: one part about i X that that that I'm really 704 00:35:49,719 --> 00:35:52,239 Speaker 1: proud of UM is the fact that we never made 705 00:35:52,280 --> 00:35:56,200 Speaker 1: this about shutting out high frequency traders per se. We 706 00:35:56,320 --> 00:35:58,720 Speaker 1: just built a market we felt could not be gamed, 707 00:35:59,280 --> 00:36:02,480 Speaker 1: and as small segment of high freakingcy traders still showed up, 708 00:36:03,280 --> 00:36:04,960 Speaker 1: and I give them a lot of credit for doing that. Right, 709 00:36:05,000 --> 00:36:08,600 Speaker 1: So Virtuo is one and UM they're they're pretty huge, 710 00:36:09,560 --> 00:36:12,040 Speaker 1: They're they're one of the biggest UM and I'll say 711 00:36:12,080 --> 00:36:14,080 Speaker 1: they're they're they're a very good partner of ours at 712 00:36:14,080 --> 00:36:16,480 Speaker 1: i X. But when we walk through the things that 713 00:36:16,520 --> 00:36:19,239 Speaker 1: we're not giving them the thing, the advantages they won't 714 00:36:19,320 --> 00:36:21,560 Speaker 1: have that they might have on other markets, they didn't 715 00:36:21,600 --> 00:36:23,040 Speaker 1: care at all. They said this is good, this is 716 00:36:23,040 --> 00:36:25,000 Speaker 1: good for the market, will be their day one. We 717 00:36:25,080 --> 00:36:27,520 Speaker 1: like what you're doing, and we've both been supportive of 718 00:36:27,560 --> 00:36:30,200 Speaker 1: each other. So it was never really about saying all 719 00:36:30,239 --> 00:36:33,160 Speaker 1: computerized trading is bad. You know, my my when I 720 00:36:33,239 --> 00:36:37,560 Speaker 1: when I traded New York listed tech on the on 721 00:36:37,600 --> 00:36:40,120 Speaker 1: the Stock Exchange floor, and I also traded over the 722 00:36:40,120 --> 00:36:43,000 Speaker 1: counter on the NASDAC terminal, I liked electronic trading a 723 00:36:43,080 --> 00:36:47,640 Speaker 1: hundred times more UM master cheaper, better, easier, instantaneous, con 724 00:36:47,880 --> 00:36:49,920 Speaker 1: more efficient. Absolutely, It's just it was. There was no 725 00:36:50,000 --> 00:36:53,239 Speaker 1: question the way the market was gonna go. UM. The 726 00:36:53,320 --> 00:36:57,200 Speaker 1: challenges that a lot of people are using technology UM 727 00:36:57,320 --> 00:37:00,600 Speaker 1: to make money and scalp off of traditional every investors. 728 00:37:00,640 --> 00:37:04,520 Speaker 1: The markets become at times more volatile, intra day volumes 729 00:37:04,520 --> 00:37:08,920 Speaker 1: are inflated. It's just you know these it's it's sense. 730 00:37:08,920 --> 00:37:11,000 Speaker 1: It can go both ways. The people that want to 731 00:37:11,040 --> 00:37:14,560 Speaker 1: provide cover can use very generic statements about technology driven 732 00:37:14,600 --> 00:37:17,719 Speaker 1: trading and call it h f T UM, and then 733 00:37:17,920 --> 00:37:19,839 Speaker 1: we can come out, or or Joe and Sal can 734 00:37:19,880 --> 00:37:22,080 Speaker 1: come out, or Michael Lewis can write about h F 735 00:37:22,200 --> 00:37:25,239 Speaker 1: T and and really focus specifically on the parts of 736 00:37:25,280 --> 00:37:28,319 Speaker 1: it that are bad. UM. And the fact that you know, 737 00:37:28,840 --> 00:37:30,759 Speaker 1: it's cheaper to trade now than it was twenty years ago, 738 00:37:30,840 --> 00:37:32,520 Speaker 1: that's not a defense for the things that we're saying, 739 00:37:32,520 --> 00:37:35,719 Speaker 1: because we're getting you very specific critiques. UM and and 740 00:37:35,760 --> 00:37:38,479 Speaker 1: there's very generic replies to that, and I think again 741 00:37:38,520 --> 00:37:40,839 Speaker 1: it's it's part of the argument, but for us, it's 742 00:37:41,080 --> 00:37:44,040 Speaker 1: you know, it's more about fairness and and that's why, 743 00:37:44,520 --> 00:37:47,280 Speaker 1: you know, I'll come on here and say a firm 744 00:37:47,360 --> 00:37:49,920 Speaker 1: like Virtue is a partner of i X, even though 745 00:37:49,920 --> 00:37:53,360 Speaker 1: they're quote classified a high frenzy trader because they've chosen 746 00:37:53,400 --> 00:37:55,759 Speaker 1: to play by our rules. We've set the rules. You know, 747 00:37:55,800 --> 00:37:57,640 Speaker 1: we're experts in the market. We know what we're doing. 748 00:37:57,880 --> 00:38:00,160 Speaker 1: We have people from exchanges and high prency trader, any 749 00:38:00,200 --> 00:38:02,640 Speaker 1: firms that work at i X. We set the ground rules. 750 00:38:02,800 --> 00:38:04,440 Speaker 1: They've decided to play. I give him a lot of 751 00:38:04,440 --> 00:38:06,600 Speaker 1: credit for that. What what other firms that are thought 752 00:38:06,600 --> 00:38:09,040 Speaker 1: of as h f t s will trade through uh 753 00:38:09,320 --> 00:38:13,080 Speaker 1: X so G GTS Securities is another one, um, you 754 00:38:13,120 --> 00:38:16,000 Speaker 1: know I M C Trades uh You know Night has 755 00:38:16,040 --> 00:38:18,800 Speaker 1: it as a variety of businesses. Um, but Night's a 756 00:38:18,800 --> 00:38:20,480 Speaker 1: good partner of ours as well, right, so they at 757 00:38:20,480 --> 00:38:22,560 Speaker 1: one point in time where one of the biggest, if 758 00:38:22,600 --> 00:38:25,080 Speaker 1: not the biggest volume on the deck. Absolutely, but you 759 00:38:25,080 --> 00:38:27,560 Speaker 1: know they have a very diversified business. But they've been 760 00:38:27,600 --> 00:38:29,759 Speaker 1: good partners of ours, right, So it's you know, and 761 00:38:29,800 --> 00:38:32,840 Speaker 1: it's in Goldman Sacks. Uh. You know in two fourteen 762 00:38:32,880 --> 00:38:37,040 Speaker 1: was our largest volume providers. So um. The the goal 763 00:38:37,120 --> 00:38:40,439 Speaker 1: for us really was to build a market that we've 764 00:38:40,480 --> 00:38:43,440 Speaker 1: believed to be fair and fair consistently. That's I mean, 765 00:38:43,480 --> 00:38:45,440 Speaker 1: if if the stock market is not fair, what does 766 00:38:45,480 --> 00:38:47,839 Speaker 1: that mean for everything else? Right? It is, it's it's 767 00:38:48,040 --> 00:38:50,520 Speaker 1: it's That was the goal and I've we've done that. 768 00:38:50,880 --> 00:38:53,200 Speaker 1: And the fact that of a wide variety of people 769 00:38:53,200 --> 00:38:56,000 Speaker 1: have shown up uh and provided support that gives us 770 00:38:56,000 --> 00:38:57,680 Speaker 1: a lot of confidence that this this is this is 771 00:38:57,680 --> 00:38:59,480 Speaker 1: the right model. And I think a lot of people 772 00:38:59,600 --> 00:39:03,960 Speaker 1: like the fact that the market itself is fixing some 773 00:39:04,080 --> 00:39:07,280 Speaker 1: of the structural eras it has. This is a market 774 00:39:07,320 --> 00:39:11,120 Speaker 1: based solution to a whole series of problems. You know, 775 00:39:11,160 --> 00:39:14,239 Speaker 1: we're we if you look back at the last century, right, 776 00:39:14,280 --> 00:39:18,360 Speaker 1: we're caught in this pretty pretty vicious negative cycle. You 777 00:39:18,400 --> 00:39:22,479 Speaker 1: have a scandal, it's followed by regulation. There's no such 778 00:39:22,480 --> 00:39:25,360 Speaker 1: thing as a perfect rule. That regulation will create loopholes 779 00:39:25,400 --> 00:39:30,600 Speaker 1: and inefficiencies consequences. People look to exploit the loopholes, and 780 00:39:30,600 --> 00:39:33,360 Speaker 1: they exploit it so badly that it creates the next scandal, 781 00:39:33,680 --> 00:39:36,520 Speaker 1: which creates the next set of regulation. And as as 782 00:39:36,840 --> 00:39:40,840 Speaker 1: regulation increases, it raises the barriers to entry for disruption. 783 00:39:41,280 --> 00:39:43,520 Speaker 1: It makes it harder to disrupt an industry that's so 784 00:39:43,560 --> 00:39:47,239 Speaker 1: heavily regulated. UM. Which means that in a way, the 785 00:39:47,320 --> 00:39:50,600 Speaker 1: people causing the scandals are the ones that are that 786 00:39:50,600 --> 00:39:53,239 Speaker 1: that remain in this industry as the walls get higher 787 00:39:53,239 --> 00:39:57,239 Speaker 1: and higher. UM. So you guys are the uber of mind. 788 00:39:59,040 --> 00:40:01,560 Speaker 1: We feel like, you know, in a way, we're trying 789 00:40:01,600 --> 00:40:04,600 Speaker 1: to We're trying to we're trying to disrupt Wall Street 790 00:40:04,600 --> 00:40:07,960 Speaker 1: in a productive way. UM. It's not productive the relationship 791 00:40:08,000 --> 00:40:10,600 Speaker 1: Wall Street has with main Street because main Street needs 792 00:40:10,600 --> 00:40:13,000 Speaker 1: Wall Street whether they like it or not. Um, they 793 00:40:13,000 --> 00:40:15,040 Speaker 1: just don't like the way Wall Street has behaved over 794 00:40:15,040 --> 00:40:17,839 Speaker 1: the last you know, a few years. And I think that, UM, 795 00:40:18,000 --> 00:40:20,799 Speaker 1: you know, we're huge proponents of of what Wall Street does, 796 00:40:21,600 --> 00:40:23,040 Speaker 1: but we think it can be done in a better 797 00:40:23,160 --> 00:40:25,839 Speaker 1: in a better way. There's no no doubt about that. 798 00:40:25,960 --> 00:40:31,200 Speaker 1: The cycle you described of scandal, regulation, loopholes, gaming it 799 00:40:31,320 --> 00:40:34,080 Speaker 1: scamp what was a little different. And I have a 800 00:40:34,120 --> 00:40:37,239 Speaker 1: lot of criticism of HFT and maybe we'll get to 801 00:40:37,360 --> 00:40:40,360 Speaker 1: some I'd love to hear your responses. Was the fact 802 00:40:40,400 --> 00:40:44,799 Speaker 1: that suddenly we had the New York Stock Exchange that 803 00:40:44,960 --> 00:40:50,120 Speaker 1: was a nonprofit sort of public commons. Almost suddenly it 804 00:40:50,239 --> 00:40:54,040 Speaker 1: becomes a for profit entity whose goal is no longer 805 00:40:54,120 --> 00:40:57,560 Speaker 1: serving the investor, but serving their clients, who turned out 806 00:40:57,600 --> 00:40:59,160 Speaker 1: to be the ones who could pay the most, or 807 00:40:59,200 --> 00:41:02,000 Speaker 1: the h f T who are paying for the early look, 808 00:41:02,120 --> 00:41:05,600 Speaker 1: who were paying for co location. The way that structure 809 00:41:06,000 --> 00:41:09,799 Speaker 1: came about was, look if I if I said, hey, 810 00:41:09,840 --> 00:41:11,799 Speaker 1: here's the system where you could look at people's orders 811 00:41:11,840 --> 00:41:15,600 Speaker 1: before they're executed and front run them, that can't possibly 812 00:41:15,719 --> 00:41:18,560 Speaker 1: be legal. But if I set up a series of 813 00:41:18,719 --> 00:41:21,319 Speaker 1: high speed lanes and slow speed lanes and you could 814 00:41:21,360 --> 00:41:25,239 Speaker 1: sniff this and see those packets, effectively, it's the same thing, 815 00:41:25,400 --> 00:41:28,440 Speaker 1: but somehow legal. Well, the funny part is is that 816 00:41:28,520 --> 00:41:31,560 Speaker 1: you know, as you when you read certain things, certain 817 00:41:31,600 --> 00:41:33,840 Speaker 1: fines that come out, or when you read, if you 818 00:41:33,920 --> 00:41:37,040 Speaker 1: replace the act of a computer with an actual person, 819 00:41:38,440 --> 00:41:40,279 Speaker 1: that person would be penalized a lot worse than the 820 00:41:40,280 --> 00:41:42,400 Speaker 1: computer gets penalized in today's market, because some of the 821 00:41:42,400 --> 00:41:44,960 Speaker 1: stuff is kind of outrageous what happens in it. But 822 00:41:44,960 --> 00:41:49,319 Speaker 1: but programmers don't get penalized. They're taking advantage of you know, 823 00:41:49,360 --> 00:41:51,840 Speaker 1: it's like playing a video game. You're you're not penalized 824 00:41:51,880 --> 00:41:53,960 Speaker 1: for shooting them out of the sky in a video game. 825 00:41:54,400 --> 00:41:56,680 Speaker 1: That's all this is is a video game for money. Yeah, 826 00:41:56,719 --> 00:41:58,000 Speaker 1: I think I think you know, you kind of hit 827 00:41:58,040 --> 00:42:00,760 Speaker 1: the nail on the head where you know, in essence, 828 00:42:00,760 --> 00:42:03,680 Speaker 1: I X is a free market solution. Um, it's our choice, 829 00:42:04,000 --> 00:42:07,720 Speaker 1: and we're trying to correct inefficiencies. We're trying to patch 830 00:42:07,800 --> 00:42:10,120 Speaker 1: up the loopholes. We're trying to and trying to make 831 00:42:10,120 --> 00:42:13,919 Speaker 1: the system better. Um. In a way, the exchanges could 832 00:42:13,960 --> 00:42:16,160 Speaker 1: have done what we've done. We've done it all within 833 00:42:16,200 --> 00:42:18,000 Speaker 1: the regulation. We haven't asked for any rule change. But 834 00:42:18,000 --> 00:42:20,680 Speaker 1: they chose to sell technology and sell data. They're they're 835 00:42:20,719 --> 00:42:23,960 Speaker 1: they're part of in a way, exploiting loopholes, and it's 836 00:42:24,040 --> 00:42:27,080 Speaker 1: very hard to get them to fix themselves. There are 837 00:42:27,280 --> 00:42:30,440 Speaker 1: very few companies that can disrupt themselves. Well, you know, 838 00:42:30,480 --> 00:42:33,120 Speaker 1: if you look what Apple did with constantly lowing the 839 00:42:33,160 --> 00:42:37,000 Speaker 1: price of the iPod, most companies and to a point 840 00:42:37,000 --> 00:42:40,960 Speaker 1: where huge huge improvements. The same thing with the phones, 841 00:42:41,040 --> 00:42:45,640 Speaker 1: and that's unusual. Typically companies are disrupted from the outside. 842 00:42:46,160 --> 00:42:48,000 Speaker 1: Not hey, this is our bread of but bread and 843 00:42:48,040 --> 00:42:49,719 Speaker 1: butter what do you mean we're gonna drop the price 844 00:42:49,760 --> 00:42:52,960 Speaker 1: in half but will be twice as good. Nobody does it. Yeah, 845 00:42:52,960 --> 00:42:55,480 Speaker 1: I mean part of a lot of people will say, 846 00:42:55,880 --> 00:42:57,360 Speaker 1: you know, this is the right thing to do for 847 00:42:57,440 --> 00:43:00,640 Speaker 1: my shareholders. I make as much money as humanly possible 848 00:43:00,960 --> 00:43:03,840 Speaker 1: from my position in the market. And UM, you know, 849 00:43:03,920 --> 00:43:07,719 Speaker 1: I think that's it's a it's a it's a valid statement. Um. 850 00:43:07,760 --> 00:43:10,040 Speaker 1: It also serves to excuse a lot of really bad 851 00:43:10,040 --> 00:43:14,160 Speaker 1: behavior with without question, without questions. So I think you 852 00:43:14,160 --> 00:43:17,399 Speaker 1: know you for us, it's you know, starting a new 853 00:43:17,440 --> 00:43:21,600 Speaker 1: market in two thousand and thirteen, Uh, understanding very clearly 854 00:43:21,840 --> 00:43:25,000 Speaker 1: the mistakes that others have made. Um, you know, we 855 00:43:25,080 --> 00:43:27,000 Speaker 1: just feel like we're in a very good position to 856 00:43:27,120 --> 00:43:29,879 Speaker 1: just build a different kind of marketplace. And let's talk 857 00:43:29,920 --> 00:43:33,040 Speaker 1: about that a sex. So you know in the book, um, 858 00:43:33,200 --> 00:43:34,640 Speaker 1: and I want to talk a little bit about Michael 859 00:43:34,680 --> 00:43:37,799 Speaker 1: Lewis and a little later um, because I think if 860 00:43:37,800 --> 00:43:41,200 Speaker 1: he keeps it this writing thing, he's gonna be really 861 00:43:41,239 --> 00:43:44,880 Speaker 1: influential one day, because he shows a lot of potential. 862 00:43:45,280 --> 00:43:47,160 Speaker 1: I love his stuff. Every time a new book of 863 00:43:47,160 --> 00:43:50,319 Speaker 1: his comes out, I save it for vacation. And it's 864 00:43:50,360 --> 00:43:54,239 Speaker 1: my It's just my favorite, most delightful vacation reading so 865 00:43:54,440 --> 00:43:58,719 Speaker 1: um and he his columns that he publishes here are 866 00:43:58,840 --> 00:44:01,799 Speaker 1: ridiculous because you can have a column that's doing really 867 00:44:01,880 --> 00:44:04,400 Speaker 1: well in the terminal and then a Michael Lewis column 868 00:44:04,440 --> 00:44:06,960 Speaker 1: comes out and that's that. Nobody is even close. It's 869 00:44:07,000 --> 00:44:09,120 Speaker 1: like number one with a bullet for three days. It 870 00:44:09,239 --> 00:44:11,520 Speaker 1: just hangs around. You look at most you know, other 871 00:44:11,560 --> 00:44:16,319 Speaker 1: ways on the terminal, most most emailed, highest ranked, most read, 872 00:44:16,840 --> 00:44:19,200 Speaker 1: and his are just like glued to the top. It's 873 00:44:19,280 --> 00:44:22,840 Speaker 1: it's almost it's almost funny. So you get the idea 874 00:44:22,920 --> 00:44:25,680 Speaker 1: to set up this company, you have to think, geez, 875 00:44:25,680 --> 00:44:29,040 Speaker 1: this is gonna cost tens of millions of dollars. Was 876 00:44:29,160 --> 00:44:31,920 Speaker 1: RBC supportive of this with an investor in this No, 877 00:44:32,040 --> 00:44:35,200 Speaker 1: so OURBC non investor. Originally we went around to try 878 00:44:35,239 --> 00:44:39,160 Speaker 1: to do this with URBC. I brought the idea to 879 00:44:39,160 --> 00:44:40,800 Speaker 1: to my boss is there and I said, this is 880 00:44:40,800 --> 00:44:44,440 Speaker 1: an idea, let's start in exchange. Uh. The feedback we 881 00:44:44,480 --> 00:44:47,920 Speaker 1: got from our clients, the big mutual funds um was 882 00:44:48,000 --> 00:44:51,360 Speaker 1: that we like the idea, but RBC can't be involved 883 00:44:51,440 --> 00:44:55,080 Speaker 1: because they're a broker, or because because other brokers would 884 00:44:55,080 --> 00:44:57,960 Speaker 1: not want to use a solution provided by RBC. UM. 885 00:44:58,200 --> 00:45:01,520 Speaker 1: You know, so, so are any of your sun investors brokers? 886 00:45:02,440 --> 00:45:04,840 Speaker 1: So Goldman is not an investor, it was an investor. 887 00:45:04,920 --> 00:45:09,320 Speaker 1: Yet no one who's a subscriber to our platform, meaning 888 00:45:09,360 --> 00:45:11,759 Speaker 1: Broke is an investor. No broker is an investor in 889 00:45:11,760 --> 00:45:15,360 Speaker 1: in a so mutual funds, hedge funds. Uh. There's some 890 00:45:15,480 --> 00:45:19,040 Speaker 1: venture firms, there's you know, entrepreneurs, there's it's all sorts. 891 00:45:19,680 --> 00:45:22,319 Speaker 1: In the book they mentioned David Einhorn and I think 892 00:45:22,560 --> 00:45:27,760 Speaker 1: was Bill Bill Ackman, Don Lobe Lobe Capital Group, Franklin Templeton, 893 00:45:27,840 --> 00:45:31,759 Speaker 1: Mass Mutual, Jim Clark from Netscape, Steve Wynn UM. So 894 00:45:32,080 --> 00:45:35,600 Speaker 1: we have we have a really great group of end users, UM. 895 00:45:35,640 --> 00:45:39,880 Speaker 1: And it's it's very you know, most people own a percent, 896 00:45:40,040 --> 00:45:43,360 Speaker 1: like it's very very small, UM. But we wanted, you know, 897 00:45:43,440 --> 00:45:47,120 Speaker 1: a broad consortium of interests that represented the end users 898 00:45:47,120 --> 00:45:49,400 Speaker 1: of the stock market. And really it's the issuers and 899 00:45:49,400 --> 00:45:52,640 Speaker 1: it's the investors in the stock market that matter most. Um, 900 00:45:52,719 --> 00:45:56,640 Speaker 1: How are you gonna avoid the temptation when I don't 901 00:45:56,680 --> 00:45:59,640 Speaker 1: even know who owns arkinnet these days comes along and says, 902 00:45:59,880 --> 00:46:01,520 Speaker 1: here is a billion dollars we want to buy you 903 00:46:02,040 --> 00:46:04,480 Speaker 1: or when Goldman says, hey, we can take you guys public, 904 00:46:04,520 --> 00:46:06,600 Speaker 1: What what do you do about that? I think? I mean, 905 00:46:06,840 --> 00:46:09,800 Speaker 1: you know, we we we thought a long time about 906 00:46:09,840 --> 00:46:13,560 Speaker 1: i X starting as a nonprofit UM. And the reason 907 00:46:13,640 --> 00:46:16,480 Speaker 1: we decided against it is because we're competing against for 908 00:46:16,680 --> 00:46:19,520 Speaker 1: profit entities and when it comes down to competing for talent, 909 00:46:19,520 --> 00:46:21,719 Speaker 1: when it comes down to a lot of things, UM, 910 00:46:22,560 --> 00:46:25,200 Speaker 1: we couldn't let the solutions suffer because of the way 911 00:46:25,200 --> 00:46:28,160 Speaker 1: we structured the company. UM. So you know, we'll continue 912 00:46:28,200 --> 00:46:30,600 Speaker 1: to look for you know, just doing the right thing 913 00:46:30,600 --> 00:46:32,839 Speaker 1: for the mission. That's the that's the key. There's been 914 00:46:32,840 --> 00:46:35,600 Speaker 1: a lot of interest in i X already. UM. You know, 915 00:46:35,640 --> 00:46:38,279 Speaker 1: we've we've turned we've turned all that down because we 916 00:46:38,320 --> 00:46:40,080 Speaker 1: feel like we're you know, we're still on a mission. 917 00:46:40,080 --> 00:46:42,360 Speaker 1: But you know, if the right partner comes along and 918 00:46:42,400 --> 00:46:44,760 Speaker 1: you think it's the right thing to do for the mission. 919 00:46:44,760 --> 00:46:47,640 Speaker 1: In the business, it's really this, this is a mission 920 00:46:47,640 --> 00:46:51,279 Speaker 1: based company. UM. We care a lot more about that 921 00:46:51,280 --> 00:46:53,359 Speaker 1: than anything. And it's very distributed. You know, I don't 922 00:46:53,400 --> 00:46:56,000 Speaker 1: own a huge chunk of i X. UM. I mean 923 00:46:56,120 --> 00:46:59,479 Speaker 1: we're going around talking to your partners all every single 924 00:46:59,520 --> 00:47:02,880 Speaker 1: person that I excellent equity UM and it's very evenly 925 00:47:02,920 --> 00:47:05,120 Speaker 1: spread out amongst you know, kind of the the top. 926 00:47:05,160 --> 00:47:08,120 Speaker 1: There's there's uh you know, uh you know, what's the structure. 927 00:47:08,200 --> 00:47:11,160 Speaker 1: What's the structure at the company. It's you. So it's 928 00:47:11,239 --> 00:47:14,799 Speaker 1: it's so yeah, So it's me. Um Ronan Ryan is 929 00:47:14,880 --> 00:47:19,719 Speaker 1: our chief trategyman Rob Parts described in the book, and 930 00:47:19,840 --> 00:47:22,960 Speaker 1: Rob Park was our CTO. He he worked with me 931 00:47:23,080 --> 00:47:26,200 Speaker 1: at RBC and and John schwall is our chief operating officer. 932 00:47:26,480 --> 00:47:28,960 Speaker 1: UM hired him at RBC from Bank of America. He 933 00:47:29,000 --> 00:47:31,399 Speaker 1: was the he was kind of the the LinkedIn guy 934 00:47:31,440 --> 00:47:34,879 Speaker 1: that did all the background research and um, you know, 935 00:47:35,160 --> 00:47:39,040 Speaker 1: we Don Bullman was a co founder. He came from NASDAK. 936 00:47:39,600 --> 00:47:42,360 Speaker 1: UM so we you know, Zorin Perkov ran global operations 937 00:47:42,360 --> 00:47:45,240 Speaker 1: at Nasadak. He came aboard. John Ramsey came from the SEC. 938 00:47:45,440 --> 00:47:47,680 Speaker 1: Sophia Lee came from Liquid Net. We just we just 939 00:47:48,040 --> 00:47:50,200 Speaker 1: you know, we just feel very lucky. Claudia Crowley we 940 00:47:50,200 --> 00:47:52,239 Speaker 1: just hired at their chief regulatory officer. She came from 941 00:47:52,239 --> 00:47:55,200 Speaker 1: the New York Stock Exchange. It's like the nineteen nine Yankees. 942 00:47:55,280 --> 00:47:58,400 Speaker 1: That's a uh, that's a murderous row. We're building you know. 943 00:47:58,440 --> 00:48:00,600 Speaker 1: And and the great part about it is, you know, 944 00:48:00,719 --> 00:48:03,799 Speaker 1: it's i X is not the best short term uh 945 00:48:03,960 --> 00:48:08,919 Speaker 1: lucrative place to work, right, people are getting rich this year. UM. 946 00:48:08,960 --> 00:48:11,359 Speaker 1: So people come for the mission. They come because they 947 00:48:11,360 --> 00:48:14,640 Speaker 1: believe in it, and they believe in it long term, um, 948 00:48:14,680 --> 00:48:16,520 Speaker 1: you know, And and the goal is to be successful 949 00:48:16,600 --> 00:48:18,600 Speaker 1: long term. So there's a long term payoff to this. 950 00:48:18,680 --> 00:48:22,120 Speaker 1: People come, um looking out three five years and that 951 00:48:22,120 --> 00:48:23,760 Speaker 1: those are the kind of employees that you really want. 952 00:48:23,840 --> 00:48:26,200 Speaker 1: And you know, part of the that the challenge you 953 00:48:26,480 --> 00:48:28,360 Speaker 1: on Wall Street in general is a lot of people 954 00:48:28,400 --> 00:48:31,839 Speaker 1: live year to year on guarantees. Um. There's a huge 955 00:48:31,880 --> 00:48:34,640 Speaker 1: sense of loyalty. Um. What I find is that, you know, 956 00:48:34,680 --> 00:48:38,160 Speaker 1: certain firms are incredibly well cultured and certain firms are 957 00:48:38,160 --> 00:48:41,680 Speaker 1: just completely toxic. And um, you know, you want to 958 00:48:41,680 --> 00:48:46,160 Speaker 1: build long term culture. UM. And again it's it's we're 959 00:48:46,200 --> 00:48:49,280 Speaker 1: trying to build that at i X. That's that's really interesting. 960 00:48:49,400 --> 00:48:52,880 Speaker 1: So now you've hit a hundred and fifty plus million 961 00:48:52,960 --> 00:48:57,480 Speaker 1: shares a day. What sort of revenue can this company do? 962 00:48:57,600 --> 00:48:59,720 Speaker 1: I mean, you guys always going to be a niche player, 963 00:49:00,160 --> 00:49:02,279 Speaker 1: or can you scale up to be five or ten 964 00:49:02,320 --> 00:49:06,040 Speaker 1: percent of the total daily when you look at it, Um, 965 00:49:06,320 --> 00:49:08,760 Speaker 1: we're one, We're around one percent of the total market 966 00:49:08,840 --> 00:49:11,560 Speaker 1: right now. Um, but we can only really compete for 967 00:49:11,680 --> 00:49:15,839 Speaker 1: fifteen or twenty of the hundred pie. Fifty six percent 968 00:49:15,880 --> 00:49:18,120 Speaker 1: of the volume every day is displayed quotes, which only 969 00:49:18,160 --> 00:49:21,400 Speaker 1: exchanges are authorized to do. UM. You know, ten percent 970 00:49:21,520 --> 00:49:24,120 Speaker 1: roughly is the open closing auction plus pre and post 971 00:49:24,160 --> 00:49:28,960 Speaker 1: market trading trades, retail, you know, with wholesalers and internalized 972 00:49:28,960 --> 00:49:31,120 Speaker 1: So there's so much volume that we don't have access 973 00:49:31,160 --> 00:49:34,759 Speaker 1: to right now. Um. Becoming an exchange obviously unlocks a 974 00:49:34,760 --> 00:49:38,000 Speaker 1: lot of a lot of potential for us. So UM, 975 00:49:38,160 --> 00:49:39,920 Speaker 1: you know, we feel like this is kind of just 976 00:49:40,080 --> 00:49:41,960 Speaker 1: the beginning. You know, if you back to you know, 977 00:49:42,080 --> 00:49:44,560 Speaker 1: talking about Joe thinking we're in the fourth inning or 978 00:49:44,640 --> 00:49:46,600 Speaker 1: four out of ten. Yeah, I think we're a third 979 00:49:46,640 --> 00:49:49,000 Speaker 1: or fourth inning of the game. There's a there's a 980 00:49:49,000 --> 00:49:50,640 Speaker 1: lot of there's a lot of ball to be player. 981 00:49:50,760 --> 00:49:53,400 Speaker 1: So once you become an exchange, and I have a 982 00:49:53,400 --> 00:49:57,239 Speaker 1: hard time imagining that the SEC isn't gonna say, hey, 983 00:49:57,280 --> 00:49:59,760 Speaker 1: these guys solve a lot of problems, take the workload 984 00:49:59,800 --> 00:50:02,520 Speaker 1: off of us. You become an exchange. Over the next 985 00:50:02,640 --> 00:50:06,120 Speaker 1: twelve months, eighteen months, somewhere all those time that timeline. 986 00:50:06,239 --> 00:50:08,960 Speaker 1: We're hopeful, Well, we're hopeful it happens this year. Okay, 987 00:50:09,080 --> 00:50:12,360 Speaker 1: so before is over. What does that do to the 988 00:50:12,360 --> 00:50:14,800 Speaker 1: potential volume that you guys can count. I mean it 989 00:50:15,239 --> 00:50:18,359 Speaker 1: unlocks more than half the market that we just can't 990 00:50:18,400 --> 00:50:20,920 Speaker 1: touch right now. And I think that, Um, you know 991 00:50:20,960 --> 00:50:24,560 Speaker 1: that's significant. And and we're we're keeping the principles of 992 00:50:24,600 --> 00:50:29,120 Speaker 1: what we do. Um, we're not paying rebates, maker takers obviously, 993 00:50:29,160 --> 00:50:33,560 Speaker 1: no maker taker, no order flow payments. Basically, it's just 994 00:50:33,600 --> 00:50:37,560 Speaker 1: a fair price. And that's what you get. Simple, transparent 995 00:50:37,840 --> 00:50:40,640 Speaker 1: and fair stock exchange. I mean, that's what we're trying 996 00:50:40,640 --> 00:50:43,400 Speaker 1: to be. And um, you know, there's an elegance that 997 00:50:43,480 --> 00:50:47,560 Speaker 1: comes with simplicity, meaning people understand what your market does 998 00:50:47,600 --> 00:50:50,600 Speaker 1: and why and why you exist. Um, and the stock 999 00:50:50,640 --> 00:50:52,680 Speaker 1: market is anything but that. It's you. You need to 1000 00:50:52,719 --> 00:50:54,919 Speaker 1: hire people from a firm to understand what that firm 1001 00:50:54,960 --> 00:50:57,279 Speaker 1: actually does. Right, and so we you know, most of 1002 00:50:57,280 --> 00:50:59,959 Speaker 1: what we've learned from exchanges you can't find by going 1003 00:51:00,080 --> 00:51:02,399 Speaker 1: on Google. You have to find people that have worked 1004 00:51:02,400 --> 00:51:04,759 Speaker 1: that exchanges or find people that know them intimately. Well, 1005 00:51:04,840 --> 00:51:08,239 Speaker 1: So I think you know, it's amazing the function of 1006 00:51:08,280 --> 00:51:11,719 Speaker 1: the stock market is so central to the economy. It's 1007 00:51:11,719 --> 00:51:14,520 Speaker 1: amazing how few people know how the stock market actually works, 1008 00:51:14,760 --> 00:51:18,480 Speaker 1: myself being one of those people five years ago. Right, So, um, 1009 00:51:18,520 --> 00:51:20,600 Speaker 1: you know, we want to build a market that people understand. 1010 00:51:21,000 --> 00:51:24,240 Speaker 1: That's that's amazing. So let's talk a little bit about 1011 00:51:24,280 --> 00:51:27,600 Speaker 1: Michael Lewis, because he's come up as a thread throughout 1012 00:51:27,760 --> 00:51:30,800 Speaker 1: and full disclosure, I write for Bloomberg View, which is 1013 00:51:30,840 --> 00:51:33,680 Speaker 1: published The publisher is David Shipley, and I know they 1014 00:51:33,719 --> 00:51:37,200 Speaker 1: have a longstanding relationship. Um, but you and I haven't 1015 00:51:37,239 --> 00:51:39,680 Speaker 1: discussed this beforehand. Sure, so I'm kind of drying. I 1016 00:51:39,680 --> 00:51:42,520 Speaker 1: sent you, Hey, let's talk about these things. But let's 1017 00:51:42,520 --> 00:51:45,920 Speaker 1: talk a little bit about Michael Michael Lewis. So you 1018 00:51:46,040 --> 00:51:49,480 Speaker 1: finally meet him in in your window Lists office with 1019 00:51:49,600 --> 00:51:52,560 Speaker 1: you and you and Ryan, and he starts to you 1020 00:51:52,600 --> 00:51:56,160 Speaker 1: see the gears turning mentioned yeah earlier. How long does 1021 00:51:56,200 --> 00:51:59,319 Speaker 1: that conversation go on? What? What is that? Like? This 1022 00:51:59,400 --> 00:52:02,319 Speaker 1: is for the in the Fair magazine article, not for 1023 00:52:02,400 --> 00:52:05,879 Speaker 1: the book. Yeah, it was, Um, I had I had 1024 00:52:05,920 --> 00:52:09,640 Speaker 1: read almost everything that he had ever written. Um, I 1025 00:52:09,680 --> 00:52:11,920 Speaker 1: read Lars Poker. I'm sure like everyone does before they 1026 00:52:11,960 --> 00:52:13,680 Speaker 1: come into business. You ask what book should I read? 1027 00:52:13,719 --> 00:52:16,800 Speaker 1: You read Liars Poker, which I always tell people market Wizards. 1028 00:52:16,840 --> 00:52:19,080 Speaker 1: But Margaret, I read that too, But because I find 1029 00:52:19,160 --> 00:52:22,799 Speaker 1: Liars Poker gives them, Hey, that's an eighties perspective that 1030 00:52:22,920 --> 00:52:25,879 Speaker 1: universe does hasn't existed. The funny part. The funny part 1031 00:52:26,040 --> 00:52:30,000 Speaker 1: is Michael Lewis is kind of horrified that that people 1032 00:52:30,040 --> 00:52:32,399 Speaker 1: read Lars Poker as a how to manual, and because 1033 00:52:32,440 --> 00:52:34,359 Speaker 1: he wrote it as kind of like a warning story. Right, 1034 00:52:34,400 --> 00:52:37,120 Speaker 1: it was an apocryphal tale, Hey, don't let this happen 1035 00:52:37,160 --> 00:52:40,439 Speaker 1: to you, and people actually use it as Oh, so 1036 00:52:40,520 --> 00:52:46,080 Speaker 1: that's that's what it's right. Um. And Moneyball, Um, it's 1037 00:52:46,080 --> 00:52:49,160 Speaker 1: probably my favorite Michael Lewis book, including Flashboys. I love 1038 00:52:49,160 --> 00:52:52,800 Speaker 1: Moneyball kind of changed my perspective on on business and 1039 00:52:52,800 --> 00:52:56,120 Speaker 1: and and and challenged me to think differently. Um. The 1040 00:52:56,200 --> 00:53:00,200 Speaker 1: book was great, the movie was great. You mentioned him 1041 00:53:00,200 --> 00:53:03,560 Speaker 1: Clark The New New Thing, which I think maybe his 1042 00:53:03,800 --> 00:53:07,000 Speaker 1: least known book is another one. It's amazing. It's a 1043 00:53:07,000 --> 00:53:09,799 Speaker 1: great it's a fat and it's amazing that you mentioned Wait, 1044 00:53:09,880 --> 00:53:12,600 Speaker 1: that's a Michael Lewis book. Yeah, it's a huge book. 1045 00:53:12,800 --> 00:53:15,280 Speaker 1: And the next one I have cued up for vacation 1046 00:53:15,400 --> 00:53:17,799 Speaker 1: is The blind Side. Yes, the football book, which I 1047 00:53:17,840 --> 00:53:20,760 Speaker 1: have not yet. Fantastic, That's what That's what people have said. 1048 00:53:21,120 --> 00:53:23,640 Speaker 1: It's it's so you finally get to meet this guy 1049 00:53:23,680 --> 00:53:26,759 Speaker 1: who you have a tremendous amount of respect for. What's 1050 00:53:26,800 --> 00:53:29,040 Speaker 1: that first meeting, Like, you know, we we just try 1051 00:53:29,160 --> 00:53:33,759 Speaker 1: to um convey what we knew, UM and and do 1052 00:53:33,840 --> 00:53:36,280 Speaker 1: it in a way that that would make him somewhat 1053 00:53:36,280 --> 00:53:39,120 Speaker 1: interested in us. At the time, we had no money. UM, 1054 00:53:39,239 --> 00:53:41,520 Speaker 1: we had nothing. You had already launched the firm. We 1055 00:53:41,520 --> 00:53:44,239 Speaker 1: we had started the firm with our own money, which 1056 00:53:44,360 --> 00:53:47,680 Speaker 1: was which basically we ran out of UM. And you know, 1057 00:53:47,760 --> 00:53:50,200 Speaker 1: at the time we kind of you know, it's I 1058 00:53:50,239 --> 00:53:52,600 Speaker 1: don't think it ever would have been a personal choice 1059 00:53:52,600 --> 00:53:57,000 Speaker 1: of mine, UM to be in the position I'm in, UM, 1060 00:53:57,040 --> 00:53:59,640 Speaker 1: because it just it changes your life, UM, to be 1061 00:54:00,920 --> 00:54:04,120 Speaker 1: it being on sixty minutes, being in this book, it 1062 00:54:04,160 --> 00:54:07,400 Speaker 1: has changed my life. UM. But as the CEO of 1063 00:54:07,440 --> 00:54:10,200 Speaker 1: I X, it was absolutely the right thing to so 1064 00:54:10,239 --> 00:54:11,759 Speaker 1: we we kind of went all in. We had nothing 1065 00:54:11,800 --> 00:54:14,560 Speaker 1: to lose at that point, and I think, um, uh, 1066 00:54:14,600 --> 00:54:15,960 Speaker 1: you know, the very first thing we did is we 1067 00:54:16,000 --> 00:54:18,720 Speaker 1: went and got in a in a car and drove 1068 00:54:18,840 --> 00:54:21,920 Speaker 1: to all the different UM centers with Michael Wis in 1069 00:54:21,960 --> 00:54:23,879 Speaker 1: the car. We drove, We drew out the map and said, 1070 00:54:23,920 --> 00:54:25,600 Speaker 1: you know, here's why our orders were getting into different 1071 00:54:25,600 --> 00:54:27,800 Speaker 1: exchanges at different times. So you go out the Holland 1072 00:54:27,800 --> 00:54:30,160 Speaker 1: Tunnel and you take it. He says, I want to 1073 00:54:30,239 --> 00:54:33,320 Speaker 1: drive these routes, so we are we okay? So, which 1074 00:54:33,360 --> 00:54:35,480 Speaker 1: sounds like him. Yeah. So we got in the car 1075 00:54:35,960 --> 00:54:39,520 Speaker 1: and um and and and drove the routes and um, 1076 00:54:39,560 --> 00:54:41,240 Speaker 1: you know, spent the day with him, going to different 1077 00:54:41,280 --> 00:54:43,000 Speaker 1: datas and you know, he walked away his head was 1078 00:54:43,000 --> 00:54:46,360 Speaker 1: spinning to think, I just I just saw the stock markets, 1079 00:54:46,560 --> 00:54:48,879 Speaker 1: but not the Star War because people see on TV 1080 00:54:50,040 --> 00:54:53,680 Speaker 1: building in New Jersey, that's right. And um. So so 1081 00:54:53,760 --> 00:54:56,320 Speaker 1: it went from I'm gonna write a short story about 1082 00:54:56,320 --> 00:54:58,960 Speaker 1: I X and which again was super exciting, He's gonna 1083 00:54:59,000 --> 00:55:01,960 Speaker 1: put in Vanity Fair. Um. But he started talking to 1084 00:55:02,000 --> 00:55:04,239 Speaker 1: more and more people. He just he every time he 1085 00:55:04,280 --> 00:55:06,000 Speaker 1: came to New York. He'd spent a little time with us, 1086 00:55:06,040 --> 00:55:08,360 Speaker 1: but he was out there canvassing meeting. The amount of 1087 00:55:08,360 --> 00:55:11,480 Speaker 1: connections he has is incredible. It's the amazing part is 1088 00:55:11,480 --> 00:55:14,160 Speaker 1: that we were going around to the asset management community 1089 00:55:14,239 --> 00:55:16,960 Speaker 1: to try to raise money. UM. And as we started 1090 00:55:17,000 --> 00:55:19,000 Speaker 1: to talk to Michael Lewis, Oh yeah, we talked to 1091 00:55:19,040 --> 00:55:20,520 Speaker 1: him for for the Big Short. We talked to him 1092 00:55:20,520 --> 00:55:23,600 Speaker 1: for the Big Short, like every other person I talked 1093 00:55:23,640 --> 00:55:26,440 Speaker 1: to talked to him for the Big Short. I was like, now, 1094 00:55:26,640 --> 00:55:28,440 Speaker 1: they never would offer this information if they didn't know 1095 00:55:28,480 --> 00:55:31,000 Speaker 1: that we were talking to him. Um. But you just 1096 00:55:31,040 --> 00:55:33,560 Speaker 1: realize how many people he actually knows UM and some 1097 00:55:33,600 --> 00:55:35,640 Speaker 1: people at firms that I'm sure they'd be fired if 1098 00:55:35,680 --> 00:55:39,960 Speaker 1: they knew that they were talking to Michael. Absolutely, it's uh, 1099 00:55:40,040 --> 00:55:42,840 Speaker 1: you know, and he's got away, He's he's uh, he's 1100 00:55:42,880 --> 00:55:45,320 Speaker 1: brilliant at what he does. I call him the poet 1101 00:55:45,400 --> 00:55:49,600 Speaker 1: Laureatete of Wall Street. He nobody tells a finance story 1102 00:55:50,160 --> 00:55:53,920 Speaker 1: the way he does. And it's always focused on these 1103 00:55:54,040 --> 00:55:57,600 Speaker 1: interesting characters, of which you're now one of you strike 1104 00:55:57,680 --> 00:56:00,319 Speaker 1: by the way. Anyone meets you on the street, they're like, oh, yeah, 1105 00:56:00,320 --> 00:56:02,520 Speaker 1: I met Brad. He's a good guy, you know. Yeah, 1106 00:56:02,719 --> 00:56:05,239 Speaker 1: I think he's Canadian. That would be it. Most of 1107 00:56:05,239 --> 00:56:09,239 Speaker 1: the other characters in his books, there's Jim Clark or 1108 00:56:09,320 --> 00:56:11,879 Speaker 1: Michael Barry, or or some of these other guys. They're 1109 00:56:11,920 --> 00:56:16,040 Speaker 1: always a little off kilter and fascinating. I'm the most 1110 00:56:16,160 --> 00:56:19,479 Speaker 1: unlikely Michael was character probably ever to be in a book, 1111 00:56:19,520 --> 00:56:21,680 Speaker 1: and I think that's right. He he had. He told 1112 00:56:21,719 --> 00:56:24,440 Speaker 1: me he had a hard time writing about me, Um 1113 00:56:24,480 --> 00:56:29,160 Speaker 1: simply because um, he said, he goes it's he was 1114 00:56:29,200 --> 00:56:32,120 Speaker 1: trying to dig up anything he could on me being 1115 00:56:32,160 --> 00:56:35,479 Speaker 1: in the Israeli Air Force. That was really, you're fired 1116 00:56:35,480 --> 00:56:37,880 Speaker 1: a pilot. And I'm only kidding. I'm only by the 1117 00:56:37,880 --> 00:56:41,200 Speaker 1: way I find myself having to constantly when when you're 1118 00:56:41,200 --> 00:56:44,440 Speaker 1: a little bit sarcastic, you have to clarify because someone's 1119 00:56:44,440 --> 00:56:48,399 Speaker 1: gonna say, wait, Brad wasn't a fighter. You have to be, 1120 00:56:48,480 --> 00:56:54,719 Speaker 1: without a doubt, the most. Yeah, lacking abnormalities is the best. 1121 00:56:55,160 --> 00:56:57,920 Speaker 1: You're You're an ordinary Wall Street guy. Hey, you had 1122 00:56:58,120 --> 00:57:00,399 Speaker 1: a big job as a trader at RBC. You made 1123 00:57:00,400 --> 00:57:02,239 Speaker 1: a lot of money. You were making seven figures. Now 1124 00:57:02,760 --> 00:57:04,560 Speaker 1: that that had to be a lot of a lot 1125 00:57:04,560 --> 00:57:06,600 Speaker 1: of fun, a lot of hard work, but nice to 1126 00:57:06,600 --> 00:57:09,240 Speaker 1: put a little money away. And now you're running a startup. 1127 00:57:09,719 --> 00:57:12,080 Speaker 1: That must that must be the most aberrational thing you're 1128 00:57:12,080 --> 00:57:16,240 Speaker 1: doing is giving up Uh, seven figure job to say, Okay, 1129 00:57:16,280 --> 00:57:17,959 Speaker 1: we're gonna go fix Wall Street and we're not gonna 1130 00:57:17,960 --> 00:57:21,120 Speaker 1: make a lot of money. First, quitting was was definitely 1131 00:57:21,120 --> 00:57:23,560 Speaker 1: at a character for me. I probably could have retired 1132 00:57:23,560 --> 00:57:25,680 Speaker 1: at OURBC. It was actually the only company I'd ever 1133 00:57:25,720 --> 00:57:27,920 Speaker 1: worked for. I was an intern there and just and 1134 00:57:27,960 --> 00:57:30,600 Speaker 1: just stayed because it was comfortable. I got offered more 1135 00:57:30,640 --> 00:57:32,880 Speaker 1: money to work elsewhere. But I like the people. I 1136 00:57:33,280 --> 00:57:37,200 Speaker 1: had a great relationship with my immediate boss, and um, 1137 00:57:37,480 --> 00:57:40,040 Speaker 1: it was it was kind of a different thing part 1138 00:57:40,040 --> 00:57:42,000 Speaker 1: of leaving. The big thing. The reason, one of the 1139 00:57:42,040 --> 00:57:44,360 Speaker 1: big reasons I left was that after we we created 1140 00:57:44,440 --> 00:57:48,920 Speaker 1: Thor and RBC's electronic platform, took off all of the 1141 00:57:48,960 --> 00:57:51,720 Speaker 1: people on on all of my key people, including myself. 1142 00:57:51,800 --> 00:57:55,600 Speaker 1: We're getting big job offers away at different firms. Um. 1143 00:57:56,000 --> 00:57:58,360 Speaker 1: And it became very evident to me that that doing 1144 00:57:58,440 --> 00:58:01,960 Speaker 1: nothing would have led to our team getting dismantled. It 1145 00:58:02,000 --> 00:58:04,160 Speaker 1: was gonna break up anyway, yes, and so you might 1146 00:58:04,160 --> 00:58:06,680 Speaker 1: as well take the whole team together elsewhere. Well. That 1147 00:58:06,680 --> 00:58:09,200 Speaker 1: that part of that was I sat down with with 1148 00:58:09,280 --> 00:58:11,560 Speaker 1: John and Ronan and Rob and said, you know, how 1149 00:58:11,600 --> 00:58:14,480 Speaker 1: important is this for us to stay together? And and 1150 00:58:14,680 --> 00:58:16,560 Speaker 1: we had built. You know when you go through things 1151 00:58:16,600 --> 00:58:18,680 Speaker 1: like that and and you know it's it's you come, 1152 00:58:18,800 --> 00:58:21,240 Speaker 1: you come from nowhere to to you know, doing something, 1153 00:58:21,320 --> 00:58:23,920 Speaker 1: and you had discovered the problems we had discovered because 1154 00:58:24,480 --> 00:58:26,720 Speaker 1: every rock we turned over had something under it, and 1155 00:58:26,720 --> 00:58:29,360 Speaker 1: it was just this amazing, like mystery story. Like every 1156 00:58:29,400 --> 00:58:31,840 Speaker 1: person you meet, you another piece ad gets out of 1157 00:58:31,920 --> 00:58:35,600 Speaker 1: the puzzle. Um, we kind of collectively decided, you know, 1158 00:58:35,880 --> 00:58:38,120 Speaker 1: we're willing to take this risk. And there's one really 1159 00:58:38,120 --> 00:58:41,640 Speaker 1: funny moment where I'm home and I'm talking to my wife. 1160 00:58:41,640 --> 00:58:43,040 Speaker 1: I'm like, you know, we're getting ready to leave, and 1161 00:58:43,080 --> 00:58:46,080 Speaker 1: she's like, well, what percent chance do you think this 1162 00:58:46,160 --> 00:58:47,720 Speaker 1: has of working? I think? I Am like, oh, I 1163 00:58:47,760 --> 00:58:49,760 Speaker 1: think it's pretty low. I think this idea we have 1164 00:58:49,840 --> 00:58:52,840 Speaker 1: right now probably, and she's like, you should probably clarify 1165 00:58:52,920 --> 00:58:54,920 Speaker 1: that with Rob and Ronan and John. So I came 1166 00:58:54,920 --> 00:58:57,240 Speaker 1: in the next day and said, guys, write on a 1167 00:58:57,240 --> 00:59:00,000 Speaker 1: piece of paper, what percent chance you think this idea? 1168 00:59:00,080 --> 00:59:03,680 Speaker 1: Yea we have right now for I X. But it's 1169 00:59:03,720 --> 00:59:05,320 Speaker 1: not i X as you know it today. It was 1170 00:59:05,360 --> 00:59:07,680 Speaker 1: a different version of I X. It actually wouldn't have worked. 1171 00:59:08,200 --> 00:59:11,400 Speaker 1: It wouldn't have worked. Um, this idea we have right? Now, 1172 00:59:11,520 --> 00:59:13,640 Speaker 1: what what chance do you think this idea has of working? 1173 00:59:15,080 --> 00:59:18,640 Speaker 1: I was the highest at everyone else was lower UM, 1174 00:59:18,720 --> 00:59:20,480 Speaker 1: which was funny, but they all what we all what 1175 00:59:20,560 --> 00:59:22,840 Speaker 1: we all agreed was that there was a seventy chance 1176 00:59:22,880 --> 00:59:25,000 Speaker 1: that the four of us would figure this out. Like 1177 00:59:25,120 --> 00:59:28,240 Speaker 1: so that's a very different set of odds. Hey, listen, 1178 00:59:28,320 --> 00:59:30,920 Speaker 1: this one issue may not work, but we could pivot 1179 00:59:30,960 --> 00:59:33,080 Speaker 1: to something right And what was that pivot? Was it? 1180 00:59:33,160 --> 00:59:35,200 Speaker 1: The shoe box was part of part of it was 1181 00:59:35,240 --> 00:59:37,320 Speaker 1: the shoe But the very first idea we had was 1182 00:59:37,400 --> 00:59:40,960 Speaker 1: we wanted to be the smart order router for the street, 1183 00:59:41,200 --> 00:59:43,400 Speaker 1: which means everyone sent us your orders and will rout 1184 00:59:43,480 --> 00:59:45,680 Speaker 1: them out to the exchanges. UM. Now the problem with 1185 00:59:45,720 --> 00:59:47,280 Speaker 1: that is all the big banks have built their own 1186 00:59:47,280 --> 00:59:50,880 Speaker 1: smarter routers, so so it's a very invasive request to say, 1187 00:59:51,200 --> 00:59:53,080 Speaker 1: I'm gonna now we're oute all your orders on you 1188 00:59:53,080 --> 00:59:55,560 Speaker 1: know for you. UM that that idea never would have 1189 00:59:55,600 --> 00:59:58,720 Speaker 1: worked and UM, but we quit on the notion of 1190 00:59:58,720 --> 01:00:03,080 Speaker 1: that idea, which which which was slightly insane. Except for that, 1191 01:00:03,120 --> 01:00:05,440 Speaker 1: we had a lot of faith in each other. And 1192 01:00:05,480 --> 01:00:08,240 Speaker 1: I think that UM had a great track record. You 1193 01:00:08,240 --> 01:00:10,920 Speaker 1: guys had Let's let's clarify this a little bit, because 1194 01:00:11,160 --> 01:00:14,720 Speaker 1: a lot of startups have launched with a lot less. First, 1195 01:00:15,000 --> 01:00:17,800 Speaker 1: you guys essentially figured out what the heck was going 1196 01:00:17,840 --> 01:00:20,720 Speaker 1: on with the market when there really didn't seem anybody 1197 01:00:20,760 --> 01:00:23,440 Speaker 1: else that really got it in the way that you 1198 01:00:23,440 --> 01:00:27,480 Speaker 1: guys did. Number one, Number two you created a product 1199 01:00:27,800 --> 01:00:32,120 Speaker 1: thor which solved a lot of those problems. So there 1200 01:00:32,160 --> 01:00:34,400 Speaker 1: had to be some degree of confidence. Okay, we know 1201 01:00:34,560 --> 01:00:37,880 Speaker 1: more about what's wrong with the structure than other people have. 1202 01:00:38,440 --> 01:00:42,600 Speaker 1: We've already demonstrated an ability to use technology to resolve it. 1203 01:00:43,080 --> 01:00:45,520 Speaker 1: Can we take those two things and put it together 1204 01:00:46,000 --> 01:00:48,000 Speaker 1: and build a real company around it? Yeah, I mean 1205 01:00:48,880 --> 01:00:52,000 Speaker 1: you kind of you. You nailed it. Um. The one 1206 01:00:52,120 --> 01:00:54,640 Speaker 1: other big point um that I made to my wife 1207 01:00:54,680 --> 01:00:56,840 Speaker 1: was that because she was really the one she she 1208 01:00:56,920 --> 01:00:58,640 Speaker 1: was the one who allowed I X to happen. Right 1209 01:00:59,240 --> 01:01:01,600 Speaker 1: are are are set? Son was born three days after 1210 01:01:01,640 --> 01:01:03,480 Speaker 1: my last day at RBC, so it was there's a 1211 01:01:03,480 --> 01:01:05,400 Speaker 1: lot going on in our personal She must have been 1212 01:01:05,440 --> 01:01:07,400 Speaker 1: thrilled with you. Yeah, well we we we got to 1213 01:01:07,440 --> 01:01:10,320 Speaker 1: the right place. Um, and she's been amazingly supportive. But 1214 01:01:10,360 --> 01:01:12,480 Speaker 1: what I said to is I said, there are very 1215 01:01:12,480 --> 01:01:16,120 Speaker 1: few people in this world that can solve the problem 1216 01:01:16,200 --> 01:01:18,080 Speaker 1: we're trying to solve, and it may not work, but 1217 01:01:18,160 --> 01:01:20,000 Speaker 1: you know, I would probably regret it for the rest 1218 01:01:20,000 --> 01:01:21,720 Speaker 1: of my life if I didn't actually try. So you 1219 01:01:21,800 --> 01:01:24,400 Speaker 1: have you have no choice. This was this wasn't all 1220 01:01:24,520 --> 01:01:27,040 Speaker 1: we gonna do this. It's I'm running out of reasons 1221 01:01:27,080 --> 01:01:29,040 Speaker 1: not to do that. That was kind of it. And 1222 01:01:29,040 --> 01:01:31,600 Speaker 1: and uh, I ran out of reasons not to do it, 1223 01:01:31,760 --> 01:01:35,600 Speaker 1: and and um and and it's it's always scary to leave, 1224 01:01:36,280 --> 01:01:38,520 Speaker 1: especially a job you're comfortable at you've been at your 1225 01:01:38,520 --> 01:01:41,760 Speaker 1: whole life. Um, but yeah, it was by the end 1226 01:01:41,760 --> 01:01:43,800 Speaker 1: of it, it felt definitely like the right decision. And 1227 01:01:43,800 --> 01:01:45,720 Speaker 1: you know, RBC is still a great client of ours. 1228 01:01:45,800 --> 01:01:48,560 Speaker 1: I still have a great relationship with with my former 1229 01:01:48,600 --> 01:01:51,040 Speaker 1: team there, and um, you know, they were very supportive 1230 01:01:51,080 --> 01:01:52,880 Speaker 1: and and they're still doing really well. So it's it 1231 01:01:52,960 --> 01:01:55,960 Speaker 1: kind of worked out for everybody. But um, yeah, it was. 1232 01:01:56,080 --> 01:01:59,760 Speaker 1: It was. It was interesting times, but you know, to 1233 01:02:00,200 --> 01:02:03,280 Speaker 1: in to be in a Michael Lewis book, never in 1234 01:02:03,280 --> 01:02:05,560 Speaker 1: a million I spent my entire life trying to just 1235 01:02:05,560 --> 01:02:07,320 Speaker 1: get along with people. I'm I'm more of a go 1236 01:02:07,480 --> 01:02:09,080 Speaker 1: with the flow kind of guy. I don't have these 1237 01:02:09,120 --> 01:02:12,360 Speaker 1: like heroic tendencies where you know, I'm running for class press. 1238 01:02:12,400 --> 01:02:15,479 Speaker 1: I didn't do any of that. Um, fairly normal guy 1239 01:02:15,640 --> 01:02:18,720 Speaker 1: and this just happened. Michael Lewis described it best when 1240 01:02:18,720 --> 01:02:21,920 Speaker 1: he said, you're a normal guy in an abnormal situation. 1241 01:02:22,080 --> 01:02:28,160 Speaker 1: And so now you go from the conversation with investigating 1242 01:02:28,360 --> 01:02:30,880 Speaker 1: h f T to hey, I think I want to 1243 01:02:30,920 --> 01:02:33,080 Speaker 1: do a book. I want to do a short story. 1244 01:02:33,120 --> 01:02:38,560 Speaker 1: Ones at what point did that magazine story become Hey, 1245 01:02:38,680 --> 01:02:40,760 Speaker 1: I'm going to do a book and you guys are 1246 01:02:40,800 --> 01:02:43,840 Speaker 1: going to be the driving factors in it. So so 1247 01:02:44,400 --> 01:02:46,680 Speaker 1: he came to the conclusion about the book. His his 1248 01:02:46,760 --> 01:02:49,520 Speaker 1: journey through high freguncy trading and the exchanges and market 1249 01:02:49,520 --> 01:02:52,480 Speaker 1: structure was similar to mine. Everyone he talked to, and 1250 01:02:52,480 --> 01:02:55,440 Speaker 1: the more rocks he turned over, the more stuff he found. Uh, 1251 01:02:55,440 --> 01:02:58,439 Speaker 1: and he stumbled on a lot of stuff himself, and UM, 1252 01:02:58,640 --> 01:03:01,800 Speaker 1: he's good. Oh he's amazing. And by the end he 1253 01:03:01,840 --> 01:03:03,720 Speaker 1: basically said this is going to be a blockbuster. Now 1254 01:03:03,720 --> 01:03:06,040 Speaker 1: what I didn't did he really say that? He said 1255 01:03:06,040 --> 01:03:07,640 Speaker 1: this or the book was bubble. He said this is 1256 01:03:07,640 --> 01:03:10,280 Speaker 1: going to be explosive, This is gonna be explosive because 1257 01:03:10,280 --> 01:03:13,440 Speaker 1: he was consuming everything that was written, and he realized 1258 01:03:13,440 --> 01:03:16,200 Speaker 1: he was writing things that have not been written before. Um, 1259 01:03:16,600 --> 01:03:19,400 Speaker 1: and which is unusual because let's let's go back and 1260 01:03:19,400 --> 01:03:23,400 Speaker 1: look at well money Ball was unique. Uh, the new 1261 01:03:23,400 --> 01:03:25,880 Speaker 1: new thing wasn't so much unique, but just a uniquely 1262 01:03:25,920 --> 01:03:29,920 Speaker 1: told story. Was a retrospective. Yeah, I mean, my you know, 1263 01:03:29,960 --> 01:03:32,280 Speaker 1: when I wrote Bailout Nation, it was one of the 1264 01:03:32,320 --> 01:03:35,600 Speaker 1: first books on the financial crisis, and I couldn't read 1265 01:03:35,640 --> 01:03:38,400 Speaker 1: anything afterwards. And then the big short comes out and 1266 01:03:38,440 --> 01:03:41,040 Speaker 1: I'm like, I'm dying to read it, and I'm like, 1267 01:03:41,080 --> 01:03:42,960 Speaker 1: you know what, I'm gonna hold this till February with 1268 01:03:43,080 --> 01:03:46,680 Speaker 1: Nona Barbados, So I'm gonna read so the year after 1269 01:03:46,880 --> 01:03:48,840 Speaker 1: the February after the book came out, and I think 1270 01:03:48,920 --> 01:03:51,320 Speaker 1: came out in like May or June. I'm I have 1271 01:03:51,400 --> 01:03:53,600 Speaker 1: the book on my night table, night table for eight 1272 01:03:53,640 --> 01:03:56,400 Speaker 1: months before we go on vacation, and I can't wait 1273 01:03:56,440 --> 01:03:58,560 Speaker 1: to read it. And I thought he just did a 1274 01:03:58,600 --> 01:04:02,840 Speaker 1: fantastic job with that. It was such a compelling story 1275 01:04:03,040 --> 01:04:06,960 Speaker 1: and all the characters are so amazing. You know another 1276 01:04:07,560 --> 01:04:09,840 Speaker 1: you know, another Michael Lewis book that just you know, 1277 01:04:09,920 --> 01:04:12,880 Speaker 1: blows your doors off, and then this thing comes along. 1278 01:04:13,600 --> 01:04:18,040 Speaker 1: And at what point does he say to you, you guys, 1279 01:04:18,360 --> 01:04:20,160 Speaker 1: you know I've been talking to you for how long 1280 01:04:20,200 --> 01:04:22,600 Speaker 1: this is going to be explosive? Well? He he, he 1281 01:04:22,720 --> 01:04:26,120 Speaker 1: knew he had a feeling it would be explosive. What 1282 01:04:26,280 --> 01:04:29,000 Speaker 1: I didn't know was how big a part of the 1283 01:04:29,000 --> 01:04:31,800 Speaker 1: book that I ended up being. I had no idea. 1284 01:04:31,920 --> 01:04:33,520 Speaker 1: I know when you got the book, you were as 1285 01:04:33,560 --> 01:04:35,320 Speaker 1: astonished as anything. I knew I was going to be 1286 01:04:35,400 --> 01:04:37,840 Speaker 1: a main character. Did you get a man obviously you 1287 01:04:37,920 --> 01:04:41,560 Speaker 1: got a PDF for a manuscript before the book. Nothing 1288 01:04:41,800 --> 01:04:46,640 Speaker 1: final copy shows up like this sounds Barnes and Noble, Amazon. 1289 01:04:47,000 --> 01:04:48,640 Speaker 1: I asked him, and I said, you know, I said 1290 01:04:48,640 --> 01:04:50,440 Speaker 1: to him, which was I said, Michael, this is a 1291 01:04:50,520 --> 01:04:54,920 Speaker 1: very technical subject. Um, do you want my help? And 1292 01:04:54,920 --> 01:04:56,439 Speaker 1: he goes, you know, you can't write a hundred thousand 1293 01:04:56,440 --> 01:05:00,120 Speaker 1: words without making a couple of mistakes. Um. And he goes, is, 1294 01:05:00,160 --> 01:05:02,640 Speaker 1: do me a favor after it comes out, make a 1295 01:05:02,800 --> 01:05:06,640 Speaker 1: make a note of the mistakes, um, and send them 1296 01:05:06,640 --> 01:05:08,600 Speaker 1: to me. And I found, you know a dozen things, 1297 01:05:08,640 --> 01:05:12,640 Speaker 1: small stuff, but I mean because people have been critical 1298 01:05:12,680 --> 01:05:15,840 Speaker 1: the Intel. Intel doesn't trade on the new York Stock Exchange, right, 1299 01:05:15,840 --> 01:05:19,000 Speaker 1: because they only trade New York listed stocks. Well, who 1300 01:05:19,040 --> 01:05:21,760 Speaker 1: cares right that it's it's yes, it's a technical error, 1301 01:05:21,760 --> 01:05:26,680 Speaker 1: but that doesn't undermine the actual books. The book is 1302 01:05:26,680 --> 01:05:29,560 Speaker 1: absolutely so he na, he nailed the book. Um, he 1303 01:05:29,600 --> 01:05:31,720 Speaker 1: made some technical errors, which people are you know, people 1304 01:05:31,720 --> 01:05:34,120 Speaker 1: are gonna people are grasping at anything they can get 1305 01:05:34,120 --> 01:05:37,640 Speaker 1: theirs there grasping and uh. And it's funny to watch, actually, 1306 01:05:37,680 --> 01:05:41,080 Speaker 1: because I've heard people say that what I experienced never happened. 1307 01:05:41,560 --> 01:05:44,240 Speaker 1: It's an amazing thing to tell a trader who has lived. Yeah, 1308 01:05:44,440 --> 01:05:47,280 Speaker 1: latency arbitrage doesn't exist. And I just I just I 1309 01:05:47,360 --> 01:05:50,680 Speaker 1: listen to that. And you can't even respond. A lot 1310 01:05:50,720 --> 01:05:52,160 Speaker 1: of stuff a book. I think a book has been 1311 01:05:52,160 --> 01:05:55,120 Speaker 1: written about you know why why this doesn't Michael lewis fiction. 1312 01:05:55,240 --> 01:05:58,600 Speaker 1: And the amazing part is is that again it's you know, 1313 01:05:58,960 --> 01:06:03,120 Speaker 1: I can speak ab out this stuff. I'm so grounded 1314 01:06:03,160 --> 01:06:06,640 Speaker 1: in my experience. I've lived through this. Um. You know, 1315 01:06:06,800 --> 01:06:08,440 Speaker 1: I can testify in front of the Senate, I can 1316 01:06:08,400 --> 01:06:10,800 Speaker 1: get in fights on television and you but let me 1317 01:06:10,840 --> 01:06:13,920 Speaker 1: interrupt you. So you also more than just you as 1318 01:06:13,960 --> 01:06:17,560 Speaker 1: a trader. You went to some of the biggest mutual funds, 1319 01:06:17,600 --> 01:06:19,600 Speaker 1: some of the biggest hedge funds, some of the most 1320 01:06:19,680 --> 01:06:23,920 Speaker 1: storied traders on Wall Street, and they pretty much all said, yeah, 1321 01:06:23,960 --> 01:06:27,120 Speaker 1: I'm going through the exact same problem. Yes, yeah, I 1322 01:06:27,160 --> 01:06:29,800 Speaker 1: mean this wasn't like you're an area fifty one and 1323 01:06:30,920 --> 01:06:34,400 Speaker 1: you saw the UFO that nobody saw. This was widespread. Hey, 1324 01:06:34,480 --> 01:06:37,360 Speaker 1: what's going on with the market? Something is wrong? Yes, well, 1325 01:06:37,440 --> 01:06:40,080 Speaker 1: you know the amazing part is the people that I 1326 01:06:40,200 --> 01:06:44,479 Speaker 1: have a common connection and understanding with our traders, They've 1327 01:06:44,520 --> 01:06:47,680 Speaker 1: lived in UM. Sometimes when you get on fights on television, 1328 01:06:47,720 --> 01:06:50,120 Speaker 1: you're fighting with lawyers, you're fighting with people who have 1329 01:06:50,200 --> 01:06:52,000 Speaker 1: never traded a day in their life. If you look 1330 01:06:52,000 --> 01:06:54,680 Speaker 1: at heads of exchanges in markets, their firms, if you've 1331 01:06:54,680 --> 01:06:57,520 Speaker 1: never traded, you're only going based on what other people 1332 01:06:57,520 --> 01:07:01,080 Speaker 1: have told you is happening. UM. It's a very common 1333 01:07:01,080 --> 01:07:03,840 Speaker 1: bond I share with traders. Whenever I walk in, people 1334 01:07:03,840 --> 01:07:06,920 Speaker 1: have like I've lived through it. I've I know exactly 1335 01:07:06,920 --> 01:07:11,440 Speaker 1: what you're talking about. UM. You know that experience allows you, 1336 01:07:11,760 --> 01:07:14,320 Speaker 1: me and our firm and the people the people that 1337 01:07:14,360 --> 01:07:17,400 Speaker 1: have gone through it to speak with such conviction because 1338 01:07:17,400 --> 01:07:20,840 Speaker 1: we know we know that it's happened conviction and authority. 1339 01:07:21,000 --> 01:07:24,320 Speaker 1: You actually became the you know. One of the guys 1340 01:07:24,400 --> 01:07:27,280 Speaker 1: in my office sent me a text this morning. There 1341 01:07:27,360 --> 01:07:29,480 Speaker 1: was a link to an article that said, if you 1342 01:07:29,520 --> 01:07:32,280 Speaker 1: read three books on a subject, you will know more 1343 01:07:32,320 --> 01:07:36,800 Speaker 1: than the population. How many people know more about the 1344 01:07:36,880 --> 01:07:41,480 Speaker 1: structure of order, routing and execution than than you guys do. 1345 01:07:42,080 --> 01:07:44,160 Speaker 1: It's got to be a handful of it's it's it's 1346 01:07:44,160 --> 01:07:46,960 Speaker 1: probably a small number. The even smaller number is how 1347 01:07:47,000 --> 01:07:50,240 Speaker 1: many people will actually tell you about it right the 1348 01:07:50,240 --> 01:07:54,160 Speaker 1: the game. The value of that knowledge, um is not 1349 01:07:54,320 --> 01:07:58,040 Speaker 1: monetized by trying to help other people understand. It's monetized 1350 01:07:58,080 --> 01:08:00,919 Speaker 1: by by gaming the system. UM. So I think that 1351 01:08:01,240 --> 01:08:03,360 Speaker 1: we were you know, one of the first things I 1352 01:08:03,440 --> 01:08:06,640 Speaker 1: realized after we discovered thor we ran these experiments at RBC. 1353 01:08:06,800 --> 01:08:09,360 Speaker 1: We realized that, hey, this by delayne when we send 1354 01:08:09,400 --> 01:08:11,080 Speaker 1: the orders, we get to all places at the same time. 1355 01:08:11,120 --> 01:08:13,440 Speaker 1: It was kind of like this Eureka moment. UM. I 1356 01:08:13,520 --> 01:08:15,760 Speaker 1: got home, I was in bed. I'll never forget it. 1357 01:08:15,840 --> 01:08:17,920 Speaker 1: I said, oh my god, we're not the first people 1358 01:08:17,960 --> 01:08:20,719 Speaker 1: to figure this out. We're not like fifth or tenth 1359 01:08:20,800 --> 01:08:23,280 Speaker 1: or fifty, like I don't know what, but everyone who's 1360 01:08:23,280 --> 01:08:25,960 Speaker 1: figured this out. Are the ones that are that are 1361 01:08:25,960 --> 01:08:29,040 Speaker 1: getting enemy. They're all part of the problem. The ones 1362 01:08:29,080 --> 01:08:34,120 Speaker 1: who had had identified this as a potential issue, instead 1363 01:08:34,160 --> 01:08:36,680 Speaker 1: of trying to fix it, said we can make money off, 1364 01:08:36,880 --> 01:08:39,880 Speaker 1: which brings me to the next question. At one point 1365 01:08:39,920 --> 01:08:43,519 Speaker 1: in time, there were estimates of h f T I'm 1366 01:08:43,520 --> 01:08:47,160 Speaker 1: gonna use the word extracting ten, fifteen, twenty billion a 1367 01:08:47,240 --> 01:08:51,519 Speaker 1: year in profits. But lately we've been hearing that volumes 1368 01:08:51,520 --> 01:08:56,200 Speaker 1: are down, volatility other than this past week, volatility has 1369 01:08:56,360 --> 01:09:00,559 Speaker 1: has been moderated, and that in general, people and markets 1370 01:09:00,560 --> 01:09:04,320 Speaker 1: are adapting and h f T isn't as lucrative as 1371 01:09:04,360 --> 01:09:06,880 Speaker 1: it once was. Any truth to that, I think, I 1372 01:09:06,880 --> 01:09:12,360 Speaker 1: mean in volatile markets, big investors are trading more um, 1373 01:09:12,479 --> 01:09:14,720 Speaker 1: which means there's more orders to get, you know, in 1374 01:09:14,760 --> 01:09:17,360 Speaker 1: the middle of so, I'd say volatility leads to a 1375 01:09:17,360 --> 01:09:18,720 Speaker 1: lot of a lot of volume and a lot of 1376 01:09:18,720 --> 01:09:21,559 Speaker 1: profits um. I'd also say the margins are going down 1377 01:09:21,600 --> 01:09:24,240 Speaker 1: because it's becoming more expensive to trade. You know, you 1378 01:09:24,240 --> 01:09:26,320 Speaker 1: have New York Stock Exchange selling laser beams on the 1379 01:09:26,400 --> 01:09:29,479 Speaker 1: roof and selling no longer. The book begins with the 1380 01:09:29,560 --> 01:09:33,760 Speaker 1: cutting the fiber optic channel in a dead straight line 1381 01:09:33,920 --> 01:09:36,519 Speaker 1: from Chicago to New York that now is going away. 1382 01:09:36,520 --> 01:09:40,280 Speaker 1: We're gonna do point to point microwaves faster than than 1383 01:09:40,560 --> 01:09:42,840 Speaker 1: less reliable than than in the ground, but still but 1384 01:09:43,160 --> 01:09:45,360 Speaker 1: there's a cost, right and I think that, Um, when 1385 01:09:45,360 --> 01:09:49,439 Speaker 1: you look at what's spent, it's billions. Billions are being spill. 1386 01:09:49,520 --> 01:09:51,280 Speaker 1: It was a billion dollars to lay that fiber from 1387 01:09:51,320 --> 01:09:53,200 Speaker 1: New York to Chicago. So part of it is about 1388 01:09:53,240 --> 01:09:54,840 Speaker 1: the money that's being made. Part of it's about the 1389 01:09:54,840 --> 01:09:57,120 Speaker 1: money that's being spent. Because ultimately, when you think about 1390 01:09:57,120 --> 01:09:59,920 Speaker 1: who's ultimately paying for the line between New Jersey and Chica, 1391 01:10:00,160 --> 01:10:03,000 Speaker 1: or who's paying for the microve tower, Um, it's coming 1392 01:10:03,040 --> 01:10:05,640 Speaker 1: out of somebody's pocket. It's going to be the investors, 1393 01:10:05,680 --> 01:10:08,040 Speaker 1: because no one would buy the microwave tower if they 1394 01:10:08,080 --> 01:10:10,000 Speaker 1: weren't able to make money from the existence of the 1395 01:10:10,000 --> 01:10:12,280 Speaker 1: microwave tower. Um, what you want to do is you 1396 01:10:12,280 --> 01:10:14,559 Speaker 1: want to make the microwave tower redundant. You can't make 1397 01:10:14,560 --> 01:10:16,720 Speaker 1: it illegal, and that that's one of the issues. You 1398 01:10:16,760 --> 01:10:21,559 Speaker 1: can't regulate evolution of technology, but you can render it useless. 1399 01:10:22,040 --> 01:10:23,639 Speaker 1: What we're trying to do at I X is create 1400 01:10:23,640 --> 01:10:25,720 Speaker 1: a level playing field where people don't feel the need 1401 01:10:25,760 --> 01:10:28,280 Speaker 1: to invest in microwve towers because it doesn't necessarily matter 1402 01:10:28,439 --> 01:10:30,960 Speaker 1: how much faster I am, because we're trying to create 1403 01:10:31,160 --> 01:10:34,280 Speaker 1: the fairest possible place, you know, the experience. But any 1404 01:10:34,320 --> 01:10:37,160 Speaker 1: new tower that goes up, someone's paying for that, and 1405 01:10:37,160 --> 01:10:38,680 Speaker 1: they're paying for it out of profits or else they 1406 01:10:38,720 --> 01:10:40,880 Speaker 1: wouldn't pay for it. It's coming out of grandma's Uh, 1407 01:10:43,040 --> 01:10:45,240 Speaker 1: if you follow, if you follow the money far enough, 1408 01:10:45,320 --> 01:10:47,600 Speaker 1: it's yeah, it's coming out of everyday people's pockets. A 1409 01:10:47,680 --> 01:10:50,040 Speaker 1: zero Am I wrong in saying it's a zero sum gain. 1410 01:10:50,080 --> 01:10:54,000 Speaker 1: If HFT is extracting fifteen billion by front running half 1411 01:10:54,000 --> 01:10:56,559 Speaker 1: a cent on a hundred thousand shares over and over 1412 01:10:56,560 --> 01:10:59,719 Speaker 1: and over again, that has to become In the stock market, 1413 01:11:00,000 --> 01:11:04,080 Speaker 1: you can everyone can't win. Contrary to some people's beliefs, 1414 01:11:04,400 --> 01:11:08,000 Speaker 1: it's just not no, right, it's it's a zero sum game. 1415 01:11:08,120 --> 01:11:13,000 Speaker 1: It is um and and again. Should the distribution of 1416 01:11:13,000 --> 01:11:15,720 Speaker 1: winners and losers be a little bit more balanced and 1417 01:11:15,760 --> 01:11:19,280 Speaker 1: more fair? Absolutely? Um, But that's again, that's that's what 1418 01:11:19,360 --> 01:11:21,360 Speaker 1: we're out there trying to solve. But it's it is 1419 01:11:21,439 --> 01:11:23,720 Speaker 1: zero sum. It's coming out of people's pockets, and and 1420 01:11:23,760 --> 01:11:25,800 Speaker 1: the hard part about it is that everyone's losing a 1421 01:11:25,800 --> 01:11:28,680 Speaker 1: little and a few people are making a lot. You know, 1422 01:11:28,760 --> 01:11:30,800 Speaker 1: David Einhorn wrote an investor letter I thought summed it 1423 01:11:30,880 --> 01:11:34,040 Speaker 1: up brilliantly. The problem is diffuse harm and concentrated benefit. 1424 01:11:34,439 --> 01:11:38,840 Speaker 1: That's brilliant, right, because people were trying to save people 1425 01:11:38,880 --> 01:11:42,000 Speaker 1: money they don't even know they're entitled to. But the 1426 01:11:42,040 --> 01:11:44,360 Speaker 1: people were kind of going after know exactly what we're 1427 01:11:44,400 --> 01:11:46,599 Speaker 1: doing and are very upset about it. So it's it's 1428 01:11:46,640 --> 01:11:48,680 Speaker 1: a it's an interesting problem to be in the middle of. 1429 01:11:48,880 --> 01:11:52,240 Speaker 1: What what other areas in the market structure have you? 1430 01:11:52,680 --> 01:11:56,280 Speaker 1: I don't know if the right word is worried, concerned? Um, 1431 01:11:56,360 --> 01:12:01,840 Speaker 1: what do you see as as a related potential problem? 1432 01:12:01,880 --> 01:12:04,040 Speaker 1: I mean, I think, you know, we haven't We've seen 1433 01:12:04,160 --> 01:12:08,160 Speaker 1: some changes, Um, but there's getting better. It's it's getting 1434 01:12:08,240 --> 01:12:12,160 Speaker 1: better more based on what people aren't doing versus what 1435 01:12:12,200 --> 01:12:15,479 Speaker 1: people have proactively done. Um. But I still don't see 1436 01:12:15,479 --> 01:12:18,639 Speaker 1: a huge amount of accountability. Um. You know, so you're 1437 01:12:19,080 --> 01:12:21,840 Speaker 1: making your money and fading into the background and riding 1438 01:12:21,840 --> 01:12:24,479 Speaker 1: off into the sunset. Um, you know, isn't isn't going 1439 01:12:24,520 --> 01:12:26,720 Speaker 1: to prevent prevent the next cycle. You know that What 1440 01:12:26,800 --> 01:12:29,880 Speaker 1: concerns me the most is the cycle that we talked about, 1441 01:12:29,960 --> 01:12:35,200 Speaker 1: scandal regulation, loophole exploitation, scandal regulation. It's gone on for 1442 01:12:35,280 --> 01:12:38,240 Speaker 1: so long, um, and what it does is it prevents 1443 01:12:38,680 --> 01:12:42,439 Speaker 1: you know, talent scandals just drive people away. Right, Certain 1444 01:12:42,439 --> 01:12:44,120 Speaker 1: people that would have come to Wall Street that you 1445 01:12:44,160 --> 01:12:45,920 Speaker 1: want to work here, just don't want to work here. Right, 1446 01:12:45,920 --> 01:12:48,200 Speaker 1: They're going to Silicon Valley. They're going to work you 1447 01:12:48,240 --> 01:12:51,439 Speaker 1: know they So that used to be the complaint in 1448 01:12:51,479 --> 01:12:55,280 Speaker 1: the middle of the financial boom. Oh, we're attracting people 1449 01:12:55,320 --> 01:12:58,040 Speaker 1: who would be better served going to Silicon Valley and 1450 01:12:58,040 --> 01:13:01,400 Speaker 1: inventing the next iPhone. It's of inventing the next al 1451 01:13:01,439 --> 01:13:04,719 Speaker 1: goo that uh yeah, is gonna come come after our orders. 1452 01:13:04,760 --> 01:13:06,519 Speaker 1: So it comes in cycles. But you know, I think 1453 01:13:06,560 --> 01:13:10,639 Speaker 1: that cycle overall leads to a heavily, heavily regulated industry 1454 01:13:10,680 --> 01:13:13,640 Speaker 1: with fewer players. Um, and the entrenched players are just 1455 01:13:13,760 --> 01:13:16,000 Speaker 1: far more powerful. Right there, There aren't there isn't a 1456 01:13:16,080 --> 01:13:18,519 Speaker 1: huge amount of disruption happening. So I think, you know, 1457 01:13:18,720 --> 01:13:21,559 Speaker 1: the cultural cycle is it is a pretty tough one 1458 01:13:21,600 --> 01:13:24,519 Speaker 1: to break. Um. You know, we're hoping to break that 1459 01:13:24,720 --> 01:13:27,280 Speaker 1: in in a in in a minor or major way. 1460 01:13:27,280 --> 01:13:29,280 Speaker 1: We're just trying to do something different. The good part 1461 01:13:29,400 --> 01:13:32,400 Speaker 1: is that you know, we do have partners that think 1462 01:13:32,479 --> 01:13:35,320 Speaker 1: I X is good long term for the market. UM. 1463 01:13:35,439 --> 01:13:37,240 Speaker 1: So that gives us a lot of confidence. Well, I 1464 01:13:37,240 --> 01:13:40,000 Speaker 1: find myself in that same boat. I hope you guys 1465 01:13:40,640 --> 01:13:43,519 Speaker 1: become an exchange. UM. That would I think would be 1466 01:13:43,560 --> 01:13:47,680 Speaker 1: a net positive for markets. UM. Any other thoughts you 1467 01:13:47,720 --> 01:13:49,800 Speaker 1: want to leave us with, what's the next book You're 1468 01:13:49,840 --> 01:13:53,360 Speaker 1: gonna find yourself start? I hope, I hope none others. UM. 1469 01:13:53,400 --> 01:13:55,280 Speaker 1: You know, it's it's just been Uh. You know, I 1470 01:13:55,280 --> 01:13:57,280 Speaker 1: just feel very lucky. UM. And you know, I do 1471 01:13:57,360 --> 01:14:00,160 Speaker 1: feel like I get way too much credit. Uh as 1472 01:14:00,240 --> 01:14:02,920 Speaker 1: a team. You know, our team has done a lot. Uh. 1473 01:14:03,040 --> 01:14:05,200 Speaker 1: Ronan and John and Rob we talked about them. There's 1474 01:14:05,240 --> 01:14:06,800 Speaker 1: a lot of other people that have that have been 1475 01:14:06,800 --> 01:14:10,439 Speaker 1: behind this. I probably you know, again, I experienced a 1476 01:14:10,439 --> 01:14:13,080 Speaker 1: lot of the issues, um, but coming up with the 1477 01:14:13,120 --> 01:14:15,599 Speaker 1: solutions was was a lot of other people. I feel like, 1478 01:14:15,880 --> 01:14:17,920 Speaker 1: you know, the books kind of thrown me out in 1479 01:14:18,000 --> 01:14:20,479 Speaker 1: the into the front. Um. You know, it's definitely a 1480 01:14:20,560 --> 01:14:22,240 Speaker 1: role I'm willing to play. But you know, there's a 1481 01:14:22,240 --> 01:14:24,800 Speaker 1: lot of people that have made this happen so uh, 1482 01:14:24,800 --> 01:14:26,240 Speaker 1: you know it's I just feel lucky to be in 1483 01:14:26,240 --> 01:14:28,400 Speaker 1: this position. Well, thank you so much for being so 1484 01:14:28,520 --> 01:14:32,120 Speaker 1: generous with your time. We've been speaking with Brad Katsuyama. 1485 01:14:32,160 --> 01:14:35,680 Speaker 1: He is the co founder and co team leader of 1486 01:14:36,160 --> 01:14:40,080 Speaker 1: I e X. If you enjoy this podcast, be sure 1487 01:14:40,080 --> 01:14:43,040 Speaker 1: and look an inch higher or lower on iTunes and 1488 01:14:43,080 --> 01:14:45,080 Speaker 1: you could see the other fourty or so of these 1489 01:14:45,120 --> 01:14:49,920 Speaker 1: conversations we've had. Um, I want to thank uh Charles Vollmer, 1490 01:14:49,960 --> 01:14:54,000 Speaker 1: who is my producer slash engineer, and Michael Batnick, who's 1491 01:14:54,040 --> 01:14:56,920 Speaker 1: head of research with the firm. I'm Barry Ridhults. You've 1492 01:14:56,960 --> 01:15:00,840 Speaker 1: been listening to Masters in Business on Bloomberg Radio.