Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I'm thrilled to have Brad Katsuyama.
Speaker 1: He is the founder and chairman of I e x UH.
Speaker 1: He's the gentleman who was immortalized in Michael Lewis's book Flashboys,
Speaker 1: and he tells us the story of what it was
Speaker 1: like really to be the guy that Lewis went to
Speaker 1: just for some background information on what high frequency trading was,
Speaker 1: how things were getting driven, about what's what's happening, etcetera, etcetera.
Speaker 1: And it's really a fascinating, um fascinating tale. You know,
Speaker 1: stop and think about what it's like to leave a
Speaker 1: million and a half dollar a year job in order
Speaker 1: to take up something that essentially was a cause. He
Speaker 1: started doing this because there were only a handful of
Speaker 1: people in the world Alds who knew what he knew.
Speaker 1: He figured out what was actually driving markets and market
Speaker 1: structure a little kookie and basically said, I have this knowledge,
Speaker 1: and I have an ethical obligation to use this knowledge
Speaker 1: for the betterment of markets and the broader economy. And
Speaker 1: you know, lots of other people had figured out the
Speaker 1: structural issues and some of the loopholes that were out
Speaker 1: there in in the world and in the markets, and
Speaker 1: they were taking advantage of it by running al go
Speaker 1: driven high frequency shops and quite bluntly making hundreds of
Speaker 1: millions of dollars a year for themselves. But but Brad,
Speaker 1: who is as as nice and down to earth the
Speaker 1: person as you would ever want to meet. In the book,
Speaker 1: he's described as RBC nice. He works at Royal Bank
Speaker 1: of Canada, and as any American will tell you, Canadians
Speaker 1: are just terribly nice people. They're delightful and Brad is
Speaker 1: you know, part for the course. He's just a real person,
Speaker 1: very very open, very transparent, totally ethical. I couldn't imagine
Speaker 1: a better person to set up a market based response
Speaker 1: to some of the abuses and problems that we've seen
Speaker 1: in high frequency trading. He's absolutely um just a fascinating,
Speaker 1: fascinating guy. The story he tells is just amazing how
Speaker 1: he figured all these things out, Uh, just all around terrific.
Speaker 1: So I'm gonna tell you, Uh, sit back, relax and
Speaker 1: get ready for a fascinating story. Our interview with Brad
Speaker 1: Katsuyama of i X. This is Masters in Business with
Speaker 1: Barry Ridholts on Bloomberg Radio. My guest today is Brad Katsuyama.
Speaker 1: You may be familiar with the name if you either
Speaker 1: a Michael Lewis's best selling book Flashboys, all about how
Speaker 1: the market structure has changed in light of high frequency trading,
Speaker 1: or if you saw an infamous segment of sixty Minutes
Speaker 1: where actually it was Michael Lewis who said the markets
Speaker 1: were rigged and that caused all sorts of mayhem over
Speaker 1: the next couple of days and weeks. Brad, Welcome to Bloomberg.
Speaker 1: So little background on your history. You grew up in
Speaker 1: Ontario and are a graduate of Wilfred Laurier University in Waterloo.
Speaker 1: Is that correct? Came to New York City as an
Speaker 1: intern at the Royal Bank of Canada in two thousand two.
Speaker 1: I was here. I came as a full time employee,
Speaker 1: but I interned in Toronto, but I moved here. I
Speaker 1: moved here in two thousand two. Yes, and eventually you
Speaker 1: became the global head of Electronics Sales and Trading, which
Speaker 1: is quite a responsible position. So being a kid from
Speaker 1: a relatively I don't want to say small town, because
Speaker 1: some Ontario is in such a small region, but Waterloo
Speaker 1: certainly is a relatively small town, as is Markham. What
Speaker 1: was it like coming to New York City and and
Speaker 1: landing on Wall Street? Yeah, so, I mean it was
Speaker 1: it was a bit of a culture shock, I'll be honest. Um.
Speaker 1: I remember driving through the first time through New York
Speaker 1: and looking at all of the buildings and it seemed
Speaker 1: like every single building was as tall as the tallest
Speaker 1: building in Toronto. It was. It was. It was, you know,
Speaker 1: outside of the Sea In Tower that you know, the
Speaker 1: downtown core of Toronto was very pretty small. Um. New
Speaker 1: York just seemed massive on every scale. Uh so it
Speaker 1: was pretty overwhelming. Um, but you know, again adjusted and
Speaker 1: I got used to it. And when you start working
Speaker 1: on Wall Street, what did you how did you find?
Speaker 1: You know, they talked about people from Canada being nice,
Speaker 1: the expression about Royal Bank Accounada is there there RBC nice? Yeah?
Speaker 1: How was Wall Street as an adjustment? Um? You know,
Speaker 1: I think I got really lucky you know when I
Speaker 1: when I worked at RBC in Toronto, in Canada, you know,
Speaker 1: they they're the number one bank there. Um. And when
Speaker 1: I moved down, when I got offered a job to
Speaker 1: come to New York. RBC had just bought a bank,
Speaker 1: Dane Rousher, and they were ranked twenty three in the
Speaker 1: United States. I jumped at it just simply because you know,
Speaker 1: there's there's nowhere to go but up, and I felt like,
Speaker 1: you know, it was kind of a it was a
Speaker 1: very underdog mentality. UM. My mentor in the business was
Speaker 1: this guy Bobby Grubert, who was my boss for eleven
Speaker 1: and a half years in in in UH in the US. UH.
Speaker 1: And he was just a great role model, just kind
Speaker 1: of kept me on the straight and arrow. Was a
Speaker 1: twenty three year old kid, and I could have gone
Speaker 1: a lot of different ways probably, and uh, you know,
Speaker 1: I owe a lot to him to kind of keep
Speaker 1: me on the on the right path. So so you
Speaker 1: began in the early two thousand's, and let's let's go
Speaker 1: back a decade and change what was trading like in
Speaker 1: those days? What was the execution like back? Sure? I mean,
Speaker 1: my you know, it was funny because I went from
Speaker 1: trading in Toronto, UM, where the market was entirely electronic.
Speaker 1: My first job in the US was I was trading
Speaker 1: listed energy stocks, which meant I was dealing with the
Speaker 1: New York Stock exchange floor, so it was calling an
Speaker 1: order down to a floor broker. UM. And I remember
Speaker 1: being informed of the three minute rule, which meant if
Speaker 1: I give an order the floor and I saw print
Speaker 1: hit the tape, I saw trade hit the tape. If
Speaker 1: it happened within three minutes, it might not be my trade.
Speaker 1: And I was completely mind boggling to me. Um, I said, well,
Speaker 1: why does the guy just get out to the post faster? Um.
Speaker 1: You know, I was the first trader at RBC to
Speaker 1: trade both listed and over the counterstocks. I was trading technology.
Speaker 1: They they promoted me to run technology UM Trading, and
Speaker 1: I traded NASDAC and I traded New York. And I
Speaker 1: could never understand why anyone would want to trade with
Speaker 1: the floor, because it was so much more efficient to
Speaker 1: trade electronically over the NASDACK terminal. Um, what you wish for? Well,
Speaker 1: you know, it's funny because it's it's always um. You know,
Speaker 1: electronic trading has always been a more efficient way to
Speaker 1: trade than to trade through middlemen per se. UM. I
Speaker 1: think the evolution of that technology has gotten a little
Speaker 1: bit perverse. But I was always of the inclination that,
Speaker 1: you know, technology was was a good thing for the markets.
Speaker 1: It has been so so. Now let's fast forward to
Speaker 1: around two thousand seven, when you notice the market was
Speaker 1: acting a little squirrelly, that every time you went to
Speaker 1: buy a stock, the market would run away from you.
Speaker 1: Just describe that early sensation of hey, something's a little
Speaker 1: funky over here. I mean, it was incredibly frustrating. UM
Speaker 1: two thousand and six. If I saw a hundred thousand
Speaker 1: shares of Intel on the offer, I'd buy. I'd buy
Speaker 1: a hundred thousand shares of Intel if I wanted to,
Speaker 1: and U two thousand seven, I could buy eighty thousand
Speaker 1: and two thousand and eight, I could buy seventy thousand
Speaker 1: and two thousand and nine, I could buy fifty two thousand.
Speaker 1: The number kept going down, and when I would try
Speaker 1: to buy the next level of stock two, I would
Speaker 1: get a smaller percentage than I got the time before. UM.
Speaker 1: It drove me crazy. And the funny part is I
Speaker 1: would I would call my tech team and I'd say, hey, guys,
Speaker 1: what is happening like? Watch the screens, look at what
Speaker 1: I'm looking at. UM. The most common answer I would
Speaker 1: get is it's a coincidence. You know, many people want
Speaker 1: to buy Intel at the same time you do, and
Speaker 1: I'd say, Okay, I'll prove you wrong. I'll cant to
Speaker 1: five and nothing's gonna happen until I press this button.
Speaker 1: And I can't to three or five or seven whatever.
Speaker 1: Nothing would happen until I press the button. I'd blow
Speaker 1: the stock and um, meaning the offers would just all disappear,
Speaker 1: they would run away. I would get a fraction, most
Speaker 1: of it would disappear, some of it would trade, and
Speaker 1: then I would be forced with two choices. Right, you
Speaker 1: either wait and the stock might never come back to
Speaker 1: your price, or you have to chase it higher. And
Speaker 1: every time I chased, I got a smaller fraction and
Speaker 1: I'd be left with the same decision the next time. So, UM,
Speaker 1: it became incredibly frustrating. And this at the time in
Speaker 1: O seven, I was running all of you as trading
Speaker 1: for RBC. UM. It was happening to every single person
Speaker 1: on my team. UM, so that that kind of was
Speaker 1: It was obviously a very frustrating time, and it was
Speaker 1: the financial crisis. So not only are we dealing with
Speaker 1: this market, that's kind of an illusion of what we
Speaker 1: thought the market was. Um. The world was melting down
Speaker 1: around us. It was. It was a pretty it was
Speaker 1: pretty unbelievable time. Actually, I'm Barry rid Hults. You're listening
Speaker 1: to Masters in Business on Bloomberg Radio today. My guest
Speaker 1: is Brad Katsuyama, made famous in the book by Michael
Speaker 1: Lewis called Flashboys. He is the founder and CEO of
Speaker 1: i e X, essentially an exchange, you know, like the
Speaker 1: New York Stocktor Exchange or NAZDAK. You are a full
Speaker 1: on exchange at this point. We're called or classified an
Speaker 1: alternative trading system. Hopefully will be an official exchange by
Speaker 1: the end of this year. Okay, that'd be great. And
Speaker 1: so you were made famous in the book Flash Boys
Speaker 1: because you were one of the people who had noticed
Speaker 1: that the market had gotten a little funky and weird
Speaker 1: and you couldn't execute orders. You're firm authorized you to
Speaker 1: lose up to ten thousand dollars a day experimenting. Tell
Speaker 1: us about that, well, I think once we started to
Speaker 1: learn more about the exchanges and how they were set
Speaker 1: up uh and the things that they were selling to
Speaker 1: certain participants high high speed traders, we started to realize
Speaker 1: that the exchanges had a lot to do with the
Speaker 1: experience that we were having. UH. In order to test
Speaker 1: these theories out, we had to set up a series
Speaker 1: of experiments interacting with different exchanges in different ways. Um
Speaker 1: And when I brought this proposal to RBC, I think
Speaker 1: it was very fortunate that I had run risk trading before,
Speaker 1: because they knew I could be responsible with capital. But
Speaker 1: I said, we need data points. We're running an experiment,
Speaker 1: and we can't use client orders to do it, which
Speaker 1: means that we're gonna have to spend a bit of
Speaker 1: our own money. But I'm not. It's not going to
Speaker 1: get egregious here. You know, my limit is ten thousand,
Speaker 1: and that that limit might sound large, but in my
Speaker 1: prior job, we were managing millions of dollars of capital,
Speaker 1: so it wasn't really a lot between friends. Well, the
Speaker 1: interesting part is we didn't actually end up losing hardly
Speaker 1: any money. Because I would I would we buy stock
Speaker 1: on the offer, it would disappear, and you know, stock
Speaker 1: would move higher, and then I turned around and sell
Speaker 1: on the bid and the stock would take again. So
Speaker 1: you're actually buying and selling that kind of the same price,
Speaker 1: and you get to data points for almost nothing, right,
Speaker 1: So so we did that we traded hundreds of millions
Speaker 1: of shares, testing out various series. Yeah, absolutely, we and
Speaker 1: it really it almost ended up a wash. So the
Speaker 1: part of the book that was fascinating, and it was
Speaker 1: also excerpted trying to remember where I saw the Wolves
Speaker 1: of wool Street New York Times magazine was it was
Speaker 1: The Times magazine. Was the description. You hire a guy
Speaker 1: you know who's about this fantastic telecom backgrounds, and he
Speaker 1: explains how the physical distances from from Wall Street out
Speaker 1: the Holland Tunnel that BATS was located, the exchange. BATS
Speaker 1: is located closest to the Holland Tunnel, and literally you
Speaker 1: could track the cell line I'm sorry, the fiber lines
Speaker 1: out the tunnel and to each of these exchanges, and
Speaker 1: that time difference is what affected execution. Yeah. We we
Speaker 1: had a lot of theories, and uh, Ronan Ryan is
Speaker 1: the guy you're describing who's a partner of mine at
Speaker 1: I X and and Ronan Ryan, you know, kind of
Speaker 1: just by a stroke another stroke of luck, we ended
Speaker 1: up meeting and he explained a lot of the missing pieces.
Speaker 1: He turned it into physical geography, he turned it into
Speaker 1: architecture and networking and the things that he had built
Speaker 1: for high frequency trading clients at the different exchanges, and um,
Speaker 1: you know, everyone came to the you know, we hired
Speaker 1: a lot of people at RBC, and everyone came with
Speaker 1: a little bit of information. No one knew the whole picture.
Speaker 1: We kind of like put the jig saw together. Speaking
Speaker 1: of which you hire, you have a guy working for
Speaker 1: you called Puzz one the Microsoft Puzzle Solving Championship. That's right,
Speaker 1: it was a team event. Uh, and we hired Puzz
Speaker 1: and his nickname is because he won that championship, Puzz.
Speaker 1: And And now at i X we have three people
Speaker 1: that have won that same championship in different years. But uh,
Speaker 1: it's it seems to be a you know, it's probably
Speaker 1: a good recruiting ground for people. It's we found some
Speaker 1: very bright, uh you know, talented people from from that competition.
Speaker 1: So so you're not losing ten thousand a day, but
Speaker 1: you're experimenting. You're figuring out physically where all the exchanges were.
Speaker 1: And one of the things you discovered that when you
Speaker 1: routed orders to specific exchanges that were very different results.
Speaker 1: That's probably being most notable. The first one out of
Speaker 1: the Holland Tunnel and and for people who are listening
Speaker 1: who may not be familiar with New York City, you
Speaker 1: could get out of Midtown to New Jersey and when
Speaker 1: you literally see daylight, the BATS building is not that
Speaker 1: far from the opening of the tunnel on the Jersey side.
Speaker 1: That's right. It was physically the closest to RBC, and
Speaker 1: hence we would always arrive there first. And the interesting
Speaker 1: thing about Bats, meaning the orders would physically arrive. And
Speaker 1: we're talking about milliseconds between orders. Milliseconds, yes, um, and
Speaker 1: actually we we were looking at the world in milliseconds
Speaker 1: and Ronan was looking at the world in microseconds. Uh.
Speaker 1: And it just happened that Ronan could get an order
Speaker 1: from BATS to various other exchanges. Um, and about four
Speaker 1: d seventy six micro seconds at the time is what
Speaker 1: is what he draw it drew out and said, here's
Speaker 1: the inn exchange latency between these buildings and RBC's was
Speaker 1: about four or five times greater than that, which meant
Speaker 1: that he could pick up a signal at BATS and
Speaker 1: race us. Now he didn't know that, you know, we
Speaker 1: had a hundred thousand shares to buy. But what he
Speaker 1: would know is that the entire offering at BATS just disappeared,
Speaker 1: which gives me a very high statistical probability that this
Speaker 1: big buyer is going to try to buy stock in
Speaker 1: other exchanges. So you're out there running to cancel stock,
Speaker 1: or you're already out there to buy stock to turn around,
Speaker 1: and seldom me at higher prices. So so he was
Speaker 1: the guy doing the telecom side of Yeah, he didn't know.
Speaker 1: He Ronan did not know a thing about trading nothing,
Speaker 1: which was amazing, right because you know, he came at
Speaker 1: this with a huge amount of knowledge, but he didn't
Speaker 1: understand the value of that knowledge. Um and it does
Speaker 1: now he does absolutely. You know, Ronan is probably one
Speaker 1: of the greatest assets anyone could have found. I feel
Speaker 1: very lucky that I that I was the one that
Speaker 1: found That's amazing. Now, when you used to send, and
Speaker 1: when you say you arrived first, or you arrived at
Speaker 1: BATS first, your order electronically would arrive that message through
Speaker 1: the fiber in the ground would actually just arrive there first.
Speaker 1: So when you would route and order just to BATS,
Speaker 1: you would get filled. But if we would route in order,
Speaker 1: let's say to BATS in New York Stock Exchange, concurrently
Speaker 1: we get filled on BATS and we would miss it
Speaker 1: on New York, which is amazing. Yeah, So the very
Speaker 1: first sequence of experiments was going to each exchange in isolation,
Speaker 1: and what you would find is you would always get
Speaker 1: a percent of what was offered if you only went
Speaker 1: to one exchange. And now they may be offered at
Speaker 1: different prices, so you're not exactly going to the best price.
Speaker 1: Now it's all it's always at the same price. It is,
Speaker 1: but if you pull up and offer in Intel, you'll
Speaker 1: see it at multiple different places, or if you pull
Speaker 1: up an offer in forward stock, you'll see a multiple places.
Speaker 1: But we said, okay, we'll just pick one exchange, one amount.
Speaker 1: We'd always get a hundred percent. But as you started
Speaker 1: to add exchanges to exchanges three, four or five at
Speaker 1: the same time, the PHIL rates started to drop, but
Speaker 1: you were always getting a percent at bats you were
Speaker 1: completely missing stock in other exchanges. So if if traders
Speaker 1: want to defeat high frequency trading and they only and
Speaker 1: they only routed orders to a single exchange, would they
Speaker 1: get filled that way? Well no, because not one exchange
Speaker 1: typically can satisfy your entire order. So when I pulled
Speaker 1: up my screen and I saw a hundred thousand shares
Speaker 1: of Intel, offered. It was typically spread across multiple exchanges.
Speaker 1: Ten right, Um, if I only went to one, I'd
Speaker 1: probably get you know, five thousand or whatever was offered
Speaker 1: at that one. But you want to get what you saw.
Speaker 1: And and the interesting part it was in two thousands
Speaker 1: and six you could actually buy or sell what you
Speaker 1: saw on your screens. In two thousands seven that wasn't
Speaker 1: the case. I'm Barry rit Helps. You're listening to Masters
Speaker 1: in Business on Bloomberg Radio. My guest today is Brad Katsuyama.
Speaker 1: He is the founder of I e X, which is
Speaker 1: a alternative trading system and soon to be in exchange hopefully,
Speaker 1: and the star of Michael Lewis's book Flashboys. Lewis was
Speaker 1: looking for research on an article for Vanity Fair and
Speaker 1: how did he end up finding you? So he he
Speaker 1: talked to a couple of people, a couple of characters
Speaker 1: in the Big Short who just happened to be clients
Speaker 1: of mind and Um. When he asked them, you know,
Speaker 1: I'm looking to do research on high freakncy trading. Who
Speaker 1: should I talk to? They pointed him to to me, UM,
Speaker 1: a lot of people same name a couple of times.
Speaker 1: Eventually get some curious Yeah, I get you know, it's
Speaker 1: it's the most interesting part about it was really it
Speaker 1: was just about giving him background. He didn't ask a
Speaker 1: ton of questions about what we were doing, in particular
Speaker 1: I X. But when he came to New York, he
Speaker 1: has to drop by our office and he walked in
Speaker 1: um to meet with Ronan and I and uh, there
Speaker 1: was twelve I think twelve or fourteen. I can't remember
Speaker 1: how many at the time, maybe twelve or fourteen people.
Speaker 1: We were in a two hundred square foot office with
Speaker 1: no windows. It was it was it looked it must
Speaker 1: have looked ridiculous to him. Absolutely closet. That's right. So
Speaker 1: we're there and all of a sudden, I can see
Speaker 1: the wheels turning his head is what are you guys
Speaker 1: doing here? And and then and then at that point
Speaker 1: kind of it went to I got to write an
Speaker 1: article about I X two. Maybe I'll take these two
Speaker 1: articles and make him in a short book. And by
Speaker 1: the end he had done a lot of research, he
Speaker 1: had talked to a lot of people, and he came
Speaker 1: back and said, this is gonna be explosive. And to
Speaker 1: say the least, it was so speaking of explosive. You
Speaker 1: guys were on uh an episode of sixty Minutes where
Speaker 1: Michael Lewis famously said the markets are rigged and that
Speaker 1: caused a huge explosion. You know the next days and
Speaker 1: weeks it's resonated to this day. What was the sixty
Speaker 1: Minutes experienced? Like? First, how tell us? What what was
Speaker 1: that it? Like? I mean, it's it's kind of you know,
Speaker 1: it was the first time I've ever been on television. Um,
Speaker 1: it's kind of amazing. Uh, you know, to be a
Speaker 1: part of that, and you know, it was nerve racking
Speaker 1: because we got we interviewed for hours, and we knew
Speaker 1: the segment was twelve and a half minutes, so you know,
Speaker 1: it could go a variety of different ways. But when
Speaker 1: one funny thing is that, um, we were the first
Speaker 1: segment of three on sixty Minutes. By the end of
Speaker 1: the hour, I had more linked in requests than I
Speaker 1: had connections. Yeah, it was it was pretty amazing. I
Speaker 1: just said, I turned my wife and I said, holy caah,
Speaker 1: this is this is real. Right, that's astonishing. What what
Speaker 1: was the fallout over the next couple of days and weeks?
Speaker 1: I mean, I think you know, again, it's it's people
Speaker 1: were reading the book at that because the book just
Speaker 1: came out the next day. So it was just phenomenally well,
Speaker 1: it exploded, It did well. Um, like there was just
Speaker 1: there was a huge amount. It was it was it
Speaker 1: was crazy. Our phone was ringing off the hook. Uh,
Speaker 1: tens of thousands of people reached out to us, and um,
Speaker 1: you know in a positive way. You know, the industry
Speaker 1: was upset. Um and uh you know that was to
Speaker 1: be expected, but again it was for all. There were
Speaker 1: so many great things that happened as a result of that.
Speaker 1: It's just you know that that's we knew that there
Speaker 1: was gonna be a little bit of that. Um. You
Speaker 1: know again, when you talk about things people don't want
Speaker 1: you to talk about, that's kind of the fallout. So
Speaker 1: now let's do a follow up to that. Subsequently, on CNBC,
Speaker 1: you're on with the head of the Bats Exchange and
Speaker 1: Michael Lewis and a few other people, and that exchange
Speaker 1: turns surreal. He starts saying stuff that turns out to
Speaker 1: be not true. He challenges you. You were almost you know,
Speaker 1: I know you don't want to say this personally, but
Speaker 1: it looked like you were holding back because you don't
Speaker 1: want to beat down this poor guy who's only the
Speaker 1: president of of the biggest exchange at the time. What
Speaker 1: was that about? That? Uh? That was that was an
Speaker 1: interesting experience. That was my first time on live to levision.
Speaker 1: I've never actually been on live TV. And you look
Speaker 1: like a pro. You were just so smooth and in
Speaker 1: the middle of it. Um. I just remember saying to myself, like,
Speaker 1: is this is this actually happening? It's just it was,
Speaker 1: it was, it was. It was kind of crazy. What
Speaker 1: what stood out was you turned him and said you
Speaker 1: really want to do this, Let's do this. That That
Speaker 1: was the quote. It's like, I'm giving you an out
Speaker 1: and you're not taking it. So for those people who
Speaker 1: may not have seen this exchange, he made a number
Speaker 1: of statements that turned out to be patently false. The
Speaker 1: New York State Attorney General General Eric Schneiderman forced Bats
Speaker 1: to issue a I didn't want to call it a clarification,
Speaker 1: it was a retraction and basically said we were wrong.
Speaker 1: I was referring to what we're gonna do in the
Speaker 1: future or some nonsense like that, And a few months
Speaker 1: later he's out of a job. Any correlation between that
Speaker 1: incident and it wasn't like he announced his retirement. He
Speaker 1: was gone and they announced he was no longer with them.
Speaker 1: It's hard to say, Um, you know, I think what
Speaker 1: was important about that is that, um that the Attorney
Speaker 1: General made him correct his statements. And what you have
Speaker 1: a lot of times is you have what what we're
Speaker 1: arguing about is completely unknown to the to the general public.
Speaker 1: Anyone watching that. Very few people, i'm sure, understood even
Speaker 1: what we were fighting about. And we're fighting about a
Speaker 1: very important part of the market, meaning there are multiple
Speaker 1: ways market datas distributed. And essentially, are you using a
Speaker 1: slow feed to price trades for all of your participants,
Speaker 1: knowing that some people who trade on your exchange have
Speaker 1: a very fast feed and that that that was the argument,
Speaker 1: and that's what yes, And I think without that level
Speaker 1: of accountability, no one would have known who was saying what.
Speaker 1: It just would have looked like, you know, a bunch
Speaker 1: of crazy people yelling at on television. Um. So, I
Speaker 1: think holding people accountable is extremely important. It's the way
Speaker 1: to make the markets better. Everyone says that they want
Speaker 1: the markets to improve, gonna start holding people accountable. That's
Speaker 1: the way to make them mark. If there's if there's
Speaker 1: no recourse for saying whatever you want, UM, you know,
Speaker 1: at some point the more it's just not going to improve.
Speaker 1: And I think that, you know, that was an important step.
Speaker 1: At least somebody took charge there and said, you know,
Speaker 1: you have to own up to what you said. I'm
Speaker 1: Barry Ridhults. You're listening to Masters and Business on Bloomberg Radio.
Speaker 1: My guest today Brad Katsuyama. He was featured in Michael
Speaker 1: Lewis's book Flash Boys, and he is the co founder
Speaker 1: of the I e x alternative training platform, hopefully soon
Speaker 1: to be a major exchange. Let's talk a little bit
Speaker 1: about I e x um dark pools, something that was
Speaker 1: commonly used by big firms. Explain exactly what dark pools are. So.
Speaker 1: Dark pool is kind of the the you know, the
Speaker 1: street lingo for alternative trading system. And really what it
Speaker 1: means is that, um, they're slightly less regulated um than exchanges.
Speaker 1: And what they can't do is they can't publish bids
Speaker 1: and offers, which means everything that happens in them is
Speaker 1: essentially dark um. But but you know, they're good guys.
Speaker 1: They're not gonna hurt anybody. They're not gonna scalp a
Speaker 1: quarter from everybody who comes in there and not tell
Speaker 1: them about it, right. I think, you know, the interesting
Speaker 1: thing about dark pools is they were started with good intentions. Um,
Speaker 1: you know, if a bank has a buyer and a seller,
Speaker 1: they shouldn't have to go on the exchange and trade
Speaker 1: that and pay the exchange to do so. They should
Speaker 1: be able to do that internally. And um, they ended up.
Speaker 1: I think the competition was so fierce, many of them
Speaker 1: ended up morphing into something that, um, that was not intended.
Speaker 1: And uh, you know, over the course of you know,
Speaker 1: the past decade. Um, that's kind of what's happened. And
Speaker 1: I think we have forty over forty dark pools in
Speaker 1: the United States. That number probably comes down over the
Speaker 1: next couple of years. So I began my career as
Speaker 1: a trader, and the question was always, hey, do you
Speaker 1: put the order out on instantet? I know, you know,
Speaker 1: uh salar nuk and is trading. Those guys started an
Speaker 1: instantt or at least we're there for a long time
Speaker 1: before they decided to launch their own own farm. Also
Speaker 1: critics of of high frequency trading, So the thought of
Speaker 1: these dark pools where nobody really knows what's going on
Speaker 1: and which just relying on brokerage firms to uh, you know,
Speaker 1: do the right thing and be on their best behavior
Speaker 1: wasn't very satisfying to you as someone trying to get
Speaker 1: orders executed. Well, I think, you know, there there are
Speaker 1: some dark pools I think that serve a very good
Speaker 1: purpose um and there are others that I think have
Speaker 1: sacrificed quality for trading more volume and um you know
Speaker 1: it's there. There's there's a direct correlation between the quality
Speaker 1: of trades and the and the frequency of trades. Um
Speaker 1: So I think that again it's you know, you look
Speaker 1: back to the days of instant net um. You know
Speaker 1: there was a purpose. If if someone has a million
Speaker 1: shares to buy, you can't just force them to put
Speaker 1: that all out on on the exchange and display it.
Speaker 1: It's gonna have a very adverse impact on the ability
Speaker 1: to you know, to complete that order. Um So, there
Speaker 1: is a home for large orders in dark pools. I
Speaker 1: do feel like, you know, we need more disclosure, We
Speaker 1: need much more transparency and how dark pools operate um
Speaker 1: And I think as we get more transparency and disclosure,
Speaker 1: you're gonna see a lot of dark pools you know,
Speaker 1: shut down um, but the ones that are left, you know,
Speaker 1: will serve a purpose because there there definitely is. A
Speaker 1: stock exchange can't solve every problem that every investor has
Speaker 1: because a lot of times their orders are too big
Speaker 1: for the markets themselves. So now let's talk a little
Speaker 1: bit about I e X. And in the process of
Speaker 1: setting up or trying to execute orders, you came up
Speaker 1: with a few insights which had to do with, hey,
Speaker 1: if we can find a way to get the orders
Speaker 1: to arrive at all the exchanges at the same time,
Speaker 1: we're not going to be scalped or picked off by
Speaker 1: high frequency traders. Uh. That was originally the Thor product
Speaker 1: that you have developed at RBC. That was the Thor
Speaker 1: router at RBC. Was was really to say, if there
Speaker 1: is this geographical disparity, meaning you know, our order arrives
Speaker 1: at the exchange closest to us first, why not you know,
Speaker 1: stagger when you send out the orders to try to
Speaker 1: arrive at all places at the same time. And it
Speaker 1: was it's a lot harder than it sounds because latency
Speaker 1: changes throughout the day, and it's milliseconds we're describing now.
Speaker 1: Now we get down into microseconds, so you have to
Speaker 1: be within a few microsoft few millions of a second
Speaker 1: have the order arrived at a dozen exchanges. Our goal
Speaker 1: was to have it done under four hundred micro seconds,
Speaker 1: and we got it down to about two d and
Speaker 1: ninety microseconds. But when we did that, our phil rate
Speaker 1: went to a d um. That product could actually now
Speaker 1: buy or sell what people saw on their screens. Uh.
Speaker 1: And it was the easiest product to sell because you
Speaker 1: were just walking to a client's office and mutual fund
Speaker 1: or hedge fund and say, if you see a million
Speaker 1: Bank of America on the offer and you try to
Speaker 1: buy that, what percentage do you get And they're gonna
Speaker 1: say anything from I'll get you a hundred percent. They'll say,
Speaker 1: give me the product. I mean, it was it was
Speaker 1: really that. It was pretty simple. The challenge was this
Speaker 1: is that our our our revenues took off and then
Speaker 1: they started the flatline um And one client put it
Speaker 1: put it the best when he said to me, Brad,
Speaker 1: we love what you've done, we love your team, we
Speaker 1: love RBC. You've only solved three percent of my problem
Speaker 1: because that's the amount of commissions, that's how much I
Speaker 1: can trade with RBC, I have to trade with all
Speaker 1: these other banks for for legitimate reasons banking, etcetera. So UM,
Speaker 1: that was kind of the moment when we decided to
Speaker 1: leave OURBC and start i X, because we realized, number one,
Speaker 1: no broker can solve this problem. Even the biggest broker.
Speaker 1: If I'm Goldman Sachs twent of market share, what does
Speaker 1: that mean? UM still leaves absolutely the way to solve
Speaker 1: this was to actually be a stock exchange, because the
Speaker 1: stock exchanges have enabled what's really happened. You know, I
Speaker 1: think that that in a way there was a responsibility
Speaker 1: by the exchanges to prevent some of what's happened, and
Speaker 1: they they've kind of enabled it. Were speaking with Brad Katsuyama,
Speaker 1: co founder of i e X, so let's talk a
Speaker 1: little bit about the shoe box. You came up with
Speaker 1: the insight that said, hey, everybody is racing to go
Speaker 1: faster and faster. What would happen if we forced everybody
Speaker 1: to slow down? Yes, and the original idea was, well,
Speaker 1: let's put our exchange in Omaha, ne Brasta and not
Speaker 1: let anybody co locate their servers there. But then UM,
Speaker 1: one of the guys came up with a suggestion you
Speaker 1: don't need physically miles, you just need a spooled fiber optics,
Speaker 1: which is essentially a shoe box with thirty eight miles
Speaker 1: worth the fiber optics of coil cable of coil cables,
Speaker 1: and and explain what the shoebox of coiled cable does
Speaker 1: to orders that come into And it's interesting because the
Speaker 1: guy who came up with the idea worked at a
Speaker 1: high freakin see trading firms previously, absolutely and worked at
Speaker 1: I And what they do is they use these spools
Speaker 1: to recreate geographical distances. So like in Europe when you're
Speaker 1: looking at the difference between different exchanges, it's all done
Speaker 1: in the same room. There's just different levels of spooling happening,
Speaker 1: and you can recreate quote, physical distance in a single
Speaker 1: room right as they're testing strategies. But so he came
Speaker 1: up with the idea. The premise behind the idea was
Speaker 1: that we never wanted anyone to be able to execute
Speaker 1: a trade on I X with advanced information. Right, Um,
Speaker 1: there's this. There There's two things exchange is really look
Speaker 1: to sell. One is they all very fast data. Right,
Speaker 1: so if you want high speed data, you gotta pay
Speaker 1: for it. Um, there's nothing inherently wrong with someone buying
Speaker 1: fast data because someone will always get it first, and
Speaker 1: someone will always get it last. Right. Um, someone in
Speaker 1: New Jersey will get it before someone in London, just
Speaker 1: basically based on the speed of light. Right, So the
Speaker 1: sylgical distances how long it takes that message to go
Speaker 1: to from from the exchange New Jersey or the exchange
Speaker 1: across the Atlanta absolutely right. So, so fast data is
Speaker 1: one thing, but the notion of co location place your
Speaker 1: server right next to the exchange matching engine, buy this
Speaker 1: high speed cable. What that allows is the person that's
Speaker 1: buying the fast information to trade hundreds and thousands of
Speaker 1: times before that information makes its way to the end
Speaker 1: the last person. Right. Um, we inherently see a problem
Speaker 1: with fairness in that. So we've done is we take
Speaker 1: very fast data into i X, we buy all the
Speaker 1: direct feeds. We've spent a lot of time, uh and
Speaker 1: money and effort and getting very fast data to i X,
Speaker 1: but we we realize will never be as fast as
Speaker 1: the fastest high frequency trader. The shoebox. Essentially, that coiled
Speaker 1: cable is to say that's that's our heads start. So
Speaker 1: if they get information that the stock has gone from
Speaker 1: ten to nine, and they want to come in here
Speaker 1: and sell stock at ten against a buyer who doesn't
Speaker 1: know that the stock has moved lower. Right, Um, they
Speaker 1: send that order to I X and it starts to
Speaker 1: go around the shoebox and it goes around the coil.
Speaker 1: And as it's going around the coil, I X will
Speaker 1: get the update the prices changed from ten to nine,
Speaker 1: and we will not let that trade take place at ten.
Speaker 1: That's the whole thing, right. The exchange's job is kind
Speaker 1: of like the referee in a way. Um, you have
Speaker 1: to understand what the conditions for fair trade is. It's
Speaker 1: both parties having equal relative information the prices nine, don't
Speaker 1: let the stock trade at ten. The issue is that
Speaker 1: high speed traders have faster information than the exchanges, which
Speaker 1: means that they always know about a price before the
Speaker 1: exchange actually understands this is the market wide price. And
Speaker 1: I think that's that's the shoe boxes about us slowing
Speaker 1: them down. How much does the shoebox actually slow h
Speaker 1: f T It's fifty micro seconds is the total. So
Speaker 1: the shoe box is located in a different data center.
Speaker 1: That data centers about five miles away, plus the shoebox
Speaker 1: adds another thirty eight miles. In total, it's three fifty
Speaker 1: micro seconds millions of a second, one one thousand of
Speaker 1: the blink of an eye. Um. But it's enough time
Speaker 1: for i X to always ensure that we know the
Speaker 1: most up to date market information so that we can
Speaker 1: fairly and consistently fairly priced trades. So their orders can't
Speaker 1: front front run anybody else's inform, they can't pick someone
Speaker 1: off who doesn't have information that they have, Yes, milliseconds
Speaker 1: ahead of them, milliseconds thousands of a second. That's too slow. Yeah,
Speaker 1: I mean it's we now measure everything in microseconds. That
Speaker 1: that's just absolutely astonishing. So there was a conversation the
Speaker 1: part of of the book where i X launches and flashboys,
Speaker 1: and you were concerned, Hey, you know, is anybody going
Speaker 1: to come to this party? We we just built this
Speaker 1: whole exchange on the theory that people want fair pricing.
Speaker 1: They didn't want to give anybody an advantage. And you
Speaker 1: had no idea if anybody was going to show up.
Speaker 1: What what was it like launching into that circumstance. It
Speaker 1: was nerve racking, to say the least, because because if
Speaker 1: there was this kind of chicken and egg problem, UM
Speaker 1: brokers would say, well, you have no volume, so why
Speaker 1: would I send you any volume? Meaning liquidity begets liquidity.
Speaker 1: If everyone takes that approach, you'll never trade a single
Speaker 1: share because everyone's waiting for someone else to trade a share,
Speaker 1: So you need someone to go first. And fifty million
Speaker 1: shares was your number that you thought, all right, if
Speaker 1: we get at least fifty million a day, maybe we
Speaker 1: can survive. Fifty million was kind of yeah, it was.
Speaker 1: It was a survival number UM, and we ended up
Speaker 1: doing five hundred and sixty thousand our first day. Uh.
Speaker 1: Some people were predicting we do shares the first day,
Speaker 1: so nobody, nobody had. The guy with the most experienced
Speaker 1: launching markets is the guy Matt Trudeau. He runs, he
Speaker 1: runs our products. He's launched seven different markets globally. His
Speaker 1: prediction the first day was share is UM and what
Speaker 1: are you doing now? Well, our record a few weeks
Speaker 1: ago was a two million shares. That's fantastic. So yeah,
Speaker 1: the the growth has been nice. Can you stick around
Speaker 1: a little bit. We'll throw the rest of this on
Speaker 1: the podcast portion so I've been speaking with Brad Katsuyama.
Speaker 1: He is the co founder of i e x Exchange.
Speaker 1: If you like this conversation, be sure and check out
Speaker 1: the rest of our chat that'll be on Bloomberg SoundCloud
Speaker 1: and of course Apple iTunes. Be sure and check out
Speaker 1: my daily column on Bloomberg View or follow me on
Speaker 1: Twitter at Rid Halts. I'm Barry Rihults. You're listening to
Speaker 1: Masters in Business on Bloomberg Radio. Welcome to the podcast
Speaker 1: portion of our show. Now I could uh throw my
Speaker 1: papers away and just kind of cut back. Rad. Thank
Speaker 1: you so much for doing this. You know, I've been
Speaker 1: somewhat of a critic of high frequency trading for a while. UM.
Speaker 1: One of the interesting things that Joe Saluzzi had said
Speaker 1: not too long ago was on a SCAE all of
Speaker 1: zero to ten, where where are we in the process
Speaker 1: getting better? And he said we're out of four, um,
Speaker 1: which was kind of surprising. You know, the pushback that
Speaker 1: I've gotten from people, um who I don't want to
Speaker 1: say or pro h f T but just aren't as critical,
Speaker 1: let's say. UM. Jack Brennan is chairman of Vanguard. He
Speaker 1: says h f T has lowered costs lowered expenses for
Speaker 1: them Titan spreads. Um cliff astness of a q R
Speaker 1: is a huge shop runs a hundred plus billion dollars.
Speaker 1: He thinks his comment was, Hey, listen, look, you guys
Speaker 1: complained that liquidly disappears when h f T guys unplug
Speaker 1: their machines. How is that any different than what specialists
Speaker 1: used to do. If they don't like the price, you
Speaker 1: don't get executed. They just dropped their bid further and further.
Speaker 1: How do you respond to those sort of comments? I
Speaker 1: think a lot of times, Um, you could interchange h
Speaker 1: f T with just technology. Technology has made things cheaper,
Speaker 1: has allowed spreads to titan. Decimalization helps press titans as well.
Speaker 1: But you know, I think a lot of the benefits
Speaker 1: people bestow on the general category of high frequency trading
Speaker 1: have more to do with technology than it does to
Speaker 1: do with anything. UM. The difficult part about the debate
Speaker 1: around high frequency trading, which is why it's still a
Speaker 1: debate five years later, we're still talking about a lot
Speaker 1: of the same things, UM, is that we haven't even
Speaker 1: talked about the flash crash, which there's still disagreements as
Speaker 1: to what the unsaying. Absolutely, you know, that the toughest
Speaker 1: part is is that not everyone who uses a computer
Speaker 1: to trade is doing harm to the market, and not
Speaker 1: everyone who's using a computer to trade is doing it
Speaker 1: for the benefit of society. Right. It's people are doing
Speaker 1: both and I feel like, you know, the one the
Speaker 1: one part about i X that that that I'm really
Speaker 1: proud of UM is the fact that we never made
Speaker 1: this about shutting out high frequency traders per se. We
Speaker 1: just built a market we felt could not be gamed,
Speaker 1: and as small segment of high freakingcy traders still showed up,
Speaker 1: and I give them a lot of credit for doing that. Right,
Speaker 1: So Virtuo is one and UM they're they're pretty huge,
Speaker 1: They're they're one of the biggest UM and I'll say
Speaker 1: they're they're they're a very good partner of ours at
Speaker 1: i X. But when we walk through the things that
Speaker 1: we're not giving them the thing, the advantages they won't
Speaker 1: have that they might have on other markets, they didn't
Speaker 1: care at all. They said this is good, this is
Speaker 1: good for the market, will be their day one. We
Speaker 1: like what you're doing, and we've both been supportive of
Speaker 1: each other. So it was never really about saying all
Speaker 1: computerized trading is bad. You know, my my when I
Speaker 1: when I traded New York listed tech on the on
Speaker 1: the Stock Exchange floor, and I also traded over the
Speaker 1: counter on the NASDAC terminal, I liked electronic trading a
Speaker 1: hundred times more UM master cheaper, better, easier, instantaneous, con
Speaker 1: more efficient. Absolutely, It's just it was. There was no
Speaker 1: question the way the market was gonna go. UM. The
Speaker 1: challenges that a lot of people are using technology UM
Speaker 1: to make money and scalp off of traditional every investors.
Speaker 1: The markets become at times more volatile, intra day volumes
Speaker 1: are inflated. It's just you know these it's it's sense.
Speaker 1: It can go both ways. The people that want to
Speaker 1: provide cover can use very generic statements about technology driven
Speaker 1: trading and call it h f T UM, and then
Speaker 1: we can come out, or or Joe and Sal can
Speaker 1: come out, or Michael Lewis can write about h F
Speaker 1: T and and really focus specifically on the parts of
Speaker 1: it that are bad. UM. And the fact that you know,
Speaker 1: it's cheaper to trade now than it was twenty years ago,
Speaker 1: that's not a defense for the things that we're saying,
Speaker 1: because we're getting you very specific critiques. UM and and
Speaker 1: there's very generic replies to that, and I think again
Speaker 1: it's it's part of the argument, but for us, it's
Speaker 1: you know, it's more about fairness and and that's why,
Speaker 1: you know, I'll come on here and say a firm
Speaker 1: like Virtue is a partner of i X, even though
Speaker 1: they're quote classified a high frenzy trader because they've chosen
Speaker 1: to play by our rules. We've set the rules. You know,
Speaker 1: we're experts in the market. We know what we're doing.
Speaker 1: We have people from exchanges and high prency trader, any
Speaker 1: firms that work at i X. We set the ground rules.
Speaker 1: They've decided to play. I give him a lot of
Speaker 1: credit for that. What what other firms that are thought
Speaker 1: of as h f t s will trade through uh
Speaker 1: X so G GTS Securities is another one, um, you
Speaker 1: know I M C Trades uh You know Night has
Speaker 1: it as a variety of businesses. Um, but Night's a
Speaker 1: good partner of ours as well, right, so they at
Speaker 1: one point in time where one of the biggest, if
Speaker 1: not the biggest volume on the deck. Absolutely, but you
Speaker 1: know they have a very diversified business. But they've been
Speaker 1: good partners of ours, right, So it's you know, and
Speaker 1: it's in Goldman Sacks. Uh. You know in two fourteen
Speaker 1: was our largest volume providers. So um. The the goal
Speaker 1: for us really was to build a market that we've
Speaker 1: believed to be fair and fair consistently. That's I mean,
Speaker 1: if if the stock market is not fair, what does
Speaker 1: that mean for everything else? Right? It is, it's it's
Speaker 1: it's That was the goal and I've we've done that.
Speaker 1: And the fact that of a wide variety of people
Speaker 1: have shown up uh and provided support that gives us
Speaker 1: a lot of confidence that this this is this is
Speaker 1: the right model. And I think a lot of people
Speaker 1: like the fact that the market itself is fixing some
Speaker 1: of the structural eras it has. This is a market
Speaker 1: based solution to a whole series of problems. You know,
Speaker 1: we're we if you look back at the last century, right,
Speaker 1: we're caught in this pretty pretty vicious negative cycle. You
Speaker 1: have a scandal, it's followed by regulation. There's no such
Speaker 1: thing as a perfect rule. That regulation will create loopholes
Speaker 1: and inefficiencies consequences. People look to exploit the loopholes, and
Speaker 1: they exploit it so badly that it creates the next scandal,
Speaker 1: which creates the next set of regulation. And as as
Speaker 1: regulation increases, it raises the barriers to entry for disruption.
Speaker 1: It makes it harder to disrupt an industry that's so
Speaker 1: heavily regulated. UM. Which means that in a way, the
Speaker 1: people causing the scandals are the ones that are that
Speaker 1: that remain in this industry as the walls get higher
Speaker 1: and higher. UM. So you guys are the uber of mind.
Speaker 1: We feel like, you know, in a way, we're trying
Speaker 1: to We're trying to we're trying to disrupt Wall Street
Speaker 1: in a productive way. UM. It's not productive the relationship
Speaker 1: Wall Street has with main Street because main Street needs
Speaker 1: Wall Street whether they like it or not. Um, they
Speaker 1: just don't like the way Wall Street has behaved over
Speaker 1: the last you know, a few years. And I think that, UM,
Speaker 1: you know, we're huge proponents of of what Wall Street does,
Speaker 1: but we think it can be done in a better
Speaker 1: in a better way. There's no no doubt about that.
Speaker 1: The cycle you described of scandal, regulation, loopholes, gaming it
Speaker 1: scamp what was a little different. And I have a
Speaker 1: lot of criticism of HFT and maybe we'll get to
Speaker 1: some I'd love to hear your responses. Was the fact
Speaker 1: that suddenly we had the New York Stock Exchange that
Speaker 1: was a nonprofit sort of public commons. Almost suddenly it
Speaker 1: becomes a for profit entity whose goal is no longer
Speaker 1: serving the investor, but serving their clients, who turned out
Speaker 1: to be the ones who could pay the most, or
Speaker 1: the h f T who are paying for the early look,
Speaker 1: who were paying for co location. The way that structure
Speaker 1: came about was, look if I if I said, hey,
Speaker 1: here's the system where you could look at people's orders
Speaker 1: before they're executed and front run them, that can't possibly
Speaker 1: be legal. But if I set up a series of
Speaker 1: high speed lanes and slow speed lanes and you could
Speaker 1: sniff this and see those packets, effectively, it's the same thing,
Speaker 1: but somehow legal. Well, the funny part is is that
Speaker 1: you know, as you when you read certain things, certain
Speaker 1: fines that come out, or when you read, if you
Speaker 1: replace the act of a computer with an actual person,
Speaker 1: that person would be penalized a lot worse than the
Speaker 1: computer gets penalized in today's market, because some of the
Speaker 1: stuff is kind of outrageous what happens in it. But
Speaker 1: but programmers don't get penalized. They're taking advantage of you know,
Speaker 1: it's like playing a video game. You're you're not penalized
Speaker 1: for shooting them out of the sky in a video game.
Speaker 1: That's all this is is a video game for money. Yeah,
Speaker 1: I think I think you know, you kind of hit
Speaker 1: the nail on the head where you know, in essence,
Speaker 1: I X is a free market solution. Um, it's our choice,
Speaker 1: and we're trying to correct inefficiencies. We're trying to patch
Speaker 1: up the loopholes. We're trying to and trying to make
Speaker 1: the system better. Um. In a way, the exchanges could
Speaker 1: have done what we've done. We've done it all within
Speaker 1: the regulation. We haven't asked for any rule change. But
Speaker 1: they chose to sell technology and sell data. They're they're
Speaker 1: they're part of in a way, exploiting loopholes, and it's
Speaker 1: very hard to get them to fix themselves. There are
Speaker 1: very few companies that can disrupt themselves. Well, you know,
Speaker 1: if you look what Apple did with constantly lowing the
Speaker 1: price of the iPod, most companies and to a point
Speaker 1: where huge huge improvements. The same thing with the phones,
Speaker 1: and that's unusual. Typically companies are disrupted from the outside.
Speaker 1: Not hey, this is our bread of but bread and
Speaker 1: butter what do you mean we're gonna drop the price
Speaker 1: in half but will be twice as good. Nobody does it. Yeah,
Speaker 1: I mean part of a lot of people will say,
Speaker 1: you know, this is the right thing to do for
Speaker 1: my shareholders. I make as much money as humanly possible
Speaker 1: from my position in the market. And UM, you know,
Speaker 1: I think that's it's a it's a it's a valid statement. Um.
Speaker 1: It also serves to excuse a lot of really bad
Speaker 1: behavior with without question, without questions. So I think you
Speaker 1: know you for us, it's you know, starting a new
Speaker 1: market in two thousand and thirteen, Uh, understanding very clearly
Speaker 1: the mistakes that others have made. Um, you know, we
Speaker 1: just feel like we're in a very good position to
Speaker 1: just build a different kind of marketplace. And let's talk
Speaker 1: about that a sex. So you know in the book, um,
Speaker 1: and I want to talk a little bit about Michael
Speaker 1: Lewis and a little later um, because I think if
Speaker 1: he keeps it this writing thing, he's gonna be really
Speaker 1: influential one day, because he shows a lot of potential.
Speaker 1: I love his stuff. Every time a new book of
Speaker 1: his comes out, I save it for vacation. And it's
Speaker 1: my It's just my favorite, most delightful vacation reading so
Speaker 1: um and he his columns that he publishes here are
Speaker 1: ridiculous because you can have a column that's doing really
Speaker 1: well in the terminal and then a Michael Lewis column
Speaker 1: comes out and that's that. Nobody is even close. It's
Speaker 1: like number one with a bullet for three days. It
Speaker 1: just hangs around. You look at most you know, other
Speaker 1: ways on the terminal, most most emailed, highest ranked, most read,
Speaker 1: and his are just like glued to the top. It's
Speaker 1: it's almost it's almost funny. So you get the idea
Speaker 1: to set up this company, you have to think, geez,
Speaker 1: this is gonna cost tens of millions of dollars. Was
Speaker 1: RBC supportive of this with an investor in this No,
Speaker 1: so OURBC non investor. Originally we went around to try
Speaker 1: to do this with URBC. I brought the idea to
Speaker 1: to my boss is there and I said, this is
Speaker 1: an idea, let's start in exchange. Uh. The feedback we
Speaker 1: got from our clients, the big mutual funds um was
Speaker 1: that we like the idea, but RBC can't be involved
Speaker 1: because they're a broker, or because because other brokers would
Speaker 1: not want to use a solution provided by RBC. UM.
Speaker 1: You know, so, so are any of your sun investors brokers?
Speaker 1: So Goldman is not an investor, it was an investor.
Speaker 1: Yet no one who's a subscriber to our platform, meaning
Speaker 1: Broke is an investor. No broker is an investor in
Speaker 1: in a so mutual funds, hedge funds. Uh. There's some
Speaker 1: venture firms, there's you know, entrepreneurs, there's it's all sorts.
Speaker 1: In the book they mentioned David Einhorn and I think
Speaker 1: was Bill Bill Ackman, Don Lobe Lobe Capital Group, Franklin Templeton,
Speaker 1: Mass Mutual, Jim Clark from Netscape, Steve Wynn UM. So
Speaker 1: we have we have a really great group of end users, UM.
Speaker 1: And it's it's very you know, most people own a percent,
Speaker 1: like it's very very small, UM. But we wanted, you know,
Speaker 1: a broad consortium of interests that represented the end users
Speaker 1: of the stock market. And really it's the issuers and
Speaker 1: it's the investors in the stock market that matter most. Um,
Speaker 1: How are you gonna avoid the temptation when I don't
Speaker 1: even know who owns arkinnet these days comes along and says,
Speaker 1: here is a billion dollars we want to buy you
Speaker 1: or when Goldman says, hey, we can take you guys public,
Speaker 1: What what do you do about that? I think? I mean,
Speaker 1: you know, we we we thought a long time about
Speaker 1: i X starting as a nonprofit UM. And the reason
Speaker 1: we decided against it is because we're competing against for
Speaker 1: profit entities and when it comes down to competing for talent,
Speaker 1: when it comes down to a lot of things, UM,
Speaker 1: we couldn't let the solutions suffer because of the way
Speaker 1: we structured the company. UM. So you know, we'll continue
Speaker 1: to look for you know, just doing the right thing
Speaker 1: for the mission. That's the that's the key. There's been
Speaker 1: a lot of interest in i X already. UM. You know,
Speaker 1: we've we've turned we've turned all that down because we
Speaker 1: feel like we're you know, we're still on a mission.
Speaker 1: But you know, if the right partner comes along and
Speaker 1: you think it's the right thing to do for the mission.
Speaker 1: In the business, it's really this, this is a mission
Speaker 1: based company. UM. We care a lot more about that
Speaker 1: than anything. And it's very distributed. You know, I don't
Speaker 1: own a huge chunk of i X. UM. I mean
Speaker 1: we're going around talking to your partners all every single
Speaker 1: person that I excellent equity UM and it's very evenly
Speaker 1: spread out amongst you know, kind of the the top.
Speaker 1: There's there's uh you know, uh you know, what's the structure.
Speaker 1: What's the structure at the company. It's you. So it's
Speaker 1: it's so yeah, So it's me. Um Ronan Ryan is
Speaker 1: our chief trategyman Rob Parts described in the book, and
Speaker 1: Rob Park was our CTO. He he worked with me
Speaker 1: at RBC and and John schwall is our chief operating officer.
Speaker 1: UM hired him at RBC from Bank of America. He
Speaker 1: was the he was kind of the the LinkedIn guy
Speaker 1: that did all the background research and um, you know,
Speaker 1: we Don Bullman was a co founder. He came from NASDAK.
Speaker 1: UM so we you know, Zorin Perkov ran global operations
Speaker 1: at Nasadak. He came aboard. John Ramsey came from the SEC.
Speaker 1: Sophia Lee came from Liquid Net. We just we just
Speaker 1: you know, we just feel very lucky. Claudia Crowley we
Speaker 1: just hired at their chief regulatory officer. She came from
Speaker 1: the New York Stock Exchange. It's like the nineteen nine Yankees.
Speaker 1: That's a uh, that's a murderous row. We're building you know.
Speaker 1: And and the great part about it is, you know,
Speaker 1: it's i X is not the best short term uh
Speaker 1: lucrative place to work, right, people are getting rich this year. UM.
Speaker 1: So people come for the mission. They come because they
Speaker 1: believe in it, and they believe in it long term, um,
Speaker 1: you know, And and the goal is to be successful
Speaker 1: long term. So there's a long term payoff to this.
Speaker 1: People come, um looking out three five years and that
Speaker 1: those are the kind of employees that you really want.
Speaker 1: And you know, part of the that the challenge you
Speaker 1: on Wall Street in general is a lot of people
Speaker 1: live year to year on guarantees. Um. There's a huge
Speaker 1: sense of loyalty. Um. What I find is that, you know,
Speaker 1: certain firms are incredibly well cultured and certain firms are
Speaker 1: just completely toxic. And um, you know, you want to
Speaker 1: build long term culture. UM. And again it's it's we're
Speaker 1: trying to build that at i X. That's that's really interesting.
Speaker 1: So now you've hit a hundred and fifty plus million
Speaker 1: shares a day. What sort of revenue can this company do?
Speaker 1: I mean, you guys always going to be a niche player,
Speaker 1: or can you scale up to be five or ten
Speaker 1: percent of the total daily when you look at it, Um,
Speaker 1: we're one, We're around one percent of the total market
Speaker 1: right now. Um, but we can only really compete for
Speaker 1: fifteen or twenty of the hundred pie. Fifty six percent
Speaker 1: of the volume every day is displayed quotes, which only
Speaker 1: exchanges are authorized to do. UM. You know, ten percent
Speaker 1: roughly is the open closing auction plus pre and post
Speaker 1: market trading trades, retail, you know, with wholesalers and internalized
Speaker 1: So there's so much volume that we don't have access
Speaker 1: to right now. Um. Becoming an exchange obviously unlocks a
Speaker 1: lot of a lot of potential for us. So UM,
Speaker 1: you know, we feel like this is kind of just
Speaker 1: the beginning. You know, if you back to you know,
Speaker 1: talking about Joe thinking we're in the fourth inning or
Speaker 1: four out of ten. Yeah, I think we're a third
Speaker 1: or fourth inning of the game. There's a there's a
Speaker 1: lot of there's a lot of ball to be player.
Speaker 1: So once you become an exchange, and I have a
Speaker 1: hard time imagining that the SEC isn't gonna say, hey,
Speaker 1: these guys solve a lot of problems, take the workload
Speaker 1: off of us. You become an exchange. Over the next
Speaker 1: twelve months, eighteen months, somewhere all those time that timeline.
Speaker 1: We're hopeful, Well, we're hopeful it happens this year. Okay,
Speaker 1: so before is over. What does that do to the
Speaker 1: potential volume that you guys can count. I mean it
Speaker 1: unlocks more than half the market that we just can't
Speaker 1: touch right now. And I think that, Um, you know
Speaker 1: that's significant. And and we're we're keeping the principles of
Speaker 1: what we do. Um, we're not paying rebates, maker takers obviously,
Speaker 1: no maker taker, no order flow payments. Basically, it's just
Speaker 1: a fair price. And that's what you get. Simple, transparent
Speaker 1: and fair stock exchange. I mean, that's what we're trying
Speaker 1: to be. And um, you know, there's an elegance that
Speaker 1: comes with simplicity, meaning people understand what your market does
Speaker 1: and why and why you exist. Um, and the stock
Speaker 1: market is anything but that. It's you. You need to
Speaker 1: hire people from a firm to understand what that firm
Speaker 1: actually does. Right, and so we you know, most of
Speaker 1: what we've learned from exchanges you can't find by going
Speaker 1: on Google. You have to find people that have worked
Speaker 1: that exchanges or find people that know them intimately. Well,
Speaker 1: So I think you know, it's amazing the function of
Speaker 1: the stock market is so central to the economy. It's
Speaker 1: amazing how few people know how the stock market actually works,
Speaker 1: myself being one of those people five years ago. Right, So, um,
Speaker 1: you know, we want to build a market that people understand.
Speaker 1: That's that's amazing. So let's talk a little bit about
Speaker 1: Michael Lewis, because he's come up as a thread throughout
Speaker 1: and full disclosure, I write for Bloomberg View, which is
Speaker 1: published The publisher is David Shipley, and I know they
Speaker 1: have a longstanding relationship. Um, but you and I haven't
Speaker 1: discussed this beforehand. Sure, so I'm kind of drying. I
Speaker 1: sent you, Hey, let's talk about these things. But let's
Speaker 1: talk a little bit about Michael Michael Lewis. So you
Speaker 1: finally meet him in in your window Lists office with
Speaker 1: you and you and Ryan, and he starts to you
Speaker 1: see the gears turning mentioned yeah earlier. How long does
Speaker 1: that conversation go on? What? What is that? Like? This
Speaker 1: is for the in the Fair magazine article, not for
Speaker 1: the book. Yeah, it was, Um, I had I had
Speaker 1: read almost everything that he had ever written. Um, I
Speaker 1: read Lars Poker. I'm sure like everyone does before they
Speaker 1: come into business. You ask what book should I read?
Speaker 1: You read Liars Poker, which I always tell people market Wizards.
Speaker 1: But Margaret, I read that too, But because I find
Speaker 1: Liars Poker gives them, Hey, that's an eighties perspective that
Speaker 1: universe does hasn't existed. The funny part. The funny part
Speaker 1: is Michael Lewis is kind of horrified that that people
Speaker 1: read Lars Poker as a how to manual, and because
Speaker 1: he wrote it as kind of like a warning story. Right,
Speaker 1: it was an apocryphal tale, Hey, don't let this happen
Speaker 1: to you, and people actually use it as Oh, so
Speaker 1: that's that's what it's right. Um. And Moneyball, Um, it's
Speaker 1: probably my favorite Michael Lewis book, including Flashboys. I love
Speaker 1: Moneyball kind of changed my perspective on on business and
Speaker 1: and and and challenged me to think differently. Um. The
Speaker 1: book was great, the movie was great. You mentioned him
Speaker 1: Clark The New New Thing, which I think maybe his
Speaker 1: least known book is another one. It's amazing. It's a
Speaker 1: great it's a fat and it's amazing that you mentioned Wait,
Speaker 1: that's a Michael Lewis book. Yeah, it's a huge book.
Speaker 1: And the next one I have cued up for vacation
Speaker 1: is The blind Side. Yes, the football book, which I
Speaker 1: have not yet. Fantastic, That's what That's what people have said.
Speaker 1: It's it's so you finally get to meet this guy
Speaker 1: who you have a tremendous amount of respect for. What's
Speaker 1: that first meeting, Like, you know, we we just try
Speaker 1: to um convey what we knew, UM and and do
Speaker 1: it in a way that that would make him somewhat
Speaker 1: interested in us. At the time, we had no money. UM,
Speaker 1: we had nothing. You had already launched the firm. We
Speaker 1: we had started the firm with our own money, which
Speaker 1: was which basically we ran out of UM. And you know,
Speaker 1: at the time we kind of you know, it's I
Speaker 1: don't think it ever would have been a personal choice
Speaker 1: of mine, UM to be in the position I'm in, UM,
Speaker 1: because it just it changes your life, UM, to be
Speaker 1: it being on sixty minutes, being in this book, it
Speaker 1: has changed my life. UM. But as the CEO of
Speaker 1: I X, it was absolutely the right thing to so
Speaker 1: we we kind of went all in. We had nothing
Speaker 1: to lose at that point, and I think, um, uh,
Speaker 1: you know, the very first thing we did is we
Speaker 1: went and got in a in a car and drove
Speaker 1: to all the different UM centers with Michael Wis in
Speaker 1: the car. We drove, We drew out the map and said,
Speaker 1: you know, here's why our orders were getting into different
Speaker 1: exchanges at different times. So you go out the Holland
Speaker 1: Tunnel and you take it. He says, I want to
Speaker 1: drive these routes, so we are we okay? So, which
Speaker 1: sounds like him. Yeah. So we got in the car
Speaker 1: and um and and and drove the routes and um,
Speaker 1: you know, spent the day with him, going to different
Speaker 1: datas and you know, he walked away his head was
Speaker 1: spinning to think, I just I just saw the stock markets,
Speaker 1: but not the Star War because people see on TV
Speaker 1: building in New Jersey, that's right. And um. So so
Speaker 1: it went from I'm gonna write a short story about
Speaker 1: I X and which again was super exciting, He's gonna
Speaker 1: put in Vanity Fair. Um. But he started talking to
Speaker 1: more and more people. He just he every time he
Speaker 1: came to New York. He'd spent a little time with us,
Speaker 1: but he was out there canvassing meeting. The amount of
Speaker 1: connections he has is incredible. It's the amazing part is
Speaker 1: that we were going around to the asset management community
Speaker 1: to try to raise money. UM. And as we started
Speaker 1: to talk to Michael Lewis, Oh yeah, we talked to
Speaker 1: him for for the Big Short. We talked to him
Speaker 1: for the Big Short, like every other person I talked
Speaker 1: to talked to him for the Big Short. I was like, now,
Speaker 1: they never would offer this information if they didn't know
Speaker 1: that we were talking to him. Um. But you just
Speaker 1: realize how many people he actually knows UM and some
Speaker 1: people at firms that I'm sure they'd be fired if
Speaker 1: they knew that they were talking to Michael. Absolutely, it's uh,
Speaker 1: you know, and he's got away, He's he's uh, he's
Speaker 1: brilliant at what he does. I call him the poet
Speaker 1: Laureatete of Wall Street. He nobody tells a finance story
Speaker 1: the way he does. And it's always focused on these
Speaker 1: interesting characters, of which you're now one of you strike
Speaker 1: by the way. Anyone meets you on the street, they're like, oh, yeah,
Speaker 1: I met Brad. He's a good guy, you know. Yeah,
Speaker 1: I think he's Canadian. That would be it. Most of
Speaker 1: the other characters in his books, there's Jim Clark or
Speaker 1: Michael Barry, or or some of these other guys. They're
Speaker 1: always a little off kilter and fascinating. I'm the most
Speaker 1: unlikely Michael was character probably ever to be in a book,
Speaker 1: and I think that's right. He he had. He told
Speaker 1: me he had a hard time writing about me, Um
Speaker 1: simply because um, he said, he goes it's he was
Speaker 1: trying to dig up anything he could on me being
Speaker 1: in the Israeli Air Force. That was really, you're fired
Speaker 1: a pilot. And I'm only kidding. I'm only by the
Speaker 1: way I find myself having to constantly when when you're
Speaker 1: a little bit sarcastic, you have to clarify because someone's
Speaker 1: gonna say, wait, Brad wasn't a fighter. You have to be,
Speaker 1: without a doubt, the most. Yeah, lacking abnormalities is the best.
Speaker 1: You're You're an ordinary Wall Street guy. Hey, you had
Speaker 1: a big job as a trader at RBC. You made
Speaker 1: a lot of money. You were making seven figures. Now
Speaker 1: that that had to be a lot of a lot
Speaker 1: of fun, a lot of hard work, but nice to
Speaker 1: put a little money away. And now you're running a startup.
Speaker 1: That must that must be the most aberrational thing you're
Speaker 1: doing is giving up Uh, seven figure job to say, Okay,
Speaker 1: we're gonna go fix Wall Street and we're not gonna
Speaker 1: make a lot of money. First, quitting was was definitely
Speaker 1: at a character for me. I probably could have retired
Speaker 1: at OURBC. It was actually the only company I'd ever
Speaker 1: worked for. I was an intern there and just and
Speaker 1: just stayed because it was comfortable. I got offered more
Speaker 1: money to work elsewhere. But I like the people. I
Speaker 1: had a great relationship with my immediate boss, and um,
Speaker 1: it was it was kind of a different thing part
Speaker 1: of leaving. The big thing. The reason, one of the
Speaker 1: big reasons I left was that after we we created
Speaker 1: Thor and RBC's electronic platform, took off all of the
Speaker 1: people on on all of my key people, including myself.
Speaker 1: We're getting big job offers away at different firms. Um.
Speaker 1: And it became very evident to me that that doing
Speaker 1: nothing would have led to our team getting dismantled. It
Speaker 1: was gonna break up anyway, yes, and so you might
Speaker 1: as well take the whole team together elsewhere. Well. That
Speaker 1: that part of that was I sat down with with
Speaker 1: John and Ronan and Rob and said, you know, how
Speaker 1: important is this for us to stay together? And and
Speaker 1: we had built. You know when you go through things
Speaker 1: like that and and you know it's it's you come,
Speaker 1: you come from nowhere to to you know, doing something,
Speaker 1: and you had discovered the problems we had discovered because
Speaker 1: every rock we turned over had something under it, and
Speaker 1: it was just this amazing, like mystery story. Like every
Speaker 1: person you meet, you another piece ad gets out of
Speaker 1: the puzzle. Um, we kind of collectively decided, you know,
Speaker 1: we're willing to take this risk. And there's one really
Speaker 1: funny moment where I'm home and I'm talking to my wife.
Speaker 1: I'm like, you know, we're getting ready to leave, and
Speaker 1: she's like, well, what percent chance do you think this
Speaker 1: has of working? I think? I Am like, oh, I
Speaker 1: think it's pretty low. I think this idea we have
Speaker 1: right now probably, and she's like, you should probably clarify
Speaker 1: that with Rob and Ronan and John. So I came
Speaker 1: in the next day and said, guys, write on a
Speaker 1: piece of paper, what percent chance you think this idea?
Speaker 1: Yea we have right now for I X. But it's
Speaker 1: not i X as you know it today. It was
Speaker 1: a different version of I X. It actually wouldn't have worked.
Speaker 1: It wouldn't have worked. Um, this idea we have right? Now,
Speaker 1: what what chance do you think this idea has of working?
Speaker 1: I was the highest at everyone else was lower UM,
Speaker 1: which was funny, but they all what we all what
Speaker 1: we all agreed was that there was a seventy chance
Speaker 1: that the four of us would figure this out. Like
Speaker 1: so that's a very different set of odds. Hey, listen,
Speaker 1: this one issue may not work, but we could pivot
Speaker 1: to something right And what was that pivot? Was it?
Speaker 1: The shoe box was part of part of it was
Speaker 1: the shoe But the very first idea we had was
Speaker 1: we wanted to be the smart order router for the street,
Speaker 1: which means everyone sent us your orders and will rout
Speaker 1: them out to the exchanges. UM. Now the problem with
Speaker 1: that is all the big banks have built their own
Speaker 1: smarter routers, so so it's a very invasive request to say,
Speaker 1: I'm gonna now we're oute all your orders on you
Speaker 1: know for you. UM that that idea never would have
Speaker 1: worked and UM, but we quit on the notion of
Speaker 1: that idea, which which which was slightly insane. Except for that,
Speaker 1: we had a lot of faith in each other. And
Speaker 1: I think that UM had a great track record. You
Speaker 1: guys had Let's let's clarify this a little bit, because
Speaker 1: a lot of startups have launched with a lot less. First,
Speaker 1: you guys essentially figured out what the heck was going
Speaker 1: on with the market when there really didn't seem anybody
Speaker 1: else that really got it in the way that you
Speaker 1: guys did. Number one, Number two you created a product
Speaker 1: thor which solved a lot of those problems. So there
Speaker 1: had to be some degree of confidence. Okay, we know
Speaker 1: more about what's wrong with the structure than other people have.
Speaker 1: We've already demonstrated an ability to use technology to resolve it.
Speaker 1: Can we take those two things and put it together
Speaker 1: and build a real company around it? Yeah, I mean
Speaker 1: you kind of you. You nailed it. Um. The one
Speaker 1: other big point um that I made to my wife
Speaker 1: was that because she was really the one she she
Speaker 1: was the one who allowed I X to happen. Right
Speaker 1: are are are set? Son was born three days after
Speaker 1: my last day at RBC, so it was there's a
Speaker 1: lot going on in our personal She must have been
Speaker 1: thrilled with you. Yeah, well we we we got to
Speaker 1: the right place. Um, and she's been amazingly supportive. But
Speaker 1: what I said to is I said, there are very
Speaker 1: few people in this world that can solve the problem
Speaker 1: we're trying to solve, and it may not work, but
Speaker 1: you know, I would probably regret it for the rest
Speaker 1: of my life if I didn't actually try. So you
Speaker 1: have you have no choice. This was this wasn't all
Speaker 1: we gonna do this. It's I'm running out of reasons
Speaker 1: not to do that. That was kind of it. And
Speaker 1: and uh, I ran out of reasons not to do it,
Speaker 1: and and um and and it's it's always scary to leave,
Speaker 1: especially a job you're comfortable at you've been at your
Speaker 1: whole life. Um, but yeah, it was by the end
Speaker 1: of it, it felt definitely like the right decision. And
Speaker 1: you know, RBC is still a great client of ours.
Speaker 1: I still have a great relationship with with my former
Speaker 1: team there, and um, you know, they were very supportive
Speaker 1: and and they're still doing really well. So it's it
Speaker 1: kind of worked out for everybody. But um, yeah, it was.
Speaker 1: It was. It was interesting times, but you know, to
Speaker 1: in to be in a Michael Lewis book, never in
Speaker 1: a million I spent my entire life trying to just
Speaker 1: get along with people. I'm I'm more of a go
Speaker 1: with the flow kind of guy. I don't have these
Speaker 1: like heroic tendencies where you know, I'm running for class press.
Speaker 1: I didn't do any of that. Um, fairly normal guy
Speaker 1: and this just happened. Michael Lewis described it best when
Speaker 1: he said, you're a normal guy in an abnormal situation.
Speaker 1: And so now you go from the conversation with investigating
Speaker 1: h f T to hey, I think I want to
Speaker 1: do a book. I want to do a short story.
Speaker 1: Ones at what point did that magazine story become Hey,
Speaker 1: I'm going to do a book and you guys are
Speaker 1: going to be the driving factors in it. So so
Speaker 1: he came to the conclusion about the book. His his
Speaker 1: journey through high freguncy trading and the exchanges and market
Speaker 1: structure was similar to mine. Everyone he talked to, and
Speaker 1: the more rocks he turned over, the more stuff he found. Uh,
Speaker 1: and he stumbled on a lot of stuff himself, and UM,
Speaker 1: he's good. Oh he's amazing. And by the end he
Speaker 1: basically said this is going to be a blockbuster. Now
Speaker 1: what I didn't did he really say that? He said
Speaker 1: this or the book was bubble. He said this is
Speaker 1: going to be explosive, This is gonna be explosive because
Speaker 1: he was consuming everything that was written, and he realized
Speaker 1: he was writing things that have not been written before. Um,
Speaker 1: and which is unusual because let's let's go back and
Speaker 1: look at well money Ball was unique. Uh, the new
Speaker 1: new thing wasn't so much unique, but just a uniquely
Speaker 1: told story. Was a retrospective. Yeah, I mean, my you know,
Speaker 1: when I wrote Bailout Nation, it was one of the
Speaker 1: first books on the financial crisis, and I couldn't read
Speaker 1: anything afterwards. And then the big short comes out and
Speaker 1: I'm like, I'm dying to read it, and I'm like,
Speaker 1: you know what, I'm gonna hold this till February with
Speaker 1: Nona Barbados, So I'm gonna read so the year after
Speaker 1: the February after the book came out, and I think
Speaker 1: came out in like May or June. I'm I have
Speaker 1: the book on my night table, night table for eight
Speaker 1: months before we go on vacation, and I can't wait
Speaker 1: to read it. And I thought he just did a
Speaker 1: fantastic job with that. It was such a compelling story
Speaker 1: and all the characters are so amazing. You know another
Speaker 1: you know, another Michael Lewis book that just you know,
Speaker 1: blows your doors off, and then this thing comes along.
Speaker 1: And at what point does he say to you, you guys,
Speaker 1: you know I've been talking to you for how long
Speaker 1: this is going to be explosive? Well? He he, he
Speaker 1: knew he had a feeling it would be explosive. What
Speaker 1: I didn't know was how big a part of the
Speaker 1: book that I ended up being. I had no idea.
Speaker 1: I know when you got the book, you were as
Speaker 1: astonished as anything. I knew I was going to be
Speaker 1: a main character. Did you get a man obviously you
Speaker 1: got a PDF for a manuscript before the book. Nothing
Speaker 1: final copy shows up like this sounds Barnes and Noble, Amazon.
Speaker 1: I asked him, and I said, you know, I said
Speaker 1: to him, which was I said, Michael, this is a
Speaker 1: very technical subject. Um, do you want my help? And
Speaker 1: he goes, you know, you can't write a hundred thousand
Speaker 1: words without making a couple of mistakes. Um. And he goes, is,
Speaker 1: do me a favor after it comes out, make a
Speaker 1: make a note of the mistakes, um, and send them
Speaker 1: to me. And I found, you know a dozen things,
Speaker 1: small stuff, but I mean because people have been critical
Speaker 1: the Intel. Intel doesn't trade on the new York Stock Exchange, right,
Speaker 1: because they only trade New York listed stocks. Well, who
Speaker 1: cares right that it's it's yes, it's a technical error,
Speaker 1: but that doesn't undermine the actual books. The book is
Speaker 1: absolutely so he na, he nailed the book. Um, he
Speaker 1: made some technical errors, which people are you know, people
Speaker 1: are gonna people are grasping at anything they can get
Speaker 1: theirs there grasping and uh. And it's funny to watch, actually,
Speaker 1: because I've heard people say that what I experienced never happened.
Speaker 1: It's an amazing thing to tell a trader who has lived. Yeah,
Speaker 1: latency arbitrage doesn't exist. And I just I just I
Speaker 1: listen to that. And you can't even respond. A lot
Speaker 1: of stuff a book. I think a book has been
Speaker 1: written about you know why why this doesn't Michael lewis fiction.
Speaker 1: And the amazing part is is that again it's you know,
Speaker 1: I can speak ab out this stuff. I'm so grounded
Speaker 1: in my experience. I've lived through this. Um. You know,
Speaker 1: I can testify in front of the Senate, I can
Speaker 1: get in fights on television and you but let me
Speaker 1: interrupt you. So you also more than just you as
Speaker 1: a trader. You went to some of the biggest mutual funds,
Speaker 1: some of the biggest hedge funds, some of the most
Speaker 1: storied traders on Wall Street, and they pretty much all said, yeah,
Speaker 1: I'm going through the exact same problem. Yes, yeah, I
Speaker 1: mean this wasn't like you're an area fifty one and
Speaker 1: you saw the UFO that nobody saw. This was widespread. Hey,
Speaker 1: what's going on with the market? Something is wrong? Yes, well,
Speaker 1: you know the amazing part is the people that I
Speaker 1: have a common connection and understanding with our traders, They've
Speaker 1: lived in UM. Sometimes when you get on fights on television,
Speaker 1: you're fighting with lawyers, you're fighting with people who have
Speaker 1: never traded a day in their life. If you look
Speaker 1: at heads of exchanges in markets, their firms, if you've
Speaker 1: never traded, you're only going based on what other people
Speaker 1: have told you is happening. UM. It's a very common
Speaker 1: bond I share with traders. Whenever I walk in, people
Speaker 1: have like I've lived through it. I've I know exactly
Speaker 1: what you're talking about. UM. You know that experience allows you,
Speaker 1: me and our firm and the people the people that
Speaker 1: have gone through it to speak with such conviction because
Speaker 1: we know we know that it's happened conviction and authority.
Speaker 1: You actually became the you know. One of the guys
Speaker 1: in my office sent me a text this morning. There
Speaker 1: was a link to an article that said, if you
Speaker 1: read three books on a subject, you will know more
Speaker 1: than the population. How many people know more about the
Speaker 1: structure of order, routing and execution than than you guys do.
Speaker 1: It's got to be a handful of it's it's it's
Speaker 1: probably a small number. The even smaller number is how
Speaker 1: many people will actually tell you about it right the
Speaker 1: the game. The value of that knowledge, um is not
Speaker 1: monetized by trying to help other people understand. It's monetized
Speaker 1: by by gaming the system. UM. So I think that
Speaker 1: we were you know, one of the first things I
Speaker 1: realized after we discovered thor we ran these experiments at RBC.
Speaker 1: We realized that, hey, this by delayne when we send
Speaker 1: the orders, we get to all places at the same time.
Speaker 1: It was kind of like this Eureka moment. UM. I
Speaker 1: got home, I was in bed. I'll never forget it.
Speaker 1: I said, oh my god, we're not the first people
Speaker 1: to figure this out. We're not like fifth or tenth
Speaker 1: or fifty, like I don't know what, but everyone who's
Speaker 1: figured this out. Are the ones that are that are
Speaker 1: getting enemy. They're all part of the problem. The ones
Speaker 1: who had had identified this as a potential issue, instead
Speaker 1: of trying to fix it, said we can make money off,
Speaker 1: which brings me to the next question. At one point
Speaker 1: in time, there were estimates of h f T I'm
Speaker 1: gonna use the word extracting ten, fifteen, twenty billion a
Speaker 1: year in profits. But lately we've been hearing that volumes
Speaker 1: are down, volatility other than this past week, volatility has
Speaker 1: has been moderated, and that in general, people and markets
Speaker 1: are adapting and h f T isn't as lucrative as
Speaker 1: it once was. Any truth to that, I think, I
Speaker 1: mean in volatile markets, big investors are trading more um,
Speaker 1: which means there's more orders to get, you know, in
Speaker 1: the middle of so, I'd say volatility leads to a
Speaker 1: lot of a lot of volume and a lot of
Speaker 1: profits um. I'd also say the margins are going down
Speaker 1: because it's becoming more expensive to trade. You know, you
Speaker 1: have New York Stock Exchange selling laser beams on the
Speaker 1: roof and selling no longer. The book begins with the
Speaker 1: cutting the fiber optic channel in a dead straight line
Speaker 1: from Chicago to New York that now is going away.
Speaker 1: We're gonna do point to point microwaves faster than than
Speaker 1: less reliable than than in the ground, but still but
Speaker 1: there's a cost, right and I think that, Um, when
Speaker 1: you look at what's spent, it's billions. Billions are being spill.
Speaker 1: It was a billion dollars to lay that fiber from
Speaker 1: New York to Chicago. So part of it is about
Speaker 1: the money that's being made. Part of it's about the
Speaker 1: money that's being spent. Because ultimately, when you think about
Speaker 1: who's ultimately paying for the line between New Jersey and Chica,
Speaker 1: or who's paying for the microve tower, Um, it's coming
Speaker 1: out of somebody's pocket. It's going to be the investors,
Speaker 1: because no one would buy the microwave tower if they
Speaker 1: weren't able to make money from the existence of the
Speaker 1: microwave tower. Um, what you want to do is you
Speaker 1: want to make the microwave tower redundant. You can't make
Speaker 1: it illegal, and that that's one of the issues. You
Speaker 1: can't regulate evolution of technology, but you can render it useless.
Speaker 1: What we're trying to do at I X is create
Speaker 1: a level playing field where people don't feel the need
Speaker 1: to invest in microwve towers because it doesn't necessarily matter
Speaker 1: how much faster I am, because we're trying to create
Speaker 1: the fairest possible place, you know, the experience. But any
Speaker 1: new tower that goes up, someone's paying for that, and
Speaker 1: they're paying for it out of profits or else they
Speaker 1: wouldn't pay for it. It's coming out of grandma's Uh,
Speaker 1: if you follow, if you follow the money far enough,
Speaker 1: it's yeah, it's coming out of everyday people's pockets. A
Speaker 1: zero Am I wrong in saying it's a zero sum gain.
Speaker 1: If HFT is extracting fifteen billion by front running half
Speaker 1: a cent on a hundred thousand shares over and over
Speaker 1: and over again, that has to become In the stock market,
Speaker 1: you can everyone can't win. Contrary to some people's beliefs,
Speaker 1: it's just not no, right, it's it's a zero sum game.
Speaker 1: It is um and and again. Should the distribution of
Speaker 1: winners and losers be a little bit more balanced and
Speaker 1: more fair? Absolutely? Um, But that's again, that's that's what
Speaker 1: we're out there trying to solve. But it's it is
Speaker 1: zero sum. It's coming out of people's pockets, and and
Speaker 1: the hard part about it is that everyone's losing a
Speaker 1: little and a few people are making a lot. You know,
Speaker 1: David Einhorn wrote an investor letter I thought summed it
Speaker 1: up brilliantly. The problem is diffuse harm and concentrated benefit.
Speaker 1: That's brilliant, right, because people were trying to save people
Speaker 1: money they don't even know they're entitled to. But the
Speaker 1: people were kind of going after know exactly what we're
Speaker 1: doing and are very upset about it. So it's it's
Speaker 1: a it's an interesting problem to be in the middle of.
Speaker 1: What what other areas in the market structure have you?
Speaker 1: I don't know if the right word is worried, concerned? Um,
Speaker 1: what do you see as as a related potential problem?
Speaker 1: I mean, I think, you know, we haven't We've seen
Speaker 1: some changes, Um, but there's getting better. It's it's getting
Speaker 1: better more based on what people aren't doing versus what
Speaker 1: people have proactively done. Um. But I still don't see
Speaker 1: a huge amount of accountability. Um. You know, so you're
Speaker 1: making your money and fading into the background and riding
Speaker 1: off into the sunset. Um, you know, isn't isn't going
Speaker 1: to prevent prevent the next cycle. You know that What
Speaker 1: concerns me the most is the cycle that we talked about,
Speaker 1: scandal regulation, loophole exploitation, scandal regulation. It's gone on for
Speaker 1: so long, um, and what it does is it prevents
Speaker 1: you know, talent scandals just drive people away. Right, Certain
Speaker 1: people that would have come to Wall Street that you
Speaker 1: want to work here, just don't want to work here. Right,
Speaker 1: They're going to Silicon Valley. They're going to work you
Speaker 1: know they So that used to be the complaint in
Speaker 1: the middle of the financial boom. Oh, we're attracting people
Speaker 1: who would be better served going to Silicon Valley and
Speaker 1: inventing the next iPhone. It's of inventing the next al
Speaker 1: goo that uh yeah, is gonna come come after our orders.
Speaker 1: So it comes in cycles. But you know, I think
Speaker 1: that cycle overall leads to a heavily, heavily regulated industry
Speaker 1: with fewer players. Um, and the entrenched players are just
Speaker 1: far more powerful. Right there, There aren't there isn't a
Speaker 1: huge amount of disruption happening. So I think, you know,
Speaker 1: the cultural cycle is it is a pretty tough one
Speaker 1: to break. Um. You know, we're hoping to break that
Speaker 1: in in a in in a minor or major way.
Speaker 1: We're just trying to do something different. The good part
Speaker 1: is that you know, we do have partners that think
Speaker 1: I X is good long term for the market. UM.
Speaker 1: So that gives us a lot of confidence. Well, I
Speaker 1: find myself in that same boat. I hope you guys
Speaker 1: become an exchange. UM. That would I think would be
Speaker 1: a net positive for markets. UM. Any other thoughts you
Speaker 1: want to leave us with, what's the next book You're
Speaker 1: gonna find yourself start? I hope, I hope none others. UM.
Speaker 1: You know, it's it's just been Uh. You know, I
Speaker 1: just feel very lucky. UM. And you know, I do
Speaker 1: feel like I get way too much credit. Uh as
Speaker 1: a team. You know, our team has done a lot. Uh.
Speaker 1: Ronan and John and Rob we talked about them. There's
Speaker 1: a lot of other people that have that have been
Speaker 1: behind this. I probably you know, again, I experienced a
Speaker 1: lot of the issues, um, but coming up with the
Speaker 1: solutions was was a lot of other people. I feel like,
Speaker 1: you know, the books kind of thrown me out in
Speaker 1: the into the front. Um. You know, it's definitely a
Speaker 1: role I'm willing to play. But you know, there's a
Speaker 1: lot of people that have made this happen so uh,
Speaker 1: you know it's I just feel lucky to be in
Speaker 1: this position. Well, thank you so much for being so
Speaker 1: generous with your time. We've been speaking with Brad Katsuyama.
Speaker 1: He is the co founder and co team leader of
Speaker 1: I e X. If you enjoy this podcast, be sure
Speaker 1: and look an inch higher or lower on iTunes and
Speaker 1: you could see the other fourty or so of these
Speaker 1: conversations we've had. Um, I want to thank uh Charles Vollmer,
Speaker 1: who is my producer slash engineer, and Michael Batnick, who's
Speaker 1: head of research with the firm. I'm Barry Ridhults. You've
Speaker 1: been listening to Masters in Business on Bloomberg Radio.