Latest / Masters in Business / IEX Group Brad Katsuyama: Masters of Business (Audio)

Transcript

IEX Group Brad Katsuyama: Masters of Business (Audio) · Masters in Business

0:03
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
0:08
Speaker 1: This week on the podcast, I'm thrilled to have Brad Katsuyama.
0:12
Speaker 1: He is the founder and chairman of I e x UH.
0:16
Speaker 1: He's the gentleman who was immortalized in Michael Lewis's book Flashboys,
0:21
Speaker 1: and he tells us the story of what it was
0:24
Speaker 1: like really to be the guy that Lewis went to
0:29
Speaker 1: just for some background information on what high frequency trading was,
0:34
Speaker 1: how things were getting driven, about what's what's happening, etcetera, etcetera.
0:39
Speaker 1: And it's really a fascinating, um fascinating tale. You know,
0:44
Speaker 1: stop and think about what it's like to leave a
0:46
Speaker 1: million and a half dollar a year job in order
0:50
Speaker 1: to take up something that essentially was a cause. He
0:55
Speaker 1: started doing this because there were only a handful of
0:59
Speaker 1: people in the world Alds who knew what he knew.
1:02
Speaker 1: He figured out what was actually driving markets and market
1:08
Speaker 1: structure a little kookie and basically said, I have this knowledge,
1:13
Speaker 1: and I have an ethical obligation to use this knowledge
1:17
Speaker 1: for the betterment of markets and the broader economy. And
1:22
Speaker 1: you know, lots of other people had figured out the
1:26
Speaker 1: structural issues and some of the loopholes that were out
1:29
Speaker 1: there in in the world and in the markets, and
1:35
Speaker 1: they were taking advantage of it by running al go
1:38
Speaker 1: driven high frequency shops and quite bluntly making hundreds of
1:42
Speaker 1: millions of dollars a year for themselves. But but Brad,
1:46
Speaker 1: who is as as nice and down to earth the
1:49
Speaker 1: person as you would ever want to meet. In the book,
1:52
Speaker 1: he's described as RBC nice. He works at Royal Bank
1:55
Speaker 1: of Canada, and as any American will tell you, Canadians
1:58
Speaker 1: are just terribly nice people. They're delightful and Brad is
2:02
Speaker 1: you know, part for the course. He's just a real person,
2:07
Speaker 1: very very open, very transparent, totally ethical. I couldn't imagine
2:12
Speaker 1: a better person to set up a market based response
2:18
Speaker 1: to some of the abuses and problems that we've seen
2:21
Speaker 1: in high frequency trading. He's absolutely um just a fascinating,
2:26
Speaker 1: fascinating guy. The story he tells is just amazing how
2:30
Speaker 1: he figured all these things out, Uh, just all around terrific.
2:34
Speaker 1: So I'm gonna tell you, Uh, sit back, relax and
2:37
Speaker 1: get ready for a fascinating story. Our interview with Brad
2:41
Speaker 1: Katsuyama of i X. This is Masters in Business with
2:49
Speaker 1: Barry Ridholts on Bloomberg Radio. My guest today is Brad Katsuyama.
2:55
Speaker 1: You may be familiar with the name if you either
2:58
Speaker 1: a Michael Lewis's best selling book Flashboys, all about how
3:04
Speaker 1: the market structure has changed in light of high frequency trading,
3:08
Speaker 1: or if you saw an infamous segment of sixty Minutes
3:13
Speaker 1: where actually it was Michael Lewis who said the markets
3:16
Speaker 1: were rigged and that caused all sorts of mayhem over
3:19
Speaker 1: the next couple of days and weeks. Brad, Welcome to Bloomberg.
3:24
Speaker 1: So little background on your history. You grew up in
3:28
Speaker 1: Ontario and are a graduate of Wilfred Laurier University in Waterloo.
3:33
Speaker 1: Is that correct? Came to New York City as an
3:36
Speaker 1: intern at the Royal Bank of Canada in two thousand two.
3:40
Speaker 1: I was here. I came as a full time employee,
3:42
Speaker 1: but I interned in Toronto, but I moved here. I
3:45
Speaker 1: moved here in two thousand two. Yes, and eventually you
3:47
Speaker 1: became the global head of Electronics Sales and Trading, which
3:50
Speaker 1: is quite a responsible position. So being a kid from
3:55
Speaker 1: a relatively I don't want to say small town, because
3:59
Speaker 1: some Ontario is in such a small region, but Waterloo
4:03
Speaker 1: certainly is a relatively small town, as is Markham. What
4:07
Speaker 1: was it like coming to New York City and and
4:09
Speaker 1: landing on Wall Street? Yeah, so, I mean it was
4:12
Speaker 1: it was a bit of a culture shock, I'll be honest. Um.
4:15
Speaker 1: I remember driving through the first time through New York
4:18
Speaker 1: and looking at all of the buildings and it seemed
4:21
Speaker 1: like every single building was as tall as the tallest
4:23
Speaker 1: building in Toronto. It was. It was. It was, you know,
4:25
Speaker 1: outside of the Sea In Tower that you know, the
4:27
Speaker 1: downtown core of Toronto was very pretty small. Um. New
4:30
Speaker 1: York just seemed massive on every scale. Uh so it
4:33
Speaker 1: was pretty overwhelming. Um, but you know, again adjusted and
4:37
Speaker 1: I got used to it. And when you start working
4:39
Speaker 1: on Wall Street, what did you how did you find?
4:41
Speaker 1: You know, they talked about people from Canada being nice,
4:45
Speaker 1: the expression about Royal Bank Accounada is there there RBC nice? Yeah?
4:48
Speaker 1: How was Wall Street as an adjustment? Um? You know,
4:51
Speaker 1: I think I got really lucky you know when I
4:53
Speaker 1: when I worked at RBC in Toronto, in Canada, you know,
4:56
Speaker 1: they they're the number one bank there. Um. And when
4:58
Speaker 1: I moved down, when I got offered a job to
5:00
Speaker 1: come to New York. RBC had just bought a bank,
5:02
Speaker 1: Dane Rousher, and they were ranked twenty three in the
5:05
Speaker 1: United States. I jumped at it just simply because you know,
5:08
Speaker 1: there's there's nowhere to go but up, and I felt like,
5:11
Speaker 1: you know, it was kind of a it was a
5:12
Speaker 1: very underdog mentality. UM. My mentor in the business was
5:16
Speaker 1: this guy Bobby Grubert, who was my boss for eleven
5:19
Speaker 1: and a half years in in in UH in the US. UH.
5:22
Speaker 1: And he was just a great role model, just kind
5:23
Speaker 1: of kept me on the straight and arrow. Was a
5:25
Speaker 1: twenty three year old kid, and I could have gone
5:26
Speaker 1: a lot of different ways probably, and uh, you know,
5:28
Speaker 1: I owe a lot to him to kind of keep
5:30
Speaker 1: me on the on the right path. So so you
5:32
Speaker 1: began in the early two thousand's, and let's let's go
5:36
Speaker 1: back a decade and change what was trading like in
5:39
Speaker 1: those days? What was the execution like back? Sure? I mean,
5:42
Speaker 1: my you know, it was funny because I went from
5:43
Speaker 1: trading in Toronto, UM, where the market was entirely electronic.
5:48
Speaker 1: My first job in the US was I was trading
5:50
Speaker 1: listed energy stocks, which meant I was dealing with the
5:52
Speaker 1: New York Stock exchange floor, so it was calling an
5:54
Speaker 1: order down to a floor broker. UM. And I remember
5:57
Speaker 1: being informed of the three minute rule, which meant if
5:59
Speaker 1: I give an order the floor and I saw print
6:01
Speaker 1: hit the tape, I saw trade hit the tape. If
6:03
Speaker 1: it happened within three minutes, it might not be my trade.
6:06
Speaker 1: And I was completely mind boggling to me. Um, I said, well,
6:09
Speaker 1: why does the guy just get out to the post faster? Um.
6:11
Speaker 1: You know, I was the first trader at RBC to
6:13
Speaker 1: trade both listed and over the counterstocks. I was trading technology.
6:17
Speaker 1: They they promoted me to run technology UM Trading, and
6:20
Speaker 1: I traded NASDAC and I traded New York. And I
6:22
Speaker 1: could never understand why anyone would want to trade with
6:25
Speaker 1: the floor, because it was so much more efficient to
6:27
Speaker 1: trade electronically over the NASDACK terminal. Um, what you wish for? Well,
6:33
Speaker 1: you know, it's funny because it's it's always um. You know,
6:36
Speaker 1: electronic trading has always been a more efficient way to
6:40
Speaker 1: trade than to trade through middlemen per se. UM. I
6:43
Speaker 1: think the evolution of that technology has gotten a little
6:45
Speaker 1: bit perverse. But I was always of the inclination that,
6:48
Speaker 1: you know, technology was was a good thing for the markets.
6:51
Speaker 1: It has been so so. Now let's fast forward to
6:53
Speaker 1: around two thousand seven, when you notice the market was
6:58
Speaker 1: acting a little squirrelly, that every time you went to
7:01
Speaker 1: buy a stock, the market would run away from you.
7:03
Speaker 1: Just describe that early sensation of hey, something's a little
7:07
Speaker 1: funky over here. I mean, it was incredibly frustrating. UM
7:11
Speaker 1: two thousand and six. If I saw a hundred thousand
7:13
Speaker 1: shares of Intel on the offer, I'd buy. I'd buy
7:16
Speaker 1: a hundred thousand shares of Intel if I wanted to,
7:18
Speaker 1: and U two thousand seven, I could buy eighty thousand
7:21
Speaker 1: and two thousand and eight, I could buy seventy thousand
7:24
Speaker 1: and two thousand and nine, I could buy fifty two thousand.
7:27
Speaker 1: The number kept going down, and when I would try
7:29
Speaker 1: to buy the next level of stock two, I would
7:33
Speaker 1: get a smaller percentage than I got the time before. UM.
7:36
Speaker 1: It drove me crazy. And the funny part is I
7:38
Speaker 1: would I would call my tech team and I'd say, hey, guys,
7:40
Speaker 1: what is happening like? Watch the screens, look at what
7:42
Speaker 1: I'm looking at. UM. The most common answer I would
7:45
Speaker 1: get is it's a coincidence. You know, many people want
7:48
Speaker 1: to buy Intel at the same time you do, and
7:50
Speaker 1: I'd say, Okay, I'll prove you wrong. I'll cant to
7:52
Speaker 1: five and nothing's gonna happen until I press this button.
7:55
Speaker 1: And I can't to three or five or seven whatever.
7:57
Speaker 1: Nothing would happen until I press the button. I'd blow
7:59
Speaker 1: the stock and um, meaning the offers would just all disappear,
8:02
Speaker 1: they would run away. I would get a fraction, most
8:05
Speaker 1: of it would disappear, some of it would trade, and
8:06
Speaker 1: then I would be forced with two choices. Right, you
8:09
Speaker 1: either wait and the stock might never come back to
8:11
Speaker 1: your price, or you have to chase it higher. And
8:14
Speaker 1: every time I chased, I got a smaller fraction and
8:16
Speaker 1: I'd be left with the same decision the next time. So, UM,
8:19
Speaker 1: it became incredibly frustrating. And this at the time in
8:21
Speaker 1: O seven, I was running all of you as trading
8:23
Speaker 1: for RBC. UM. It was happening to every single person
8:26
Speaker 1: on my team. UM, so that that kind of was
8:29
Speaker 1: It was obviously a very frustrating time, and it was
8:31
Speaker 1: the financial crisis. So not only are we dealing with
8:34
Speaker 1: this market, that's kind of an illusion of what we
8:36
Speaker 1: thought the market was. Um. The world was melting down
8:38
Speaker 1: around us. It was. It was a pretty it was
8:40
Speaker 1: pretty unbelievable time. Actually, I'm Barry rid Hults. You're listening
8:43
Speaker 1: to Masters in Business on Bloomberg Radio today. My guest
8:47
Speaker 1: is Brad Katsuyama, made famous in the book by Michael
8:50
Speaker 1: Lewis called Flashboys. He is the founder and CEO of
8:55
Speaker 1: i e X, essentially an exchange, you know, like the
8:58
Speaker 1: New York Stocktor Exchange or NAZDAK. You are a full
9:01
Speaker 1: on exchange at this point. We're called or classified an
9:06
Speaker 1: alternative trading system. Hopefully will be an official exchange by
9:10
Speaker 1: the end of this year. Okay, that'd be great. And
9:13
Speaker 1: so you were made famous in the book Flash Boys
9:16
Speaker 1: because you were one of the people who had noticed
9:19
Speaker 1: that the market had gotten a little funky and weird
9:22
Speaker 1: and you couldn't execute orders. You're firm authorized you to
9:27
Speaker 1: lose up to ten thousand dollars a day experimenting. Tell
9:31
Speaker 1: us about that, well, I think once we started to
9:34
Speaker 1: learn more about the exchanges and how they were set
9:37
Speaker 1: up uh and the things that they were selling to
9:39
Speaker 1: certain participants high high speed traders, we started to realize
9:43
Speaker 1: that the exchanges had a lot to do with the
9:45
Speaker 1: experience that we were having. UH. In order to test
9:48
Speaker 1: these theories out, we had to set up a series
9:50
Speaker 1: of experiments interacting with different exchanges in different ways. Um
9:54
Speaker 1: And when I brought this proposal to RBC, I think
9:57
Speaker 1: it was very fortunate that I had run risk trading before,
10:00
Speaker 1: because they knew I could be responsible with capital. But
10:02
Speaker 1: I said, we need data points. We're running an experiment,
10:05
Speaker 1: and we can't use client orders to do it, which
10:08
Speaker 1: means that we're gonna have to spend a bit of
10:09
Speaker 1: our own money. But I'm not. It's not going to
10:11
Speaker 1: get egregious here. You know, my limit is ten thousand,
10:14
Speaker 1: and that that limit might sound large, but in my
10:17
Speaker 1: prior job, we were managing millions of dollars of capital,
10:20
Speaker 1: so it wasn't really a lot between friends. Well, the
10:24
Speaker 1: interesting part is we didn't actually end up losing hardly
10:26
Speaker 1: any money. Because I would I would we buy stock
10:29
Speaker 1: on the offer, it would disappear, and you know, stock
10:31
Speaker 1: would move higher, and then I turned around and sell
10:33
Speaker 1: on the bid and the stock would take again. So
10:35
Speaker 1: you're actually buying and selling that kind of the same price,
10:37
Speaker 1: and you get to data points for almost nothing, right,
10:40
Speaker 1: So so we did that we traded hundreds of millions
10:43
Speaker 1: of shares, testing out various series. Yeah, absolutely, we and
10:45
Speaker 1: it really it almost ended up a wash. So the
10:48
Speaker 1: part of the book that was fascinating, and it was
10:50
Speaker 1: also excerpted trying to remember where I saw the Wolves
10:53
Speaker 1: of wool Street New York Times magazine was it was
10:56
Speaker 1: The Times magazine. Was the description. You hire a guy
10:59
Speaker 1: you know who's about this fantastic telecom backgrounds, and he
11:03
Speaker 1: explains how the physical distances from from Wall Street out
11:09
Speaker 1: the Holland Tunnel that BATS was located, the exchange. BATS
11:13
Speaker 1: is located closest to the Holland Tunnel, and literally you
11:17
Speaker 1: could track the cell line I'm sorry, the fiber lines
11:20
Speaker 1: out the tunnel and to each of these exchanges, and
11:24
Speaker 1: that time difference is what affected execution. Yeah. We we
11:27
Speaker 1: had a lot of theories, and uh, Ronan Ryan is
11:30
Speaker 1: the guy you're describing who's a partner of mine at
11:32
Speaker 1: I X and and Ronan Ryan, you know, kind of
11:36
Speaker 1: just by a stroke another stroke of luck, we ended
11:39
Speaker 1: up meeting and he explained a lot of the missing pieces.
11:43
Speaker 1: He turned it into physical geography, he turned it into
11:46
Speaker 1: architecture and networking and the things that he had built
11:49
Speaker 1: for high frequency trading clients at the different exchanges, and um,
11:53
Speaker 1: you know, everyone came to the you know, we hired
11:55
Speaker 1: a lot of people at RBC, and everyone came with
11:56
Speaker 1: a little bit of information. No one knew the whole picture.
12:00
Speaker 1: We kind of like put the jig saw together. Speaking
12:02
Speaker 1: of which you hire, you have a guy working for
12:04
Speaker 1: you called Puzz one the Microsoft Puzzle Solving Championship. That's right,
12:10
Speaker 1: it was a team event. Uh, and we hired Puzz
12:12
Speaker 1: and his nickname is because he won that championship, Puzz.
12:15
Speaker 1: And And now at i X we have three people
12:18
Speaker 1: that have won that same championship in different years. But uh,
12:21
Speaker 1: it's it seems to be a you know, it's probably
12:23
Speaker 1: a good recruiting ground for people. It's we found some
12:26
Speaker 1: very bright, uh you know, talented people from from that competition.
12:29
Speaker 1: So so you're not losing ten thousand a day, but
12:32
Speaker 1: you're experimenting. You're figuring out physically where all the exchanges were.
12:37
Speaker 1: And one of the things you discovered that when you
12:39
Speaker 1: routed orders to specific exchanges that were very different results.
12:45
Speaker 1: That's probably being most notable. The first one out of
12:48
Speaker 1: the Holland Tunnel and and for people who are listening
12:50
Speaker 1: who may not be familiar with New York City, you
12:53
Speaker 1: could get out of Midtown to New Jersey and when
12:57
Speaker 1: you literally see daylight, the BATS building is not that
13:01
Speaker 1: far from the opening of the tunnel on the Jersey side.
13:04
Speaker 1: That's right. It was physically the closest to RBC, and
13:07
Speaker 1: hence we would always arrive there first. And the interesting
13:09
Speaker 1: thing about Bats, meaning the orders would physically arrive. And
13:13
Speaker 1: we're talking about milliseconds between orders. Milliseconds, yes, um, and
13:18
Speaker 1: actually we we were looking at the world in milliseconds
13:21
Speaker 1: and Ronan was looking at the world in microseconds. Uh.
13:24
Speaker 1: And it just happened that Ronan could get an order
13:26
Speaker 1: from BATS to various other exchanges. Um, and about four
13:31
Speaker 1: d seventy six micro seconds at the time is what
13:34
Speaker 1: is what he draw it drew out and said, here's
13:35
Speaker 1: the inn exchange latency between these buildings and RBC's was
13:39
Speaker 1: about four or five times greater than that, which meant
13:42
Speaker 1: that he could pick up a signal at BATS and
13:43
Speaker 1: race us. Now he didn't know that, you know, we
13:46
Speaker 1: had a hundred thousand shares to buy. But what he
13:48
Speaker 1: would know is that the entire offering at BATS just disappeared,
13:52
Speaker 1: which gives me a very high statistical probability that this
13:55
Speaker 1: big buyer is going to try to buy stock in
13:57
Speaker 1: other exchanges. So you're out there running to cancel stock,
14:00
Speaker 1: or you're already out there to buy stock to turn around,
14:02
Speaker 1: and seldom me at higher prices. So so he was
14:04
Speaker 1: the guy doing the telecom side of Yeah, he didn't know.
14:06
Speaker 1: He Ronan did not know a thing about trading nothing,
14:10
Speaker 1: which was amazing, right because you know, he came at
14:12
Speaker 1: this with a huge amount of knowledge, but he didn't
14:14
Speaker 1: understand the value of that knowledge. Um and it does
14:18
Speaker 1: now he does absolutely. You know, Ronan is probably one
14:21
Speaker 1: of the greatest assets anyone could have found. I feel
14:24
Speaker 1: very lucky that I that I was the one that
14:26
Speaker 1: found That's amazing. Now, when you used to send, and
14:28
Speaker 1: when you say you arrived first, or you arrived at
14:31
Speaker 1: BATS first, your order electronically would arrive that message through
14:36
Speaker 1: the fiber in the ground would actually just arrive there first.
14:39
Speaker 1: So when you would route and order just to BATS,
14:41
Speaker 1: you would get filled. But if we would route in order,
14:45
Speaker 1: let's say to BATS in New York Stock Exchange, concurrently
14:49
Speaker 1: we get filled on BATS and we would miss it
14:51
Speaker 1: on New York, which is amazing. Yeah, So the very
14:54
Speaker 1: first sequence of experiments was going to each exchange in isolation,
14:58
Speaker 1: and what you would find is you would always get
15:00
Speaker 1: a percent of what was offered if you only went
15:03
Speaker 1: to one exchange. And now they may be offered at
15:05
Speaker 1: different prices, so you're not exactly going to the best price.
15:08
Speaker 1: Now it's all it's always at the same price. It is,
15:10
Speaker 1: but if you pull up and offer in Intel, you'll
15:12
Speaker 1: see it at multiple different places, or if you pull
15:13
Speaker 1: up an offer in forward stock, you'll see a multiple places.
15:16
Speaker 1: But we said, okay, we'll just pick one exchange, one amount.
15:18
Speaker 1: We'd always get a hundred percent. But as you started
15:20
Speaker 1: to add exchanges to exchanges three, four or five at
15:23
Speaker 1: the same time, the PHIL rates started to drop, but
15:26
Speaker 1: you were always getting a percent at bats you were
15:29
Speaker 1: completely missing stock in other exchanges. So if if traders
15:32
Speaker 1: want to defeat high frequency trading and they only and
15:35
Speaker 1: they only routed orders to a single exchange, would they
15:39
Speaker 1: get filled that way? Well no, because not one exchange
15:42
Speaker 1: typically can satisfy your entire order. So when I pulled
15:46
Speaker 1: up my screen and I saw a hundred thousand shares
15:48
Speaker 1: of Intel, offered. It was typically spread across multiple exchanges.
15:52
Speaker 1: Ten right, Um, if I only went to one, I'd
15:55
Speaker 1: probably get you know, five thousand or whatever was offered
15:58
Speaker 1: at that one. But you want to get what you saw.
16:01
Speaker 1: And and the interesting part it was in two thousands
16:03
Speaker 1: and six you could actually buy or sell what you
16:04
Speaker 1: saw on your screens. In two thousands seven that wasn't
16:06
Speaker 1: the case. I'm Barry rit Helps. You're listening to Masters
16:09
Speaker 1: in Business on Bloomberg Radio. My guest today is Brad Katsuyama.
16:13
Speaker 1: He is the founder of I e X, which is
16:16
Speaker 1: a alternative trading system and soon to be in exchange hopefully,
16:20
Speaker 1: and the star of Michael Lewis's book Flashboys. Lewis was
16:24
Speaker 1: looking for research on an article for Vanity Fair and
16:29
Speaker 1: how did he end up finding you? So he he
16:31
Speaker 1: talked to a couple of people, a couple of characters
16:33
Speaker 1: in the Big Short who just happened to be clients
16:37
Speaker 1: of mind and Um. When he asked them, you know,
16:40
Speaker 1: I'm looking to do research on high freakncy trading. Who
16:42
Speaker 1: should I talk to? They pointed him to to me, UM,
16:45
Speaker 1: a lot of people same name a couple of times.
16:48
Speaker 1: Eventually get some curious Yeah, I get you know, it's
16:51
Speaker 1: it's the most interesting part about it was really it
16:54
Speaker 1: was just about giving him background. He didn't ask a
16:56
Speaker 1: ton of questions about what we were doing, in particular
16:59
Speaker 1: I X. But when he came to New York, he
17:02
Speaker 1: has to drop by our office and he walked in
17:04
Speaker 1: um to meet with Ronan and I and uh, there
17:07
Speaker 1: was twelve I think twelve or fourteen. I can't remember
17:10
Speaker 1: how many at the time, maybe twelve or fourteen people.
17:12
Speaker 1: We were in a two hundred square foot office with
17:14
Speaker 1: no windows. It was it was it looked it must
17:16
Speaker 1: have looked ridiculous to him. Absolutely closet. That's right. So
17:21
Speaker 1: we're there and all of a sudden, I can see
17:23
Speaker 1: the wheels turning his head is what are you guys
17:25
Speaker 1: doing here? And and then and then at that point
17:27
Speaker 1: kind of it went to I got to write an
17:29
Speaker 1: article about I X two. Maybe I'll take these two
17:32
Speaker 1: articles and make him in a short book. And by
17:34
Speaker 1: the end he had done a lot of research, he
17:36
Speaker 1: had talked to a lot of people, and he came
17:37
Speaker 1: back and said, this is gonna be explosive. And to
17:42
Speaker 1: say the least, it was so speaking of explosive. You
17:45
Speaker 1: guys were on uh an episode of sixty Minutes where
17:48
Speaker 1: Michael Lewis famously said the markets are rigged and that
17:52
Speaker 1: caused a huge explosion. You know the next days and
17:55
Speaker 1: weeks it's resonated to this day. What was the sixty
17:59
Speaker 1: Minutes experienced? Like? First, how tell us? What what was
18:02
Speaker 1: that it? Like? I mean, it's it's kind of you know,
18:05
Speaker 1: it was the first time I've ever been on television. Um,
18:09
Speaker 1: it's kind of amazing. Uh, you know, to be a
18:11
Speaker 1: part of that, and you know, it was nerve racking
18:13
Speaker 1: because we got we interviewed for hours, and we knew
18:15
Speaker 1: the segment was twelve and a half minutes, so you know,
18:18
Speaker 1: it could go a variety of different ways. But when
18:20
Speaker 1: one funny thing is that, um, we were the first
18:23
Speaker 1: segment of three on sixty Minutes. By the end of
18:25
Speaker 1: the hour, I had more linked in requests than I
18:28
Speaker 1: had connections. Yeah, it was it was pretty amazing. I
18:30
Speaker 1: just said, I turned my wife and I said, holy caah,
18:33
Speaker 1: this is this is real. Right, that's astonishing. What what
18:36
Speaker 1: was the fallout over the next couple of days and weeks?
18:38
Speaker 1: I mean, I think you know, again, it's it's people
18:41
Speaker 1: were reading the book at that because the book just
18:43
Speaker 1: came out the next day. So it was just phenomenally well,
18:46
Speaker 1: it exploded, It did well. Um, like there was just
18:50
Speaker 1: there was a huge amount. It was it was it
18:52
Speaker 1: was crazy. Our phone was ringing off the hook. Uh,
18:55
Speaker 1: tens of thousands of people reached out to us, and um,
18:58
Speaker 1: you know in a positive way. You know, the industry
19:00
Speaker 1: was upset. Um and uh you know that was to
19:03
Speaker 1: be expected, but again it was for all. There were
19:08
Speaker 1: so many great things that happened as a result of that.
19:10
Speaker 1: It's just you know that that's we knew that there
19:13
Speaker 1: was gonna be a little bit of that. Um. You
19:15
Speaker 1: know again, when you talk about things people don't want
19:17
Speaker 1: you to talk about, that's kind of the fallout. So
19:20
Speaker 1: now let's do a follow up to that. Subsequently, on CNBC,
19:24
Speaker 1: you're on with the head of the Bats Exchange and
19:29
Speaker 1: Michael Lewis and a few other people, and that exchange
19:33
Speaker 1: turns surreal. He starts saying stuff that turns out to
19:37
Speaker 1: be not true. He challenges you. You were almost you know,
19:41
Speaker 1: I know you don't want to say this personally, but
19:44
Speaker 1: it looked like you were holding back because you don't
19:46
Speaker 1: want to beat down this poor guy who's only the
19:49
Speaker 1: president of of the biggest exchange at the time. What
19:53
Speaker 1: was that about? That? Uh? That was that was an
19:57
Speaker 1: interesting experience. That was my first time on live to levision.
20:00
Speaker 1: I've never actually been on live TV. And you look
20:02
Speaker 1: like a pro. You were just so smooth and in
20:05
Speaker 1: the middle of it. Um. I just remember saying to myself, like,
20:08
Speaker 1: is this is this actually happening? It's just it was,
20:11
Speaker 1: it was, it was. It was kind of crazy. What
20:13
Speaker 1: what stood out was you turned him and said you
20:15
Speaker 1: really want to do this, Let's do this. That That
20:18
Speaker 1: was the quote. It's like, I'm giving you an out
20:20
Speaker 1: and you're not taking it. So for those people who
20:23
Speaker 1: may not have seen this exchange, he made a number
20:26
Speaker 1: of statements that turned out to be patently false. The
20:29
Speaker 1: New York State Attorney General General Eric Schneiderman forced Bats
20:35
Speaker 1: to issue a I didn't want to call it a clarification,
20:38
Speaker 1: it was a retraction and basically said we were wrong.
20:43
Speaker 1: I was referring to what we're gonna do in the
20:45
Speaker 1: future or some nonsense like that, And a few months
20:49
Speaker 1: later he's out of a job. Any correlation between that
20:53
Speaker 1: incident and it wasn't like he announced his retirement. He
20:57
Speaker 1: was gone and they announced he was no longer with them.
20:59
Speaker 1: It's hard to say, Um, you know, I think what
21:02
Speaker 1: was important about that is that, um that the Attorney
21:05
Speaker 1: General made him correct his statements. And what you have
21:08
Speaker 1: a lot of times is you have what what we're
21:11
Speaker 1: arguing about is completely unknown to the to the general public.
21:15
Speaker 1: Anyone watching that. Very few people, i'm sure, understood even
21:17
Speaker 1: what we were fighting about. And we're fighting about a
21:20
Speaker 1: very important part of the market, meaning there are multiple
21:23
Speaker 1: ways market datas distributed. And essentially, are you using a
21:27
Speaker 1: slow feed to price trades for all of your participants,
21:31
Speaker 1: knowing that some people who trade on your exchange have
21:33
Speaker 1: a very fast feed and that that that was the argument,
21:35
Speaker 1: and that's what yes, And I think without that level
21:39
Speaker 1: of accountability, no one would have known who was saying what.
21:41
Speaker 1: It just would have looked like, you know, a bunch
21:43
Speaker 1: of crazy people yelling at on television. Um. So, I
21:45
Speaker 1: think holding people accountable is extremely important. It's the way
21:49
Speaker 1: to make the markets better. Everyone says that they want
21:51
Speaker 1: the markets to improve, gonna start holding people accountable. That's
21:54
Speaker 1: the way to make them mark. If there's if there's
21:56
Speaker 1: no recourse for saying whatever you want, UM, you know,
21:59
Speaker 1: at some point the more it's just not going to improve.
22:01
Speaker 1: And I think that, you know, that was an important step.
22:03
Speaker 1: At least somebody took charge there and said, you know,
22:06
Speaker 1: you have to own up to what you said. I'm
22:08
Speaker 1: Barry Ridhults. You're listening to Masters and Business on Bloomberg Radio.
22:12
Speaker 1: My guest today Brad Katsuyama. He was featured in Michael
22:16
Speaker 1: Lewis's book Flash Boys, and he is the co founder
22:19
Speaker 1: of the I e x alternative training platform, hopefully soon
22:24
Speaker 1: to be a major exchange. Let's talk a little bit
22:27
Speaker 1: about I e x um dark pools, something that was
22:31
Speaker 1: commonly used by big firms. Explain exactly what dark pools are. So.
22:36
Speaker 1: Dark pool is kind of the the you know, the
22:39
Speaker 1: street lingo for alternative trading system. And really what it
22:42
Speaker 1: means is that, um, they're slightly less regulated um than exchanges.
22:46
Speaker 1: And what they can't do is they can't publish bids
22:49
Speaker 1: and offers, which means everything that happens in them is
22:51
Speaker 1: essentially dark um. But but you know, they're good guys.
22:56
Speaker 1: They're not gonna hurt anybody. They're not gonna scalp a
22:59
Speaker 1: quarter from everybody who comes in there and not tell
23:01
Speaker 1: them about it, right. I think, you know, the interesting
23:03
Speaker 1: thing about dark pools is they were started with good intentions. Um,
23:06
Speaker 1: you know, if a bank has a buyer and a seller,
23:09
Speaker 1: they shouldn't have to go on the exchange and trade
23:10
Speaker 1: that and pay the exchange to do so. They should
23:13
Speaker 1: be able to do that internally. And um, they ended up.
23:15
Speaker 1: I think the competition was so fierce, many of them
23:18
Speaker 1: ended up morphing into something that, um, that was not intended.
23:22
Speaker 1: And uh, you know, over the course of you know,
23:24
Speaker 1: the past decade. Um, that's kind of what's happened. And
23:27
Speaker 1: I think we have forty over forty dark pools in
23:31
Speaker 1: the United States. That number probably comes down over the
23:33
Speaker 1: next couple of years. So I began my career as
23:35
Speaker 1: a trader, and the question was always, hey, do you
23:38
Speaker 1: put the order out on instantet? I know, you know,
23:41
Speaker 1: uh salar nuk and is trading. Those guys started an
23:46
Speaker 1: instantt or at least we're there for a long time
23:48
Speaker 1: before they decided to launch their own own farm. Also
23:51
Speaker 1: critics of of high frequency trading, So the thought of
23:56
Speaker 1: these dark pools where nobody really knows what's going on
23:59
Speaker 1: and which just relying on brokerage firms to uh, you know,
24:03
Speaker 1: do the right thing and be on their best behavior
24:05
Speaker 1: wasn't very satisfying to you as someone trying to get
24:08
Speaker 1: orders executed. Well, I think, you know, there there are
24:11
Speaker 1: some dark pools I think that serve a very good
24:13
Speaker 1: purpose um and there are others that I think have
24:16
Speaker 1: sacrificed quality for trading more volume and um you know
24:21
Speaker 1: it's there. There's there's a direct correlation between the quality
24:24
Speaker 1: of trades and the and the frequency of trades. Um
24:27
Speaker 1: So I think that again it's you know, you look
24:29
Speaker 1: back to the days of instant net um. You know
24:32
Speaker 1: there was a purpose. If if someone has a million
24:34
Speaker 1: shares to buy, you can't just force them to put
24:36
Speaker 1: that all out on on the exchange and display it.
24:39
Speaker 1: It's gonna have a very adverse impact on the ability
24:41
Speaker 1: to you know, to complete that order. Um So, there
24:44
Speaker 1: is a home for large orders in dark pools. I
24:47
Speaker 1: do feel like, you know, we need more disclosure, We
24:50
Speaker 1: need much more transparency and how dark pools operate um
24:53
Speaker 1: And I think as we get more transparency and disclosure,
24:55
Speaker 1: you're gonna see a lot of dark pools you know,
24:57
Speaker 1: shut down um, but the ones that are left, you know,
25:00
Speaker 1: will serve a purpose because there there definitely is. A
25:03
Speaker 1: stock exchange can't solve every problem that every investor has
25:07
Speaker 1: because a lot of times their orders are too big
25:09
Speaker 1: for the markets themselves. So now let's talk a little
25:12
Speaker 1: bit about I e X. And in the process of
25:15
Speaker 1: setting up or trying to execute orders, you came up
25:19
Speaker 1: with a few insights which had to do with, hey,
25:22
Speaker 1: if we can find a way to get the orders
25:25
Speaker 1: to arrive at all the exchanges at the same time,
25:29
Speaker 1: we're not going to be scalped or picked off by
25:31
Speaker 1: high frequency traders. Uh. That was originally the Thor product
25:34
Speaker 1: that you have developed at RBC. That was the Thor
25:37
Speaker 1: router at RBC. Was was really to say, if there
25:39
Speaker 1: is this geographical disparity, meaning you know, our order arrives
25:44
Speaker 1: at the exchange closest to us first, why not you know,
25:47
Speaker 1: stagger when you send out the orders to try to
25:49
Speaker 1: arrive at all places at the same time. And it
25:51
Speaker 1: was it's a lot harder than it sounds because latency
25:53
Speaker 1: changes throughout the day, and it's milliseconds we're describing now.
25:57
Speaker 1: Now we get down into microseconds, so you have to
25:59
Speaker 1: be within a few microsoft few millions of a second
26:02
Speaker 1: have the order arrived at a dozen exchanges. Our goal
26:05
Speaker 1: was to have it done under four hundred micro seconds,
26:09
Speaker 1: and we got it down to about two d and
26:11
Speaker 1: ninety microseconds. But when we did that, our phil rate
26:14
Speaker 1: went to a d um. That product could actually now
26:17
Speaker 1: buy or sell what people saw on their screens. Uh.
26:20
Speaker 1: And it was the easiest product to sell because you
26:22
Speaker 1: were just walking to a client's office and mutual fund
26:24
Speaker 1: or hedge fund and say, if you see a million
26:27
Speaker 1: Bank of America on the offer and you try to
26:28
Speaker 1: buy that, what percentage do you get And they're gonna
26:30
Speaker 1: say anything from I'll get you a hundred percent. They'll say,
26:35
Speaker 1: give me the product. I mean, it was it was
26:37
Speaker 1: really that. It was pretty simple. The challenge was this
26:39
Speaker 1: is that our our our revenues took off and then
26:42
Speaker 1: they started the flatline um And one client put it
26:45
Speaker 1: put it the best when he said to me, Brad,
26:48
Speaker 1: we love what you've done, we love your team, we
26:50
Speaker 1: love RBC. You've only solved three percent of my problem
26:54
Speaker 1: because that's the amount of commissions, that's how much I
26:56
Speaker 1: can trade with RBC, I have to trade with all
26:59
Speaker 1: these other banks for for legitimate reasons banking, etcetera. So UM,
27:05
Speaker 1: that was kind of the moment when we decided to
27:08
Speaker 1: leave OURBC and start i X, because we realized, number one,
27:11
Speaker 1: no broker can solve this problem. Even the biggest broker.
27:14
Speaker 1: If I'm Goldman Sachs twent of market share, what does
27:17
Speaker 1: that mean? UM still leaves absolutely the way to solve
27:22
Speaker 1: this was to actually be a stock exchange, because the
27:24
Speaker 1: stock exchanges have enabled what's really happened. You know, I
27:27
Speaker 1: think that that in a way there was a responsibility
27:30
Speaker 1: by the exchanges to prevent some of what's happened, and
27:33
Speaker 1: they they've kind of enabled it. Were speaking with Brad Katsuyama,
27:37
Speaker 1: co founder of i e X, so let's talk a
27:39
Speaker 1: little bit about the shoe box. You came up with
27:42
Speaker 1: the insight that said, hey, everybody is racing to go
27:46
Speaker 1: faster and faster. What would happen if we forced everybody
27:50
Speaker 1: to slow down? Yes, and the original idea was, well,
27:52
Speaker 1: let's put our exchange in Omaha, ne Brasta and not
27:55
Speaker 1: let anybody co locate their servers there. But then UM,
27:59
Speaker 1: one of the guys came up with a suggestion you
28:02
Speaker 1: don't need physically miles, you just need a spooled fiber optics,
28:06
Speaker 1: which is essentially a shoe box with thirty eight miles
28:09
Speaker 1: worth the fiber optics of coil cable of coil cables,
28:13
Speaker 1: and and explain what the shoebox of coiled cable does
28:17
Speaker 1: to orders that come into And it's interesting because the
28:19
Speaker 1: guy who came up with the idea worked at a
28:21
Speaker 1: high freakin see trading firms previously, absolutely and worked at
28:25
Speaker 1: I And what they do is they use these spools
28:28
Speaker 1: to recreate geographical distances. So like in Europe when you're
28:32
Speaker 1: looking at the difference between different exchanges, it's all done
28:36
Speaker 1: in the same room. There's just different levels of spooling happening,
28:39
Speaker 1: and you can recreate quote, physical distance in a single
28:43
Speaker 1: room right as they're testing strategies. But so he came
28:45
Speaker 1: up with the idea. The premise behind the idea was
28:47
Speaker 1: that we never wanted anyone to be able to execute
28:50
Speaker 1: a trade on I X with advanced information. Right, Um,
28:55
Speaker 1: there's this. There There's two things exchange is really look
28:59
Speaker 1: to sell. One is they all very fast data. Right,
29:01
Speaker 1: so if you want high speed data, you gotta pay
29:03
Speaker 1: for it. Um, there's nothing inherently wrong with someone buying
29:07
Speaker 1: fast data because someone will always get it first, and
29:09
Speaker 1: someone will always get it last. Right. Um, someone in
29:12
Speaker 1: New Jersey will get it before someone in London, just
29:14
Speaker 1: basically based on the speed of light. Right, So the
29:17
Speaker 1: sylgical distances how long it takes that message to go
29:19
Speaker 1: to from from the exchange New Jersey or the exchange
29:22
Speaker 1: across the Atlanta absolutely right. So, so fast data is
29:26
Speaker 1: one thing, but the notion of co location place your
29:29
Speaker 1: server right next to the exchange matching engine, buy this
29:31
Speaker 1: high speed cable. What that allows is the person that's
29:34
Speaker 1: buying the fast information to trade hundreds and thousands of
29:38
Speaker 1: times before that information makes its way to the end
29:41
Speaker 1: the last person. Right. Um, we inherently see a problem
29:45
Speaker 1: with fairness in that. So we've done is we take
29:47
Speaker 1: very fast data into i X, we buy all the
29:49
Speaker 1: direct feeds. We've spent a lot of time, uh and
29:52
Speaker 1: money and effort and getting very fast data to i X,
29:55
Speaker 1: but we we realize will never be as fast as
29:58
Speaker 1: the fastest high frequency trader. The shoebox. Essentially, that coiled
30:02
Speaker 1: cable is to say that's that's our heads start. So
30:05
Speaker 1: if they get information that the stock has gone from
30:07
Speaker 1: ten to nine, and they want to come in here
30:09
Speaker 1: and sell stock at ten against a buyer who doesn't
30:12
Speaker 1: know that the stock has moved lower. Right, Um, they
30:14
Speaker 1: send that order to I X and it starts to
30:16
Speaker 1: go around the shoebox and it goes around the coil.
30:19
Speaker 1: And as it's going around the coil, I X will
30:21
Speaker 1: get the update the prices changed from ten to nine,
30:24
Speaker 1: and we will not let that trade take place at ten.
30:26
Speaker 1: That's the whole thing, right. The exchange's job is kind
30:28
Speaker 1: of like the referee in a way. Um, you have
30:31
Speaker 1: to understand what the conditions for fair trade is. It's
30:34
Speaker 1: both parties having equal relative information the prices nine, don't
30:39
Speaker 1: let the stock trade at ten. The issue is that
30:42
Speaker 1: high speed traders have faster information than the exchanges, which
30:46
Speaker 1: means that they always know about a price before the
30:48
Speaker 1: exchange actually understands this is the market wide price. And
30:50
Speaker 1: I think that's that's the shoe boxes about us slowing
30:54
Speaker 1: them down. How much does the shoebox actually slow h
30:58
Speaker 1: f T It's fifty micro seconds is the total. So
31:01
Speaker 1: the shoe box is located in a different data center.
31:03
Speaker 1: That data centers about five miles away, plus the shoebox
31:06
Speaker 1: adds another thirty eight miles. In total, it's three fifty
31:09
Speaker 1: micro seconds millions of a second, one one thousand of
31:13
Speaker 1: the blink of an eye. Um. But it's enough time
31:16
Speaker 1: for i X to always ensure that we know the
31:19
Speaker 1: most up to date market information so that we can
31:21
Speaker 1: fairly and consistently fairly priced trades. So their orders can't
31:25
Speaker 1: front front run anybody else's inform, they can't pick someone
31:29
Speaker 1: off who doesn't have information that they have, Yes, milliseconds
31:33
Speaker 1: ahead of them, milliseconds thousands of a second. That's too slow. Yeah,
31:40
Speaker 1: I mean it's we now measure everything in microseconds. That
31:43
Speaker 1: that's just absolutely astonishing. So there was a conversation the
31:48
Speaker 1: part of of the book where i X launches and flashboys,
31:52
Speaker 1: and you were concerned, Hey, you know, is anybody going
31:54
Speaker 1: to come to this party? We we just built this
31:57
Speaker 1: whole exchange on the theory that people want fair pricing.
32:01
Speaker 1: They didn't want to give anybody an advantage. And you
32:03
Speaker 1: had no idea if anybody was going to show up.
32:07
Speaker 1: What what was it like launching into that circumstance. It
32:10
Speaker 1: was nerve racking, to say the least, because because if
32:14
Speaker 1: there was this kind of chicken and egg problem, UM
32:17
Speaker 1: brokers would say, well, you have no volume, so why
32:21
Speaker 1: would I send you any volume? Meaning liquidity begets liquidity.
32:24
Speaker 1: If everyone takes that approach, you'll never trade a single
32:27
Speaker 1: share because everyone's waiting for someone else to trade a share,
32:29
Speaker 1: So you need someone to go first. And fifty million
32:33
Speaker 1: shares was your number that you thought, all right, if
32:36
Speaker 1: we get at least fifty million a day, maybe we
32:38
Speaker 1: can survive. Fifty million was kind of yeah, it was.
32:40
Speaker 1: It was a survival number UM, and we ended up
32:43
Speaker 1: doing five hundred and sixty thousand our first day. Uh.
32:47
Speaker 1: Some people were predicting we do shares the first day,
32:49
Speaker 1: so nobody, nobody had. The guy with the most experienced
32:52
Speaker 1: launching markets is the guy Matt Trudeau. He runs, he
32:54
Speaker 1: runs our products. He's launched seven different markets globally. His
32:57
Speaker 1: prediction the first day was share is UM and what
33:01
Speaker 1: are you doing now? Well, our record a few weeks
33:03
Speaker 1: ago was a two million shares. That's fantastic. So yeah,
33:06
Speaker 1: the the growth has been nice. Can you stick around
33:09
Speaker 1: a little bit. We'll throw the rest of this on
33:11
Speaker 1: the podcast portion so I've been speaking with Brad Katsuyama.
33:15
Speaker 1: He is the co founder of i e x Exchange.
33:18
Speaker 1: If you like this conversation, be sure and check out
33:21
Speaker 1: the rest of our chat that'll be on Bloomberg SoundCloud
33:25
Speaker 1: and of course Apple iTunes. Be sure and check out
33:28
Speaker 1: my daily column on Bloomberg View or follow me on
33:31
Speaker 1: Twitter at Rid Halts. I'm Barry Rihults. You're listening to
33:35
Speaker 1: Masters in Business on Bloomberg Radio. Welcome to the podcast
33:39
Speaker 1: portion of our show. Now I could uh throw my
33:43
Speaker 1: papers away and just kind of cut back. Rad. Thank
33:45
Speaker 1: you so much for doing this. You know, I've been
33:49
Speaker 1: somewhat of a critic of high frequency trading for a while. UM.
33:52
Speaker 1: One of the interesting things that Joe Saluzzi had said
33:56
Speaker 1: not too long ago was on a SCAE all of
34:00
Speaker 1: zero to ten, where where are we in the process
34:03
Speaker 1: getting better? And he said we're out of four, um,
34:07
Speaker 1: which was kind of surprising. You know, the pushback that
34:10
Speaker 1: I've gotten from people, um who I don't want to
34:14
Speaker 1: say or pro h f T but just aren't as critical,
34:19
Speaker 1: let's say. UM. Jack Brennan is chairman of Vanguard. He
34:24
Speaker 1: says h f T has lowered costs lowered expenses for
34:28
Speaker 1: them Titan spreads. Um cliff astness of a q R
34:31
Speaker 1: is a huge shop runs a hundred plus billion dollars.
34:35
Speaker 1: He thinks his comment was, Hey, listen, look, you guys
34:39
Speaker 1: complained that liquidly disappears when h f T guys unplug
34:42
Speaker 1: their machines. How is that any different than what specialists
34:45
Speaker 1: used to do. If they don't like the price, you
34:47
Speaker 1: don't get executed. They just dropped their bid further and further.
34:51
Speaker 1: How do you respond to those sort of comments? I
34:53
Speaker 1: think a lot of times, Um, you could interchange h
34:57
Speaker 1: f T with just technology. Technology has made things cheaper,
35:02
Speaker 1: has allowed spreads to titan. Decimalization helps press titans as well.
35:06
Speaker 1: But you know, I think a lot of the benefits
35:08
Speaker 1: people bestow on the general category of high frequency trading
35:12
Speaker 1: have more to do with technology than it does to
35:15
Speaker 1: do with anything. UM. The difficult part about the debate
35:19
Speaker 1: around high frequency trading, which is why it's still a
35:21
Speaker 1: debate five years later, we're still talking about a lot
35:23
Speaker 1: of the same things, UM, is that we haven't even
35:26
Speaker 1: talked about the flash crash, which there's still disagreements as
35:29
Speaker 1: to what the unsaying. Absolutely, you know, that the toughest
35:32
Speaker 1: part is is that not everyone who uses a computer
35:35
Speaker 1: to trade is doing harm to the market, and not
35:39
Speaker 1: everyone who's using a computer to trade is doing it
35:41
Speaker 1: for the benefit of society. Right. It's people are doing
35:44
Speaker 1: both and I feel like, you know, the one the
35:47
Speaker 1: one part about i X that that that I'm really
35:49
Speaker 1: proud of UM is the fact that we never made
35:52
Speaker 1: this about shutting out high frequency traders per se. We
35:56
Speaker 1: just built a market we felt could not be gamed,
35:59
Speaker 1: and as small segment of high freakingcy traders still showed up,
36:03
Speaker 1: and I give them a lot of credit for doing that. Right,
36:05
Speaker 1: So Virtuo is one and UM they're they're pretty huge,
36:09
Speaker 1: They're they're one of the biggest UM and I'll say
36:12
Speaker 1: they're they're they're a very good partner of ours at
36:14
Speaker 1: i X. But when we walk through the things that
36:16
Speaker 1: we're not giving them the thing, the advantages they won't
36:19
Speaker 1: have that they might have on other markets, they didn't
36:21
Speaker 1: care at all. They said this is good, this is
36:23
Speaker 1: good for the market, will be their day one. We
36:25
Speaker 1: like what you're doing, and we've both been supportive of
36:27
Speaker 1: each other. So it was never really about saying all
36:30
Speaker 1: computerized trading is bad. You know, my my when I
36:33
Speaker 1: when I traded New York listed tech on the on
36:37
Speaker 1: the Stock Exchange floor, and I also traded over the
36:40
Speaker 1: counter on the NASDAC terminal, I liked electronic trading a
36:43
Speaker 1: hundred times more UM master cheaper, better, easier, instantaneous, con
36:47
Speaker 1: more efficient. Absolutely, It's just it was. There was no
36:50
Speaker 1: question the way the market was gonna go. UM. The
36:53
Speaker 1: challenges that a lot of people are using technology UM
36:57
Speaker 1: to make money and scalp off of traditional every investors.
37:00
Speaker 1: The markets become at times more volatile, intra day volumes
37:04
Speaker 1: are inflated. It's just you know these it's it's sense.
37:08
Speaker 1: It can go both ways. The people that want to
37:11
Speaker 1: provide cover can use very generic statements about technology driven
37:14
Speaker 1: trading and call it h f T UM, and then
37:17
Speaker 1: we can come out, or or Joe and Sal can
37:19
Speaker 1: come out, or Michael Lewis can write about h F
37:22
Speaker 1: T and and really focus specifically on the parts of
37:25
Speaker 1: it that are bad. UM. And the fact that you know,
37:28
Speaker 1: it's cheaper to trade now than it was twenty years ago,
37:30
Speaker 1: that's not a defense for the things that we're saying,
37:32
Speaker 1: because we're getting you very specific critiques. UM and and
37:35
Speaker 1: there's very generic replies to that, and I think again
37:38
Speaker 1: it's it's part of the argument, but for us, it's
37:41
Speaker 1: you know, it's more about fairness and and that's why,
37:44
Speaker 1: you know, I'll come on here and say a firm
37:47
Speaker 1: like Virtue is a partner of i X, even though
37:49
Speaker 1: they're quote classified a high frenzy trader because they've chosen
37:53
Speaker 1: to play by our rules. We've set the rules. You know,
37:55
Speaker 1: we're experts in the market. We know what we're doing.
37:57
Speaker 1: We have people from exchanges and high prency trader, any
38:00
Speaker 1: firms that work at i X. We set the ground rules.
38:02
Speaker 1: They've decided to play. I give him a lot of
38:04
Speaker 1: credit for that. What what other firms that are thought
38:06
Speaker 1: of as h f t s will trade through uh
38:09
Speaker 1: X so G GTS Securities is another one, um, you
38:13
Speaker 1: know I M C Trades uh You know Night has
38:16
Speaker 1: it as a variety of businesses. Um, but Night's a
38:18
Speaker 1: good partner of ours as well, right, so they at
38:20
Speaker 1: one point in time where one of the biggest, if
38:22
Speaker 1: not the biggest volume on the deck. Absolutely, but you
38:25
Speaker 1: know they have a very diversified business. But they've been
38:27
Speaker 1: good partners of ours, right, So it's you know, and
38:29
Speaker 1: it's in Goldman Sacks. Uh. You know in two fourteen
38:32
Speaker 1: was our largest volume providers. So um. The the goal
38:37
Speaker 1: for us really was to build a market that we've
38:40
Speaker 1: believed to be fair and fair consistently. That's I mean,
38:43
Speaker 1: if if the stock market is not fair, what does
38:45
Speaker 1: that mean for everything else? Right? It is, it's it's
38:48
Speaker 1: it's That was the goal and I've we've done that.
38:50
Speaker 1: And the fact that of a wide variety of people
38:53
Speaker 1: have shown up uh and provided support that gives us
38:56
Speaker 1: a lot of confidence that this this is this is
38:57
Speaker 1: the right model. And I think a lot of people
38:59
Speaker 1: like the fact that the market itself is fixing some
39:04
Speaker 1: of the structural eras it has. This is a market
39:07
Speaker 1: based solution to a whole series of problems. You know,
39:11
Speaker 1: we're we if you look back at the last century, right,
39:14
Speaker 1: we're caught in this pretty pretty vicious negative cycle. You
39:18
Speaker 1: have a scandal, it's followed by regulation. There's no such
39:22
Speaker 1: thing as a perfect rule. That regulation will create loopholes
39:25
Speaker 1: and inefficiencies consequences. People look to exploit the loopholes, and
39:30
Speaker 1: they exploit it so badly that it creates the next scandal,
39:33
Speaker 1: which creates the next set of regulation. And as as
39:36
Speaker 1: regulation increases, it raises the barriers to entry for disruption.
39:41
Speaker 1: It makes it harder to disrupt an industry that's so
39:43
Speaker 1: heavily regulated. UM. Which means that in a way, the
39:47
Speaker 1: people causing the scandals are the ones that are that
39:50
Speaker 1: that remain in this industry as the walls get higher
39:53
Speaker 1: and higher. UM. So you guys are the uber of mind.
39:59
Speaker 1: We feel like, you know, in a way, we're trying
40:01
Speaker 1: to We're trying to we're trying to disrupt Wall Street
40:04
Speaker 1: in a productive way. UM. It's not productive the relationship
40:08
Speaker 1: Wall Street has with main Street because main Street needs
40:10
Speaker 1: Wall Street whether they like it or not. Um, they
40:13
Speaker 1: just don't like the way Wall Street has behaved over
40:15
Speaker 1: the last you know, a few years. And I think that, UM,
40:18
Speaker 1: you know, we're huge proponents of of what Wall Street does,
40:21
Speaker 1: but we think it can be done in a better
40:23
Speaker 1: in a better way. There's no no doubt about that.
40:25
Speaker 1: The cycle you described of scandal, regulation, loopholes, gaming it
40:31
Speaker 1: scamp what was a little different. And I have a
40:34
Speaker 1: lot of criticism of HFT and maybe we'll get to
40:37
Speaker 1: some I'd love to hear your responses. Was the fact
40:40
Speaker 1: that suddenly we had the New York Stock Exchange that
40:44
Speaker 1: was a nonprofit sort of public commons. Almost suddenly it
40:50
Speaker 1: becomes a for profit entity whose goal is no longer
40:54
Speaker 1: serving the investor, but serving their clients, who turned out
40:57
Speaker 1: to be the ones who could pay the most, or
40:59
Speaker 1: the h f T who are paying for the early look,
41:02
Speaker 1: who were paying for co location. The way that structure
41:06
Speaker 1: came about was, look if I if I said, hey,
41:09
Speaker 1: here's the system where you could look at people's orders
41:11
Speaker 1: before they're executed and front run them, that can't possibly
41:15
Speaker 1: be legal. But if I set up a series of
41:18
Speaker 1: high speed lanes and slow speed lanes and you could
41:21
Speaker 1: sniff this and see those packets, effectively, it's the same thing,
41:25
Speaker 1: but somehow legal. Well, the funny part is is that
41:28
Speaker 1: you know, as you when you read certain things, certain
41:31
Speaker 1: fines that come out, or when you read, if you
41:33
Speaker 1: replace the act of a computer with an actual person,
41:38
Speaker 1: that person would be penalized a lot worse than the
41:40
Speaker 1: computer gets penalized in today's market, because some of the
41:42
Speaker 1: stuff is kind of outrageous what happens in it. But
41:44
Speaker 1: but programmers don't get penalized. They're taking advantage of you know,
41:49
Speaker 1: it's like playing a video game. You're you're not penalized
41:51
Speaker 1: for shooting them out of the sky in a video game.
41:54
Speaker 1: That's all this is is a video game for money. Yeah,
41:56
Speaker 1: I think I think you know, you kind of hit
41:58
Speaker 1: the nail on the head where you know, in essence,
42:00
Speaker 1: I X is a free market solution. Um, it's our choice,
42:04
Speaker 1: and we're trying to correct inefficiencies. We're trying to patch
42:07
Speaker 1: up the loopholes. We're trying to and trying to make
42:10
Speaker 1: the system better. Um. In a way, the exchanges could
42:13
Speaker 1: have done what we've done. We've done it all within
42:16
Speaker 1: the regulation. We haven't asked for any rule change. But
42:18
Speaker 1: they chose to sell technology and sell data. They're they're
42:20
Speaker 1: they're part of in a way, exploiting loopholes, and it's
42:24
Speaker 1: very hard to get them to fix themselves. There are
42:27
Speaker 1: very few companies that can disrupt themselves. Well, you know,
42:30
Speaker 1: if you look what Apple did with constantly lowing the
42:33
Speaker 1: price of the iPod, most companies and to a point
42:37
Speaker 1: where huge huge improvements. The same thing with the phones,
42:41
Speaker 1: and that's unusual. Typically companies are disrupted from the outside.
42:46
Speaker 1: Not hey, this is our bread of but bread and
42:48
Speaker 1: butter what do you mean we're gonna drop the price
42:49
Speaker 1: in half but will be twice as good. Nobody does it. Yeah,
42:52
Speaker 1: I mean part of a lot of people will say,
42:55
Speaker 1: you know, this is the right thing to do for
42:57
Speaker 1: my shareholders. I make as much money as humanly possible
43:00
Speaker 1: from my position in the market. And UM, you know,
43:03
Speaker 1: I think that's it's a it's a it's a valid statement. Um.
43:07
Speaker 1: It also serves to excuse a lot of really bad
43:10
Speaker 1: behavior with without question, without questions. So I think you
43:14
Speaker 1: know you for us, it's you know, starting a new
43:17
Speaker 1: market in two thousand and thirteen, Uh, understanding very clearly
43:21
Speaker 1: the mistakes that others have made. Um, you know, we
43:25
Speaker 1: just feel like we're in a very good position to
43:27
Speaker 1: just build a different kind of marketplace. And let's talk
43:29
Speaker 1: about that a sex. So you know in the book, um,
43:33
Speaker 1: and I want to talk a little bit about Michael
43:34
Speaker 1: Lewis and a little later um, because I think if
43:37
Speaker 1: he keeps it this writing thing, he's gonna be really
43:41
Speaker 1: influential one day, because he shows a lot of potential.
43:45
Speaker 1: I love his stuff. Every time a new book of
43:47
Speaker 1: his comes out, I save it for vacation. And it's
43:50
Speaker 1: my It's just my favorite, most delightful vacation reading so
43:54
Speaker 1: um and he his columns that he publishes here are
43:58
Speaker 1: ridiculous because you can have a column that's doing really
44:01
Speaker 1: well in the terminal and then a Michael Lewis column
44:04
Speaker 1: comes out and that's that. Nobody is even close. It's
44:07
Speaker 1: like number one with a bullet for three days. It
44:09
Speaker 1: just hangs around. You look at most you know, other
44:11
Speaker 1: ways on the terminal, most most emailed, highest ranked, most read,
44:16
Speaker 1: and his are just like glued to the top. It's
44:19
Speaker 1: it's almost it's almost funny. So you get the idea
44:22
Speaker 1: to set up this company, you have to think, geez,
44:25
Speaker 1: this is gonna cost tens of millions of dollars. Was
44:29
Speaker 1: RBC supportive of this with an investor in this No,
44:32
Speaker 1: so OURBC non investor. Originally we went around to try
44:35
Speaker 1: to do this with URBC. I brought the idea to
44:39
Speaker 1: to my boss is there and I said, this is
44:40
Speaker 1: an idea, let's start in exchange. Uh. The feedback we
44:44
Speaker 1: got from our clients, the big mutual funds um was
44:48
Speaker 1: that we like the idea, but RBC can't be involved
44:51
Speaker 1: because they're a broker, or because because other brokers would
44:55
Speaker 1: not want to use a solution provided by RBC. UM.
44:58
Speaker 1: You know, so, so are any of your sun investors brokers?
45:02
Speaker 1: So Goldman is not an investor, it was an investor.
45:04
Speaker 1: Yet no one who's a subscriber to our platform, meaning
45:09
Speaker 1: Broke is an investor. No broker is an investor in
45:11
Speaker 1: in a so mutual funds, hedge funds. Uh. There's some
45:15
Speaker 1: venture firms, there's you know, entrepreneurs, there's it's all sorts.
45:19
Speaker 1: In the book they mentioned David Einhorn and I think
45:22
Speaker 1: was Bill Bill Ackman, Don Lobe Lobe Capital Group, Franklin Templeton,
45:27
Speaker 1: Mass Mutual, Jim Clark from Netscape, Steve Wynn UM. So
45:32
Speaker 1: we have we have a really great group of end users, UM.
45:35
Speaker 1: And it's it's very you know, most people own a percent,
45:40
Speaker 1: like it's very very small, UM. But we wanted, you know,
45:43
Speaker 1: a broad consortium of interests that represented the end users
45:47
Speaker 1: of the stock market. And really it's the issuers and
45:49
Speaker 1: it's the investors in the stock market that matter most. Um,
45:52
Speaker 1: How are you gonna avoid the temptation when I don't
45:56
Speaker 1: even know who owns arkinnet these days comes along and says,
45:59
Speaker 1: here is a billion dollars we want to buy you
46:02
Speaker 1: or when Goldman says, hey, we can take you guys public,
46:04
Speaker 1: What what do you do about that? I think? I mean,
46:06
Speaker 1: you know, we we we thought a long time about
46:09
Speaker 1: i X starting as a nonprofit UM. And the reason
46:13
Speaker 1: we decided against it is because we're competing against for
46:16
Speaker 1: profit entities and when it comes down to competing for talent,
46:19
Speaker 1: when it comes down to a lot of things, UM,
46:22
Speaker 1: we couldn't let the solutions suffer because of the way
46:25
Speaker 1: we structured the company. UM. So you know, we'll continue
46:28
Speaker 1: to look for you know, just doing the right thing
46:30
Speaker 1: for the mission. That's the that's the key. There's been
46:32
Speaker 1: a lot of interest in i X already. UM. You know,
46:35
Speaker 1: we've we've turned we've turned all that down because we
46:38
Speaker 1: feel like we're you know, we're still on a mission.
46:40
Speaker 1: But you know, if the right partner comes along and
46:42
Speaker 1: you think it's the right thing to do for the mission.
46:44
Speaker 1: In the business, it's really this, this is a mission
46:47
Speaker 1: based company. UM. We care a lot more about that
46:51
Speaker 1: than anything. And it's very distributed. You know, I don't
46:53
Speaker 1: own a huge chunk of i X. UM. I mean
46:56
Speaker 1: we're going around talking to your partners all every single
46:59
Speaker 1: person that I excellent equity UM and it's very evenly
47:02
Speaker 1: spread out amongst you know, kind of the the top.
47:05
Speaker 1: There's there's uh you know, uh you know, what's the structure.
47:08
Speaker 1: What's the structure at the company. It's you. So it's
47:11
Speaker 1: it's so yeah, So it's me. Um Ronan Ryan is
47:14
Speaker 1: our chief trategyman Rob Parts described in the book, and
47:19
Speaker 1: Rob Park was our CTO. He he worked with me
47:23
Speaker 1: at RBC and and John schwall is our chief operating officer.
47:26
Speaker 1: UM hired him at RBC from Bank of America. He
47:29
Speaker 1: was the he was kind of the the LinkedIn guy
47:31
Speaker 1: that did all the background research and um, you know,
47:35
Speaker 1: we Don Bullman was a co founder. He came from NASDAK.
47:39
Speaker 1: UM so we you know, Zorin Perkov ran global operations
47:42
Speaker 1: at Nasadak. He came aboard. John Ramsey came from the SEC.
47:45
Speaker 1: Sophia Lee came from Liquid Net. We just we just
47:48
Speaker 1: you know, we just feel very lucky. Claudia Crowley we
47:50
Speaker 1: just hired at their chief regulatory officer. She came from
47:52
Speaker 1: the New York Stock Exchange. It's like the nineteen nine Yankees.
47:55
Speaker 1: That's a uh, that's a murderous row. We're building you know.
47:58
Speaker 1: And and the great part about it is, you know,
48:00
Speaker 1: it's i X is not the best short term uh
48:03
Speaker 1: lucrative place to work, right, people are getting rich this year. UM.
48:08
Speaker 1: So people come for the mission. They come because they
48:11
Speaker 1: believe in it, and they believe in it long term, um,
48:14
Speaker 1: you know, And and the goal is to be successful
48:16
Speaker 1: long term. So there's a long term payoff to this.
48:18
Speaker 1: People come, um looking out three five years and that
48:22
Speaker 1: those are the kind of employees that you really want.
48:23
Speaker 1: And you know, part of the that the challenge you
48:26
Speaker 1: on Wall Street in general is a lot of people
48:28
Speaker 1: live year to year on guarantees. Um. There's a huge
48:31
Speaker 1: sense of loyalty. Um. What I find is that, you know,
48:34
Speaker 1: certain firms are incredibly well cultured and certain firms are
48:38
Speaker 1: just completely toxic. And um, you know, you want to
48:41
Speaker 1: build long term culture. UM. And again it's it's we're
48:46
Speaker 1: trying to build that at i X. That's that's really interesting.
48:49
Speaker 1: So now you've hit a hundred and fifty plus million
48:52
Speaker 1: shares a day. What sort of revenue can this company do?
48:57
Speaker 1: I mean, you guys always going to be a niche player,
49:00
Speaker 1: or can you scale up to be five or ten
49:02
Speaker 1: percent of the total daily when you look at it, Um,
49:06
Speaker 1: we're one, We're around one percent of the total market
49:08
Speaker 1: right now. Um, but we can only really compete for
49:11
Speaker 1: fifteen or twenty of the hundred pie. Fifty six percent
49:15
Speaker 1: of the volume every day is displayed quotes, which only
49:18
Speaker 1: exchanges are authorized to do. UM. You know, ten percent
49:21
Speaker 1: roughly is the open closing auction plus pre and post
49:24
Speaker 1: market trading trades, retail, you know, with wholesalers and internalized
49:28
Speaker 1: So there's so much volume that we don't have access
49:31
Speaker 1: to right now. Um. Becoming an exchange obviously unlocks a
49:34
Speaker 1: lot of a lot of potential for us. So UM,
49:38
Speaker 1: you know, we feel like this is kind of just
49:40
Speaker 1: the beginning. You know, if you back to you know,
49:42
Speaker 1: talking about Joe thinking we're in the fourth inning or
49:44
Speaker 1: four out of ten. Yeah, I think we're a third
49:46
Speaker 1: or fourth inning of the game. There's a there's a
49:49
Speaker 1: lot of there's a lot of ball to be player.
49:50
Speaker 1: So once you become an exchange, and I have a
49:53
Speaker 1: hard time imagining that the SEC isn't gonna say, hey,
49:57
Speaker 1: these guys solve a lot of problems, take the workload
49:59
Speaker 1: off of us. You become an exchange. Over the next
50:02
Speaker 1: twelve months, eighteen months, somewhere all those time that timeline.
50:06
Speaker 1: We're hopeful, Well, we're hopeful it happens this year. Okay,
50:09
Speaker 1: so before is over. What does that do to the
50:12
Speaker 1: potential volume that you guys can count. I mean it
50:15
Speaker 1: unlocks more than half the market that we just can't
50:18
Speaker 1: touch right now. And I think that, Um, you know
50:20
Speaker 1: that's significant. And and we're we're keeping the principles of
50:24
Speaker 1: what we do. Um, we're not paying rebates, maker takers obviously,
50:29
Speaker 1: no maker taker, no order flow payments. Basically, it's just
50:33
Speaker 1: a fair price. And that's what you get. Simple, transparent
50:37
Speaker 1: and fair stock exchange. I mean, that's what we're trying
50:40
Speaker 1: to be. And um, you know, there's an elegance that
50:43
Speaker 1: comes with simplicity, meaning people understand what your market does
50:47
Speaker 1: and why and why you exist. Um, and the stock
50:50
Speaker 1: market is anything but that. It's you. You need to
50:52
Speaker 1: hire people from a firm to understand what that firm
50:54
Speaker 1: actually does. Right, and so we you know, most of
50:57
Speaker 1: what we've learned from exchanges you can't find by going
51:00
Speaker 1: on Google. You have to find people that have worked
51:02
Speaker 1: that exchanges or find people that know them intimately. Well,
51:04
Speaker 1: So I think you know, it's amazing the function of
51:08
Speaker 1: the stock market is so central to the economy. It's
51:11
Speaker 1: amazing how few people know how the stock market actually works,
51:14
Speaker 1: myself being one of those people five years ago. Right, So, um,
51:18
Speaker 1: you know, we want to build a market that people understand.
51:21
Speaker 1: That's that's amazing. So let's talk a little bit about
51:24
Speaker 1: Michael Lewis, because he's come up as a thread throughout
51:27
Speaker 1: and full disclosure, I write for Bloomberg View, which is
51:30
Speaker 1: published The publisher is David Shipley, and I know they
51:33
Speaker 1: have a longstanding relationship. Um, but you and I haven't
51:37
Speaker 1: discussed this beforehand. Sure, so I'm kind of drying. I
51:39
Speaker 1: sent you, Hey, let's talk about these things. But let's
51:42
Speaker 1: talk a little bit about Michael Michael Lewis. So you
51:46
Speaker 1: finally meet him in in your window Lists office with
51:49
Speaker 1: you and you and Ryan, and he starts to you
51:52
Speaker 1: see the gears turning mentioned yeah earlier. How long does
51:56
Speaker 1: that conversation go on? What? What is that? Like? This
51:59
Speaker 1: is for the in the Fair magazine article, not for
52:02
Speaker 1: the book. Yeah, it was, Um, I had I had
52:05
Speaker 1: read almost everything that he had ever written. Um, I
52:09
Speaker 1: read Lars Poker. I'm sure like everyone does before they
52:11
Speaker 1: come into business. You ask what book should I read?
52:13
Speaker 1: You read Liars Poker, which I always tell people market Wizards.
52:16
Speaker 1: But Margaret, I read that too, But because I find
52:19
Speaker 1: Liars Poker gives them, Hey, that's an eighties perspective that
52:22
Speaker 1: universe does hasn't existed. The funny part. The funny part
52:26
Speaker 1: is Michael Lewis is kind of horrified that that people
52:30
Speaker 1: read Lars Poker as a how to manual, and because
52:32
Speaker 1: he wrote it as kind of like a warning story. Right,
52:34
Speaker 1: it was an apocryphal tale, Hey, don't let this happen
52:37
Speaker 1: to you, and people actually use it as Oh, so
52:40
Speaker 1: that's that's what it's right. Um. And Moneyball, Um, it's
52:46
Speaker 1: probably my favorite Michael Lewis book, including Flashboys. I love
52:49
Speaker 1: Moneyball kind of changed my perspective on on business and
52:52
Speaker 1: and and and challenged me to think differently. Um. The
52:56
Speaker 1: book was great, the movie was great. You mentioned him
53:00
Speaker 1: Clark The New New Thing, which I think maybe his
53:03
Speaker 1: least known book is another one. It's amazing. It's a
53:07
Speaker 1: great it's a fat and it's amazing that you mentioned Wait,
53:09
Speaker 1: that's a Michael Lewis book. Yeah, it's a huge book.
53:12
Speaker 1: And the next one I have cued up for vacation
53:15
Speaker 1: is The blind Side. Yes, the football book, which I
53:17
Speaker 1: have not yet. Fantastic, That's what That's what people have said.
53:21
Speaker 1: It's it's so you finally get to meet this guy
53:23
Speaker 1: who you have a tremendous amount of respect for. What's
53:26
Speaker 1: that first meeting, Like, you know, we we just try
53:29
Speaker 1: to um convey what we knew, UM and and do
53:33
Speaker 1: it in a way that that would make him somewhat
53:36
Speaker 1: interested in us. At the time, we had no money. UM,
53:39
Speaker 1: we had nothing. You had already launched the firm. We
53:41
Speaker 1: we had started the firm with our own money, which
53:44
Speaker 1: was which basically we ran out of UM. And you know,
53:47
Speaker 1: at the time we kind of you know, it's I
53:50
Speaker 1: don't think it ever would have been a personal choice
53:52
Speaker 1: of mine, UM to be in the position I'm in, UM,
53:57
Speaker 1: because it just it changes your life, UM, to be
54:00
Speaker 1: it being on sixty minutes, being in this book, it
54:04
Speaker 1: has changed my life. UM. But as the CEO of
54:07
Speaker 1: I X, it was absolutely the right thing to so
54:10
Speaker 1: we we kind of went all in. We had nothing
54:11
Speaker 1: to lose at that point, and I think, um, uh,
54:14
Speaker 1: you know, the very first thing we did is we
54:16
Speaker 1: went and got in a in a car and drove
54:18
Speaker 1: to all the different UM centers with Michael Wis in
54:21
Speaker 1: the car. We drove, We drew out the map and said,
54:23
Speaker 1: you know, here's why our orders were getting into different
54:25
Speaker 1: exchanges at different times. So you go out the Holland
54:27
Speaker 1: Tunnel and you take it. He says, I want to
54:30
Speaker 1: drive these routes, so we are we okay? So, which
54:33
Speaker 1: sounds like him. Yeah. So we got in the car
54:35
Speaker 1: and um and and and drove the routes and um,
54:39
Speaker 1: you know, spent the day with him, going to different
54:41
Speaker 1: datas and you know, he walked away his head was
54:43
Speaker 1: spinning to think, I just I just saw the stock markets,
54:46
Speaker 1: but not the Star War because people see on TV
54:50
Speaker 1: building in New Jersey, that's right. And um. So so
54:53
Speaker 1: it went from I'm gonna write a short story about
54:56
Speaker 1: I X and which again was super exciting, He's gonna
54:59
Speaker 1: put in Vanity Fair. Um. But he started talking to
55:02
Speaker 1: more and more people. He just he every time he
55:04
Speaker 1: came to New York. He'd spent a little time with us,
55:06
Speaker 1: but he was out there canvassing meeting. The amount of
55:08
Speaker 1: connections he has is incredible. It's the amazing part is
55:11
Speaker 1: that we were going around to the asset management community
55:14
Speaker 1: to try to raise money. UM. And as we started
55:17
Speaker 1: to talk to Michael Lewis, Oh yeah, we talked to
55:19
Speaker 1: him for for the Big Short. We talked to him
55:20
Speaker 1: for the Big Short, like every other person I talked
55:23
Speaker 1: to talked to him for the Big Short. I was like, now,
55:26
Speaker 1: they never would offer this information if they didn't know
55:28
Speaker 1: that we were talking to him. Um. But you just
55:31
Speaker 1: realize how many people he actually knows UM and some
55:33
Speaker 1: people at firms that I'm sure they'd be fired if
55:35
Speaker 1: they knew that they were talking to Michael. Absolutely, it's uh,
55:40
Speaker 1: you know, and he's got away, He's he's uh, he's
55:42
Speaker 1: brilliant at what he does. I call him the poet
55:45
Speaker 1: Laureatete of Wall Street. He nobody tells a finance story
55:50
Speaker 1: the way he does. And it's always focused on these
55:54
Speaker 1: interesting characters, of which you're now one of you strike
55:57
Speaker 1: by the way. Anyone meets you on the street, they're like, oh, yeah,
56:00
Speaker 1: I met Brad. He's a good guy, you know. Yeah,
56:02
Speaker 1: I think he's Canadian. That would be it. Most of
56:05
Speaker 1: the other characters in his books, there's Jim Clark or
56:09
Speaker 1: Michael Barry, or or some of these other guys. They're
56:11
Speaker 1: always a little off kilter and fascinating. I'm the most
56:16
Speaker 1: unlikely Michael was character probably ever to be in a book,
56:19
Speaker 1: and I think that's right. He he had. He told
56:21
Speaker 1: me he had a hard time writing about me, Um
56:24
Speaker 1: simply because um, he said, he goes it's he was
56:29
Speaker 1: trying to dig up anything he could on me being
56:32
Speaker 1: in the Israeli Air Force. That was really, you're fired
56:35
Speaker 1: a pilot. And I'm only kidding. I'm only by the
56:37
Speaker 1: way I find myself having to constantly when when you're
56:41
Speaker 1: a little bit sarcastic, you have to clarify because someone's
56:44
Speaker 1: gonna say, wait, Brad wasn't a fighter. You have to be,
56:48
Speaker 1: without a doubt, the most. Yeah, lacking abnormalities is the best.
56:55
Speaker 1: You're You're an ordinary Wall Street guy. Hey, you had
56:58
Speaker 1: a big job as a trader at RBC. You made
57:00
Speaker 1: a lot of money. You were making seven figures. Now
57:02
Speaker 1: that that had to be a lot of a lot
57:04
Speaker 1: of fun, a lot of hard work, but nice to
57:06
Speaker 1: put a little money away. And now you're running a startup.
57:09
Speaker 1: That must that must be the most aberrational thing you're
57:12
Speaker 1: doing is giving up Uh, seven figure job to say, Okay,
57:16
Speaker 1: we're gonna go fix Wall Street and we're not gonna
57:17
Speaker 1: make a lot of money. First, quitting was was definitely
57:21
Speaker 1: at a character for me. I probably could have retired
57:23
Speaker 1: at OURBC. It was actually the only company I'd ever
57:25
Speaker 1: worked for. I was an intern there and just and
57:27
Speaker 1: just stayed because it was comfortable. I got offered more
57:30
Speaker 1: money to work elsewhere. But I like the people. I
57:33
Speaker 1: had a great relationship with my immediate boss, and um,
57:37
Speaker 1: it was it was kind of a different thing part
57:40
Speaker 1: of leaving. The big thing. The reason, one of the
57:42
Speaker 1: big reasons I left was that after we we created
57:44
Speaker 1: Thor and RBC's electronic platform, took off all of the
57:48
Speaker 1: people on on all of my key people, including myself.
57:51
Speaker 1: We're getting big job offers away at different firms. Um.
57:56
Speaker 1: And it became very evident to me that that doing
57:58
Speaker 1: nothing would have led to our team getting dismantled. It
58:02
Speaker 1: was gonna break up anyway, yes, and so you might
58:04
Speaker 1: as well take the whole team together elsewhere. Well. That
58:06
Speaker 1: that part of that was I sat down with with
58:09
Speaker 1: John and Ronan and Rob and said, you know, how
58:11
Speaker 1: important is this for us to stay together? And and
58:14
Speaker 1: we had built. You know when you go through things
58:16
Speaker 1: like that and and you know it's it's you come,
58:18
Speaker 1: you come from nowhere to to you know, doing something,
58:21
Speaker 1: and you had discovered the problems we had discovered because
58:24
Speaker 1: every rock we turned over had something under it, and
58:26
Speaker 1: it was just this amazing, like mystery story. Like every
58:29
Speaker 1: person you meet, you another piece ad gets out of
58:31
Speaker 1: the puzzle. Um, we kind of collectively decided, you know,
58:35
Speaker 1: we're willing to take this risk. And there's one really
58:38
Speaker 1: funny moment where I'm home and I'm talking to my wife.
58:41
Speaker 1: I'm like, you know, we're getting ready to leave, and
58:43
Speaker 1: she's like, well, what percent chance do you think this
58:46
Speaker 1: has of working? I think? I Am like, oh, I
58:47
Speaker 1: think it's pretty low. I think this idea we have
58:49
Speaker 1: right now probably, and she's like, you should probably clarify
58:52
Speaker 1: that with Rob and Ronan and John. So I came
58:54
Speaker 1: in the next day and said, guys, write on a
58:57
Speaker 1: piece of paper, what percent chance you think this idea?
59:00
Speaker 1: Yea we have right now for I X. But it's
59:03
Speaker 1: not i X as you know it today. It was
59:05
Speaker 1: a different version of I X. It actually wouldn't have worked.
59:08
Speaker 1: It wouldn't have worked. Um, this idea we have right? Now,
59:11
Speaker 1: what what chance do you think this idea has of working?
59:15
Speaker 1: I was the highest at everyone else was lower UM,
59:18
Speaker 1: which was funny, but they all what we all what
59:20
Speaker 1: we all agreed was that there was a seventy chance
59:22
Speaker 1: that the four of us would figure this out. Like
59:25
Speaker 1: so that's a very different set of odds. Hey, listen,
59:28
Speaker 1: this one issue may not work, but we could pivot
59:30
Speaker 1: to something right And what was that pivot? Was it?
59:33
Speaker 1: The shoe box was part of part of it was
59:35
Speaker 1: the shoe But the very first idea we had was
59:37
Speaker 1: we wanted to be the smart order router for the street,
59:41
Speaker 1: which means everyone sent us your orders and will rout
59:43
Speaker 1: them out to the exchanges. UM. Now the problem with
59:45
Speaker 1: that is all the big banks have built their own
59:47
Speaker 1: smarter routers, so so it's a very invasive request to say,
59:51
Speaker 1: I'm gonna now we're oute all your orders on you
59:53
Speaker 1: know for you. UM that that idea never would have
59:55
Speaker 1: worked and UM, but we quit on the notion of
59:58
Speaker 1: that idea, which which which was slightly insane. Except for that,
1:00:03
Speaker 1: we had a lot of faith in each other. And
1:00:05
Speaker 1: I think that UM had a great track record. You
1:00:08
Speaker 1: guys had Let's let's clarify this a little bit, because
1:00:11
Speaker 1: a lot of startups have launched with a lot less. First,
1:00:15
Speaker 1: you guys essentially figured out what the heck was going
1:00:17
Speaker 1: on with the market when there really didn't seem anybody
1:00:20
Speaker 1: else that really got it in the way that you
1:00:23
Speaker 1: guys did. Number one, Number two you created a product
1:00:27
Speaker 1: thor which solved a lot of those problems. So there
1:00:32
Speaker 1: had to be some degree of confidence. Okay, we know
1:00:34
Speaker 1: more about what's wrong with the structure than other people have.
1:00:38
Speaker 1: We've already demonstrated an ability to use technology to resolve it.
1:00:43
Speaker 1: Can we take those two things and put it together
1:00:46
Speaker 1: and build a real company around it? Yeah, I mean
1:00:48
Speaker 1: you kind of you. You nailed it. Um. The one
1:00:52
Speaker 1: other big point um that I made to my wife
1:00:54
Speaker 1: was that because she was really the one she she
1:00:56
Speaker 1: was the one who allowed I X to happen. Right
1:00:59
Speaker 1: are are are set? Son was born three days after
1:01:01
Speaker 1: my last day at RBC, so it was there's a
1:01:03
Speaker 1: lot going on in our personal She must have been
1:01:05
Speaker 1: thrilled with you. Yeah, well we we we got to
1:01:07
Speaker 1: the right place. Um, and she's been amazingly supportive. But
1:01:10
Speaker 1: what I said to is I said, there are very
1:01:12
Speaker 1: few people in this world that can solve the problem
1:01:16
Speaker 1: we're trying to solve, and it may not work, but
1:01:18
Speaker 1: you know, I would probably regret it for the rest
1:01:20
Speaker 1: of my life if I didn't actually try. So you
1:01:21
Speaker 1: have you have no choice. This was this wasn't all
1:01:24
Speaker 1: we gonna do this. It's I'm running out of reasons
1:01:27
Speaker 1: not to do that. That was kind of it. And
1:01:29
Speaker 1: and uh, I ran out of reasons not to do it,
1:01:31
Speaker 1: and and um and and it's it's always scary to leave,
1:01:36
Speaker 1: especially a job you're comfortable at you've been at your
1:01:38
Speaker 1: whole life. Um, but yeah, it was by the end
1:01:41
Speaker 1: of it, it felt definitely like the right decision. And
1:01:43
Speaker 1: you know, RBC is still a great client of ours.
1:01:45
Speaker 1: I still have a great relationship with with my former
1:01:48
Speaker 1: team there, and um, you know, they were very supportive
1:01:51
Speaker 1: and and they're still doing really well. So it's it
1:01:52
Speaker 1: kind of worked out for everybody. But um, yeah, it was.
1:01:56
Speaker 1: It was. It was interesting times, but you know, to
1:02:00
Speaker 1: in to be in a Michael Lewis book, never in
1:02:03
Speaker 1: a million I spent my entire life trying to just
1:02:05
Speaker 1: get along with people. I'm I'm more of a go
1:02:07
Speaker 1: with the flow kind of guy. I don't have these
1:02:09
Speaker 1: like heroic tendencies where you know, I'm running for class press.
1:02:12
Speaker 1: I didn't do any of that. Um, fairly normal guy
1:02:15
Speaker 1: and this just happened. Michael Lewis described it best when
1:02:18
Speaker 1: he said, you're a normal guy in an abnormal situation.
1:02:22
Speaker 1: And so now you go from the conversation with investigating
1:02:28
Speaker 1: h f T to hey, I think I want to
1:02:30
Speaker 1: do a book. I want to do a short story.
1:02:33
Speaker 1: Ones at what point did that magazine story become Hey,
1:02:38
Speaker 1: I'm going to do a book and you guys are
1:02:40
Speaker 1: going to be the driving factors in it. So so
1:02:44
Speaker 1: he came to the conclusion about the book. His his
1:02:46
Speaker 1: journey through high freguncy trading and the exchanges and market
1:02:49
Speaker 1: structure was similar to mine. Everyone he talked to, and
1:02:52
Speaker 1: the more rocks he turned over, the more stuff he found. Uh,
1:02:55
Speaker 1: and he stumbled on a lot of stuff himself, and UM,
1:02:58
Speaker 1: he's good. Oh he's amazing. And by the end he
1:03:01
Speaker 1: basically said this is going to be a blockbuster. Now
1:03:03
Speaker 1: what I didn't did he really say that? He said
1:03:06
Speaker 1: this or the book was bubble. He said this is
1:03:07
Speaker 1: going to be explosive, This is gonna be explosive because
1:03:10
Speaker 1: he was consuming everything that was written, and he realized
1:03:13
Speaker 1: he was writing things that have not been written before. Um,
1:03:16
Speaker 1: and which is unusual because let's let's go back and
1:03:19
Speaker 1: look at well money Ball was unique. Uh, the new
1:03:23
Speaker 1: new thing wasn't so much unique, but just a uniquely
1:03:25
Speaker 1: told story. Was a retrospective. Yeah, I mean, my you know,
1:03:29
Speaker 1: when I wrote Bailout Nation, it was one of the
1:03:32
Speaker 1: first books on the financial crisis, and I couldn't read
1:03:35
Speaker 1: anything afterwards. And then the big short comes out and
1:03:38
Speaker 1: I'm like, I'm dying to read it, and I'm like,
1:03:41
Speaker 1: you know what, I'm gonna hold this till February with
1:03:43
Speaker 1: Nona Barbados, So I'm gonna read so the year after
1:03:46
Speaker 1: the February after the book came out, and I think
1:03:48
Speaker 1: came out in like May or June. I'm I have
1:03:51
Speaker 1: the book on my night table, night table for eight
1:03:53
Speaker 1: months before we go on vacation, and I can't wait
1:03:56
Speaker 1: to read it. And I thought he just did a
1:03:58
Speaker 1: fantastic job with that. It was such a compelling story
1:04:03
Speaker 1: and all the characters are so amazing. You know another
1:04:07
Speaker 1: you know, another Michael Lewis book that just you know,
1:04:09
Speaker 1: blows your doors off, and then this thing comes along.
1:04:13
Speaker 1: And at what point does he say to you, you guys,
1:04:18
Speaker 1: you know I've been talking to you for how long
1:04:20
Speaker 1: this is going to be explosive? Well? He he, he
1:04:22
Speaker 1: knew he had a feeling it would be explosive. What
1:04:26
Speaker 1: I didn't know was how big a part of the
1:04:29
Speaker 1: book that I ended up being. I had no idea.
1:04:31
Speaker 1: I know when you got the book, you were as
1:04:33
Speaker 1: astonished as anything. I knew I was going to be
1:04:35
Speaker 1: a main character. Did you get a man obviously you
1:04:37
Speaker 1: got a PDF for a manuscript before the book. Nothing
1:04:41
Speaker 1: final copy shows up like this sounds Barnes and Noble, Amazon.
1:04:47
Speaker 1: I asked him, and I said, you know, I said
1:04:48
Speaker 1: to him, which was I said, Michael, this is a
1:04:50
Speaker 1: very technical subject. Um, do you want my help? And
1:04:54
Speaker 1: he goes, you know, you can't write a hundred thousand
1:04:56
Speaker 1: words without making a couple of mistakes. Um. And he goes, is,
1:05:00
Speaker 1: do me a favor after it comes out, make a
1:05:02
Speaker 1: make a note of the mistakes, um, and send them
1:05:06
Speaker 1: to me. And I found, you know a dozen things,
1:05:08
Speaker 1: small stuff, but I mean because people have been critical
1:05:12
Speaker 1: the Intel. Intel doesn't trade on the new York Stock Exchange, right,
1:05:15
Speaker 1: because they only trade New York listed stocks. Well, who
1:05:19
Speaker 1: cares right that it's it's yes, it's a technical error,
1:05:21
Speaker 1: but that doesn't undermine the actual books. The book is
1:05:26
Speaker 1: absolutely so he na, he nailed the book. Um, he
1:05:29
Speaker 1: made some technical errors, which people are you know, people
1:05:31
Speaker 1: are gonna people are grasping at anything they can get
1:05:34
Speaker 1: theirs there grasping and uh. And it's funny to watch, actually,
1:05:37
Speaker 1: because I've heard people say that what I experienced never happened.
1:05:41
Speaker 1: It's an amazing thing to tell a trader who has lived. Yeah,
1:05:44
Speaker 1: latency arbitrage doesn't exist. And I just I just I
1:05:47
Speaker 1: listen to that. And you can't even respond. A lot
1:05:50
Speaker 1: of stuff a book. I think a book has been
1:05:52
Speaker 1: written about you know why why this doesn't Michael lewis fiction.
1:05:55
Speaker 1: And the amazing part is is that again it's you know,
1:05:58
Speaker 1: I can speak ab out this stuff. I'm so grounded
1:06:03
Speaker 1: in my experience. I've lived through this. Um. You know,
1:06:06
Speaker 1: I can testify in front of the Senate, I can
1:06:08
Speaker 1: get in fights on television and you but let me
1:06:10
Speaker 1: interrupt you. So you also more than just you as
1:06:13
Speaker 1: a trader. You went to some of the biggest mutual funds,
1:06:17
Speaker 1: some of the biggest hedge funds, some of the most
1:06:19
Speaker 1: storied traders on Wall Street, and they pretty much all said, yeah,
1:06:23
Speaker 1: I'm going through the exact same problem. Yes, yeah, I
1:06:27
Speaker 1: mean this wasn't like you're an area fifty one and
1:06:30
Speaker 1: you saw the UFO that nobody saw. This was widespread. Hey,
1:06:34
Speaker 1: what's going on with the market? Something is wrong? Yes, well,
1:06:37
Speaker 1: you know the amazing part is the people that I
1:06:40
Speaker 1: have a common connection and understanding with our traders, They've
1:06:44
Speaker 1: lived in UM. Sometimes when you get on fights on television,
1:06:47
Speaker 1: you're fighting with lawyers, you're fighting with people who have
1:06:50
Speaker 1: never traded a day in their life. If you look
1:06:52
Speaker 1: at heads of exchanges in markets, their firms, if you've
1:06:54
Speaker 1: never traded, you're only going based on what other people
1:06:57
Speaker 1: have told you is happening. UM. It's a very common
1:07:01
Speaker 1: bond I share with traders. Whenever I walk in, people
1:07:03
Speaker 1: have like I've lived through it. I've I know exactly
1:07:06
Speaker 1: what you're talking about. UM. You know that experience allows you,
1:07:11
Speaker 1: me and our firm and the people the people that
1:07:14
Speaker 1: have gone through it to speak with such conviction because
1:07:17
Speaker 1: we know we know that it's happened conviction and authority.
1:07:21
Speaker 1: You actually became the you know. One of the guys
1:07:24
Speaker 1: in my office sent me a text this morning. There
1:07:27
Speaker 1: was a link to an article that said, if you
1:07:29
Speaker 1: read three books on a subject, you will know more
1:07:32
Speaker 1: than the population. How many people know more about the
1:07:36
Speaker 1: structure of order, routing and execution than than you guys do.
1:07:42
Speaker 1: It's got to be a handful of it's it's it's
1:07:44
Speaker 1: probably a small number. The even smaller number is how
1:07:47
Speaker 1: many people will actually tell you about it right the
1:07:50
Speaker 1: the game. The value of that knowledge, um is not
1:07:54
Speaker 1: monetized by trying to help other people understand. It's monetized
1:07:58
Speaker 1: by by gaming the system. UM. So I think that
1:08:01
Speaker 1: we were you know, one of the first things I
1:08:03
Speaker 1: realized after we discovered thor we ran these experiments at RBC.
1:08:06
Speaker 1: We realized that, hey, this by delayne when we send
1:08:09
Speaker 1: the orders, we get to all places at the same time.
1:08:11
Speaker 1: It was kind of like this Eureka moment. UM. I
1:08:13
Speaker 1: got home, I was in bed. I'll never forget it.
1:08:15
Speaker 1: I said, oh my god, we're not the first people
1:08:17
Speaker 1: to figure this out. We're not like fifth or tenth
1:08:20
Speaker 1: or fifty, like I don't know what, but everyone who's
1:08:23
Speaker 1: figured this out. Are the ones that are that are
1:08:25
Speaker 1: getting enemy. They're all part of the problem. The ones
1:08:29
Speaker 1: who had had identified this as a potential issue, instead
1:08:34
Speaker 1: of trying to fix it, said we can make money off,
1:08:36
Speaker 1: which brings me to the next question. At one point
1:08:39
Speaker 1: in time, there were estimates of h f T I'm
1:08:43
Speaker 1: gonna use the word extracting ten, fifteen, twenty billion a
1:08:47
Speaker 1: year in profits. But lately we've been hearing that volumes
1:08:51
Speaker 1: are down, volatility other than this past week, volatility has
1:08:56
Speaker 1: has been moderated, and that in general, people and markets
1:09:00
Speaker 1: are adapting and h f T isn't as lucrative as
1:09:04
Speaker 1: it once was. Any truth to that, I think, I
1:09:06
Speaker 1: mean in volatile markets, big investors are trading more um,
1:09:12
Speaker 1: which means there's more orders to get, you know, in
1:09:14
Speaker 1: the middle of so, I'd say volatility leads to a
1:09:17
Speaker 1: lot of a lot of volume and a lot of
1:09:18
Speaker 1: profits um. I'd also say the margins are going down
1:09:21
Speaker 1: because it's becoming more expensive to trade. You know, you
1:09:24
Speaker 1: have New York Stock Exchange selling laser beams on the
1:09:26
Speaker 1: roof and selling no longer. The book begins with the
1:09:29
Speaker 1: cutting the fiber optic channel in a dead straight line
1:09:33
Speaker 1: from Chicago to New York that now is going away.
1:09:36
Speaker 1: We're gonna do point to point microwaves faster than than
1:09:40
Speaker 1: less reliable than than in the ground, but still but
1:09:43
Speaker 1: there's a cost, right and I think that, Um, when
1:09:45
Speaker 1: you look at what's spent, it's billions. Billions are being spill.
1:09:49
Speaker 1: It was a billion dollars to lay that fiber from
1:09:51
Speaker 1: New York to Chicago. So part of it is about
1:09:53
Speaker 1: the money that's being made. Part of it's about the
1:09:54
Speaker 1: money that's being spent. Because ultimately, when you think about
1:09:57
Speaker 1: who's ultimately paying for the line between New Jersey and Chica,
1:10:00
Speaker 1: or who's paying for the microve tower, Um, it's coming
1:10:03
Speaker 1: out of somebody's pocket. It's going to be the investors,
1:10:05
Speaker 1: because no one would buy the microwave tower if they
1:10:08
Speaker 1: weren't able to make money from the existence of the
1:10:10
Speaker 1: microwave tower. Um, what you want to do is you
1:10:12
Speaker 1: want to make the microwave tower redundant. You can't make
1:10:14
Speaker 1: it illegal, and that that's one of the issues. You
1:10:16
Speaker 1: can't regulate evolution of technology, but you can render it useless.
1:10:22
Speaker 1: What we're trying to do at I X is create
1:10:23
Speaker 1: a level playing field where people don't feel the need
1:10:25
Speaker 1: to invest in microwve towers because it doesn't necessarily matter
1:10:28
Speaker 1: how much faster I am, because we're trying to create
1:10:31
Speaker 1: the fairest possible place, you know, the experience. But any
1:10:34
Speaker 1: new tower that goes up, someone's paying for that, and
1:10:37
Speaker 1: they're paying for it out of profits or else they
1:10:38
Speaker 1: wouldn't pay for it. It's coming out of grandma's Uh,
1:10:43
Speaker 1: if you follow, if you follow the money far enough,
1:10:45
Speaker 1: it's yeah, it's coming out of everyday people's pockets. A
1:10:47
Speaker 1: zero Am I wrong in saying it's a zero sum gain.
1:10:50
Speaker 1: If HFT is extracting fifteen billion by front running half
1:10:54
Speaker 1: a cent on a hundred thousand shares over and over
1:10:56
Speaker 1: and over again, that has to become In the stock market,
1:11:00
Speaker 1: you can everyone can't win. Contrary to some people's beliefs,
1:11:04
Speaker 1: it's just not no, right, it's it's a zero sum game.
1:11:08
Speaker 1: It is um and and again. Should the distribution of
1:11:13
Speaker 1: winners and losers be a little bit more balanced and
1:11:15
Speaker 1: more fair? Absolutely? Um, But that's again, that's that's what
1:11:19
Speaker 1: we're out there trying to solve. But it's it is
1:11:21
Speaker 1: zero sum. It's coming out of people's pockets, and and
1:11:23
Speaker 1: the hard part about it is that everyone's losing a
1:11:25
Speaker 1: little and a few people are making a lot. You know,
1:11:28
Speaker 1: David Einhorn wrote an investor letter I thought summed it
1:11:30
Speaker 1: up brilliantly. The problem is diffuse harm and concentrated benefit.
1:11:34
Speaker 1: That's brilliant, right, because people were trying to save people
1:11:38
Speaker 1: money they don't even know they're entitled to. But the
1:11:42
Speaker 1: people were kind of going after know exactly what we're
1:11:44
Speaker 1: doing and are very upset about it. So it's it's
1:11:46
Speaker 1: a it's an interesting problem to be in the middle of.
1:11:48
Speaker 1: What what other areas in the market structure have you?
1:11:52
Speaker 1: I don't know if the right word is worried, concerned? Um,
1:11:56
Speaker 1: what do you see as as a related potential problem?
1:12:01
Speaker 1: I mean, I think, you know, we haven't We've seen
1:12:04
Speaker 1: some changes, Um, but there's getting better. It's it's getting
1:12:08
Speaker 1: better more based on what people aren't doing versus what
1:12:12
Speaker 1: people have proactively done. Um. But I still don't see
1:12:15
Speaker 1: a huge amount of accountability. Um. You know, so you're
1:12:19
Speaker 1: making your money and fading into the background and riding
1:12:21
Speaker 1: off into the sunset. Um, you know, isn't isn't going
1:12:24
Speaker 1: to prevent prevent the next cycle. You know that What
1:12:26
Speaker 1: concerns me the most is the cycle that we talked about,
1:12:29
Speaker 1: scandal regulation, loophole exploitation, scandal regulation. It's gone on for
1:12:35
Speaker 1: so long, um, and what it does is it prevents
1:12:38
Speaker 1: you know, talent scandals just drive people away. Right, Certain
1:12:42
Speaker 1: people that would have come to Wall Street that you
1:12:44
Speaker 1: want to work here, just don't want to work here. Right,
1:12:45
Speaker 1: They're going to Silicon Valley. They're going to work you
1:12:48
Speaker 1: know they So that used to be the complaint in
1:12:51
Speaker 1: the middle of the financial boom. Oh, we're attracting people
1:12:55
Speaker 1: who would be better served going to Silicon Valley and
1:12:58
Speaker 1: inventing the next iPhone. It's of inventing the next al
1:13:01
Speaker 1: goo that uh yeah, is gonna come come after our orders.
1:13:04
Speaker 1: So it comes in cycles. But you know, I think
1:13:06
Speaker 1: that cycle overall leads to a heavily, heavily regulated industry
1:13:10
Speaker 1: with fewer players. Um, and the entrenched players are just
1:13:13
Speaker 1: far more powerful. Right there, There aren't there isn't a
1:13:16
Speaker 1: huge amount of disruption happening. So I think, you know,
1:13:18
Speaker 1: the cultural cycle is it is a pretty tough one
1:13:21
Speaker 1: to break. Um. You know, we're hoping to break that
1:13:24
Speaker 1: in in a in in a minor or major way.
1:13:27
Speaker 1: We're just trying to do something different. The good part
1:13:29
Speaker 1: is that you know, we do have partners that think
1:13:32
Speaker 1: I X is good long term for the market. UM.
1:13:35
Speaker 1: So that gives us a lot of confidence. Well, I
1:13:37
Speaker 1: find myself in that same boat. I hope you guys
1:13:40
Speaker 1: become an exchange. UM. That would I think would be
1:13:43
Speaker 1: a net positive for markets. UM. Any other thoughts you
1:13:47
Speaker 1: want to leave us with, what's the next book You're
1:13:49
Speaker 1: gonna find yourself start? I hope, I hope none others. UM.
1:13:53
Speaker 1: You know, it's it's just been Uh. You know, I
1:13:55
Speaker 1: just feel very lucky. UM. And you know, I do
1:13:57
Speaker 1: feel like I get way too much credit. Uh as
1:14:00
Speaker 1: a team. You know, our team has done a lot. Uh.
1:14:03
Speaker 1: Ronan and John and Rob we talked about them. There's
1:14:05
Speaker 1: a lot of other people that have that have been
1:14:06
Speaker 1: behind this. I probably you know, again, I experienced a
1:14:10
Speaker 1: lot of the issues, um, but coming up with the
1:14:13
Speaker 1: solutions was was a lot of other people. I feel like,
1:14:15
Speaker 1: you know, the books kind of thrown me out in
1:14:18
Speaker 1: the into the front. Um. You know, it's definitely a
1:14:20
Speaker 1: role I'm willing to play. But you know, there's a
1:14:22
Speaker 1: lot of people that have made this happen so uh,
1:14:24
Speaker 1: you know it's I just feel lucky to be in
1:14:26
Speaker 1: this position. Well, thank you so much for being so
1:14:28
Speaker 1: generous with your time. We've been speaking with Brad Katsuyama.
1:14:32
Speaker 1: He is the co founder and co team leader of
1:14:36
Speaker 1: I e X. If you enjoy this podcast, be sure
1:14:40
Speaker 1: and look an inch higher or lower on iTunes and
1:14:43
Speaker 1: you could see the other fourty or so of these
1:14:45
Speaker 1: conversations we've had. Um, I want to thank uh Charles Vollmer,
1:14:49
Speaker 1: who is my producer slash engineer, and Michael Batnick, who's
1:14:54
Speaker 1: head of research with the firm. I'm Barry Ridhults. You've
1:14:56
Speaker 1: been listening to Masters in Business on Bloomberg Radio.