Thursday, April 10, 2014 |
(Photo: Scott Eells/Bloomberg)
First aired on The Current (9/4/2014)
"I think this is a person who may have walked into American finance and changed it forever."
That's what best-selling author Michael Lewis has to say about Brad Katsuyama. Katsuyama was "a nice Canadian kid" from Markham, Ont., one who ended up trading for RBC on Wall Street by happenstance. When he got there, he was at first perplexed, then disturbed by the secrecy and undeclared advantages of high-frequency trading. So he fought back, and is now considered a revolutionary in the world of high finance. Michael Lewis has captured it all in a new book Flash Boys: A Wall Street Revolt.
High-frequency trading is the ability to place a trade many, many, many times faster than the blink of an eye and it has become a fixture of stock markets all over the world.
"Hundreds and hundreds of trades can be made in a millisecond," Lewis told The Current host Anna Maria Tremonti in a recent interview. "The source of the problem in the exchange is the market on which investor orders get prices is two or three milliseconds behind the market that the high-frequency traders see. The analogy is that the high-frequency traders get the right to trade against you using yesterday's prices and they know today's prices." High-frequency traders swoop in to buy stocks, increase the price by a small fraction (often just pennies), and then sell it on to the investors while pocketing the profits. Per stock, this doesn't add up to much. But a few pennies every millisecond, all year long? That adds up to billions of dollars for the industry and millions of dollars in the bank accounts of traders
How does Katsuyama fit into all this? As he quickly rose through the ranks of RBC just before the financial crash of 2008, he began to question a career in finance. "At the same time he's encountering what he regards as clearly predatory activity on the stock market," Lewis said. So, with RBC's blessing, he began to look into it. "The deeper he digs, the more he realizes the system has been set up to benefit the intermediaries -- Wall Street firms, exchanges, high-frequency traders -- at the cost of investors and the economy as a whole without anybody telling the investors what's going on."
This bothered Katsuyama. He saw it as "rich, elite people stealing from middle class savings." So he decided to do something about it and started telling people about what he learned. The response in the financial industry was divisive, but Katsuyama felt that "the regulators would not come to the defence of the investors." He got a lot of support from RBC, but eventually realized that it is too small to change the system from within. So he started his own exchange, "an exchange that takes responsibility to investor's orders, and that responsibility is to keep these orders out of the hands of predators." The exchange is called IEX. It opened for business in October 2013 and, Lewis said, "they are going gangbusters" thanks to orders from investors "who want to create a fairer market" -- including Goldman Sachs. "Brad Katsuyama has built a viable option to the current stock market."
Things are shifting on Wall Street. People are talking. The U.S. Justice Department is investigating what's going on. And it's partly because of the efforts of Brad Katsuyama. "I think he's restoring trust in the financial system," Lewis said. "I think he's going to be a historic figure. And thank God for him."