My guest this week is Brad Katsuyama, the founder of the IEX exchange and protagonist of Michael Lewis’s famous book Flash Boys, which chronicled the role of high frequency trading in markets.
This conversation was yet another reminder of how complicated markets can be, and that very few participants know all aspects of the process well. Brad and I get deep into the history behind his company, and the ways in which markets and exchanges have evolved, better or worse. We discuss latency arbitrage, why exchanges make less money on actual trading activity than you might guess, and the two most impactful meetings Brad took while setting up IEX.
One of my favorite parts of this conversation was our exploration of entrepreneurship. Brad’s whole story is one that entrepreneurs will appreciate, and is full of lessons for those aspiring to start their own business.
1:50 – (First Question) Brad’s original discovery of a latency problem in trading stocks
10:41 – how the business model of the NASDAQ and exchanges and how it may surprise people
12:06 – The edge that exchanges are now monetizing
14:36 – How Brad went from finding a solution to his current firm
18:08 – Types of high frequency traders that there are
22:23 – The formation of IEX
25:36 – Funding IEX
28:38 – What happens to the initial funding
30:20 – Describe what IEX is as it was sold to early buy side investors
32:21 – Explaining the concept of a speedbump
36:08 – Pitching companies so they will be listed on their index
38:27 – Explains maker-taker fees
42:37 – The sources of revenue for IEX vs traditional exchanges
44:43 – Most memorable meeting Brad has had in establishing IEX
47:29 – How did he do this with young kids?
50:28 – Has the pool of potential profits that high-frequency trading firms can earn gone down
51:43 – What has Brad most excited about the future in terms of helping the buyside
53:07 – What was it like to see Brad’s venture get turned into a best-selling book. (Flash Boys: A Wall Street Revolt)
56:50 – Biggest thing that Brad has learned
58:46 – What would Brad do if he couldn’t work in the investing world.
1:00:15 – Kindest thing anyone has done for Brad