- Brad Katsuyama is the co-founder and CEO of the Investors Exchange (IEX), which thwarts predatory high-frequency trading (HFT).
- HFT uses computers to make many trades in a fraction of a second, which Katsuyama argues is used by some in an unfair way.
- Katsuyama and IEX came to prominence as the stars of Michael Lewis‘ 2014 bestseller “Flash Boys.”
- IEX will list its first company in October, a major turning point for the exchange.
- Katsuyama does not consider himself a natural entrepreneur, but was compelled to start IEX out of a fierce belief that he could help fight what he deemed a rigged system.
Brad Katsuyama has never considered himself a maverick or anything like an entrepreneur. Before founding the Investors Exchange (IEX), he had a cushy job as an executive at the Royal Bank of Canada.
But the more he learned about high-frequency trading – where computers can trade a bunch of stocks in a fraction of a second – the less comfortable he felt. He felt so strongly that high-frequency trading was harming the market that he set out on a path to create his own exchange, where predatory trading was thwarted.
Investors can trade stocks from other exchanges on the IEX, with the idea that it’s a level playing field. And in October it will list its first company, Interactive Brokers.
As CEO, Katsuyama has adapted to being the face of the IEX. But when Michael Lewis wrote a book about him, in 2014, the best-selling “Flash Boys,” he felt a bit in over his head.
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Transcript edited for clarity.
Brad Katsuyama: I had never been on television, live television, until “60 Minutes.” I had more LinkedIn requests at the end of that “60 Minutes” episode than I had connections. We had over 500 people during the episode send résumés to the [email protected] email. So things changed very quickly.
Beforehand, Michael Lewis gave me pretty good advice, and he said, read something about you that says you’re a hero and read something about you that’s really negative. He said, do an inventory of how that feels. He said, if the bad ones feel much, much worse and the good one feels good, he said, stop reading everything. So I did that, and the bad one felt really, really bad. And so I just … really, I don’t know if I’d read an article fully written about me in years. My team is good at keeping me informed, and I focus on the business, and I think if you don’t let it change you, I think I’m the same person I was before that happened.
Richard Feloni: On that note, how do you think that Lewis represented you? Even just you personally?
Katsuyama: He absolutely nailed me personally, my character, And what was really funny, was that I was really nervous going into it because I had read basically everything Michael had written.
Feloni: In preparation or just as a fan?
Katsuyama: No, as a fan. “Moneyball” is probably still one of my favourite books of all time.
Feloni: So now you got to star in your favourite writer’s –
Katsuyama: I never thought that was actually going to happen, but his characters are larger than life. And I was really concerned. I’m a pretty normal person and never meant to cause much trouble. Even growing up, I always just tried to get along with people. It’s just a lot easier to do that than to fight. And so, in the middle of kind of his research and his writing, he said, I’m having a lot of trouble writing about you because you’re kind of boring!
And so, I remember, he flew up to Toronto to have dinner with five of my childhood friends, and he went around with my mum, my stepfather, to try to get to know me better or my background better. On the plane ride back, he sends me a text and says, I figured you out. And I was, like, OK, here we go.
You were never looking for a fight, he goes; the fight found you and you fought back. And that is the truest statement that could ever be made about how I ended up in this situation. I was never looking, never really to fight with anyone. It just so happened that this was the way my life went, and when faced with the decision of whether to let it go or to fight back, I chose to fight back.
I think him figuring that out on his own, I think, for me was the first time I was comfortable. The way that he was going to portray me was actually going to be an accurate description of who I am as a person so, that’s what resonated with people in “Flash Boys,” is that this could have been anybody. I don’t view myself as special in any particular way. I think I was the right person in the right situation.
Feloni: So growing up, did you have a vision of who you would become? Did you have a dream of what you wanted to be?
Katsuyama: Absolutely not. I’ve had a comfortable life. I’ve had the same group of friends really since I was 5 years old. Grew up in a pretty normal place. My family life is solid. I was never forced or had this strong desire to be something. So yeah, no. In a funny way. Which is really why, I read Michael Lewis to read about other people who were doing amazing things. I never in a million years thought that I would be in a Michael Lewis book. Just never.
Feloni: That’s funny. Not the traditional path to being a disrupter.
Katsuyama: No. Not at all. There’s nothing about my background … I think part of the struggle was there was nothing about my background that made him think that this is something that would have happened.
One interesting piece is that he was, like, give me something, you know, to talk about. Because typically it’s something in your childhood sparks something, and so when he found out my parents were divorced, he really tried to dive in. He was, like, tell me more about that. I was, like, listen. I said, my mum and my dad are still friends. My dad would come over for Christmas and we’d all golf together. Lewis is, like, “OK, that’s not going to work.” He basically scratched it out.
I’ve always been someone who’s had a lot of ideas. I’ve always been someone who’s tried to give advice and be a good friend and a good teammate. But, yeah, there was never this take-on-the-system mentality at all.
Finding something that had him reconsider everything
Feloni: And even aside from your personal character, was there ever any side of you that was maybe entrepreneurial in that sense?
Katsuyama: I worked at the same place my entire career so ….
Feloni: So no.
Katsuyama: I worked at the Royal Bank of Canada. I had many different jobs. I always like building and creating, running and building teams, and I had seven jobs in 12 years at RBC. So I think maybe there was a bit of that spirit there, but I could have retired at RBC and never had a second doubt. So I think maybe … I’d say I’m more of an intrapreneur than an entrepreneur.
Feloni: What led you into finance in the first place?
Katsuyama: Definitely not a love of finance. I mean, I took finance in school, but I never really had an affinity for the stock market.
I played hockey and football growing up. My stepfather played hockey with someone who was a client of the Royal Bank of Canada, and he said, you know what, I think Brad would be a good trader. He’s competitive. He’s good with numbers and he’s pretty smart. So my stepdad came home and said, you know, Jack thinks you’d be a good trader, and here’s a contact at the Royal Bank of Canada, and so I sent it in. And basically it was choosing between that, a job at Microsoft, a job at investment, and a marketing job at Proctor and Gamble. Those were my picks, and I picked trading. It’s just where I ended up, in a way.
I think part of IEX, knowing the risks we took to start IEX, I think partly is grounded in I don’t feel that working on Wall Street identifies who I am. So if I lost it all tomorrow, I think I could be totally happy with my life, from that point forward, and I think a lot of people over-identify with their jobs. I don’t really feel that way.
So, one of my jobs was going from running risk training where I managed a group of human traders to taking on the role to run global electronic sales and training, and that meant managing a team of computer programmers and network engineers. People who are building algorithms that my training team was using. That shift, in a way, was eye-opening for me because it turned out that those network engineers and programmers actually knew more about how the stock market worked, than I did or my trading team did as traders!
And when you start to understand the plumbing of the stock market, you start to ask a lot of questions. Well, how can they trade at that speed? Well, why is the exchange selling them this cable? Why are the exchanges erecting these microwave dishes? You start to get down this questioning path and then you figure out, wow, I can’t find any of this stuff on the internet. I have to hire people with insider knowledge about how these exchanges are actually operating their businesses.
It does become an insider’s game. Where the majority of the people, including some big investors, have no idea this is what’s happening in the stock market. Because again, if you’re applying this tax on people, you don’t want them to know that they are being taxed. You don’t want them to know that you even exist. You just want to keep applying that, so that’s really what happened. This subculture in the stock market exploded and it was taxing everyone else who needs the stock market to invest in companies.
That’s the thing that I think is, you know, most concerning about all this is, that the purpose of the stock market is you have companies that need capital to build their businesses, build products, provide services, et cetera, and the investors are the ones who have that capital. So that transference in today’s market, 2018, should be pretty efficient, right? Unfortunately, it’s not efficient at all because the middlemen, the exchanges, have made it unbelievably complicated to extract maximum rents from that transference of capital. So I think that’s what we’re trying to do, is fix that.
Feloni: And then when you were exposed to this, at what point did it go from being something that you were upset by, or just intrigued by, to all right, I’m quitting my job, I’m starting my own exchange? That’s a pretty big leap.
Katsuyama: So I think the decision point at RBC, there were a few factors. I think one was, yes, we wanted to solve this problem on a bigger scale. Two is that the success we had at RBC. There’s this one survey called the Greenwich Associates Report, and RBC went from being ranked No. 19 in the United States for products to No. 1 in six months.
Feloni: And that was the team you were working with?
Katsuyama: That was the team that I was running. So that was a huge win. So that doesn’t mean we’re No. 1 in market share. That just means people think our products are the best.
The analogy I used is that’s like winning the Super Bowl and then everyone the next year is a free agent and then you have a salary cap. There is no way you can keep that team together. So what was happening at RBC is that me and a bunch of my key people were all getting job offers from other banks. So if I don’t do anything, I’m just going to be managing a team that’s been depleted and there’s going to be all this turnover and we’re going to have to start over and do a bunch of things. So that wasn’t very appealing.
The third piece was I was starting to read more articles. This was in 2011, where big banks, I remember reading this article that’s saying Goldman Sachs is having trouble paying its best people, because they want to pay them enough to keep them, which they have to do. But they don’t want to pay them too much to enrage society. And I started to hear more and more about Wall Street compensation. I said wow, society is having an impact on the way Wall Street operates. I also kind of wanted to kind of get in front of a tidal wave that I thought was coming where Wall Street was going to be more accountable for transparency and truth and fairness. There was this trend.
Feloni: Like a cultural shift after the Great Recession.
Katsuyama: Absolutely. The financial crisis created a mistrust between Main Street and Wall Street, and I thought we can create a company that essentially positions ourselves for this wave. Not to say that people didn’t trust RBC – they did. It was a great place to work, but just kind of creating our own company to keep this group together, to solve the bigger problem, and to be kind of well positioned for this change that we’re seeing coming on Wall Street.
Those three factors were the reason that we decided to leave.
Risking it all to take on a duopoly
Feloni: Then what did your family and friends say when you decided you were going to do this?
Katsuyama: The first person I had to get buy-in from was my wife, and my second son was born three days after I started IEX. So obviously life was changing pretty dramatically. But she was always a believer in kind of, this is your path and I have confidence in what you’re doing, and kind of the deal we made is if this doesn’t work, I am going to leave finance and we’re going to prioritise where we live and I’ll find another job.
So, again, I think it was an asset to not be attached to Wall Street. I was willing to take a risk that other people aren’t necessarily willing to take. I got buy-in from her and my family, my friends – no one really questioned what we were doing. I think I had enough conviction at that point that this was the right path, that people bought in.
A lot of people from RBC, when they heard I was leaving, wanted to leave. We took a very small group of people. But I think one piece of advice I would give people is it ended on good terms because I didn’t hide anything from RBC. When I had the idea, I brought it to them. We tried to do it actually as an RBC-created exchange and the customers told us, well, it can’t just be RBC because Goldman Sachs will never want to route to an RBC-created exchange. So RBC understood that they couldn’t be a part of this exchange. And so, I think being above board, and there were people I trusted at RBC …
Feloni: Just being fully transparent?
Katsuyama: Being fully transparent. We walked away. I think a lot of times people try to hide things. And it ends up working out a lot worse and frankly, RBC is still a good customer. Relationships are still there. There’s still a level of trust and I think if I had tried to hide all this, that would have been destroyed. And I had worked my whole career. Why would anyone want to burn a bridge like that?
Feloni: What did you find, in terms of the experience of being a leader as an executive at a big bank, to now being a CEO of a startup?
Katsuyama: You take a lot of things for granted at big companies. I think what concerns me a little bit about what happens now or when I talk at universities or different places, I think some people want to start a company more than they want to start a particular company – “I just want to be an entrepreneur.” I think there’s a huge amount of risk there, because there are things that you would take for granted or there’s things that you can learn at a big company, that you just can’t on your own because once you’re on your own, it’s as much about survival as it is about anything.
Feloni: So there’s less time to learn more skills?
Katsuyama: Absolutely. Without question. It’s like, “OK, we need phones. We need insurance. We need this, that, and the other thing.” So you’re making decisions that are necessary that certainly aren’t … you’re not learning anything when you’re on, when you’re talking to the phone company all day. I think, you learn how much we took for granted at a big company. At a big company it’s about here’s a business, go build it. And everything else just sort of works, right? You show up. There’s chairs in your office and stuff like that. I think as an entrepreneur you find out really quickly how much needs to be done that has nothing to do with the business you’re trying to run.
Feloni: And you’re there as the lead inspiration for your team, as well.
Katsuyama: Yeah, the risk level … I think I fretted more about the risk other people were taking than my own risk. At one point, the highest paid person at IEX was my assistant because she wanted to come and she did, God bless her for coming, but she couldn’t afford as big of a pay cut as the rest of us could in a way, so you kind of got to do things like that to make sure that you’re treating people fairly. Yeah, I still fret about it. People’s families rely on us to make good decisions and to build a good business so that’s a level of stress that I think you don’t have at a big company.
But at the same time, when the buck stops at you, when you’re the CEO of the company, you can control the amount of politics that exist in your own space and, also to an extent, the company’s space. And I think that I spent a lot of time at a big organisation dealing with politics and that cuts into productivity. I don’t think I work more hours than I did at the big bank. I just think I work way more productively in the hours I spend.
We’re in a different life cycle. The early life cycle, fundraising was the hardest thing I’ve ever had to do in my life. It’s incredibly humbling. You get rejected hundreds of times and people are basically pretty ruthless at times about the thing, your dream. It’s like, “Here’s my dream,” and they’re like, “Here’s all the reasons why it’s not going to happen,” or, “Here’s why you are stupid or crazy, or, you know, I heard [you’ve got odds of] “one in a million” from a pretty savvy investor. When you hear that you’re like, oh my God, what have I done? Fundraising was definitely something I had no idea how hard it was going to be.
Feloni: Well, in that moment, when you have someone who kind of like, maybe someone who you admire and respect, and they just completely shoot down your dream, did you have a moment where you questioned everything that you were doing?
Katsuyama: I had many moments when I questioned everything I was doing!
So one piece of advice that I give to anyone thinking about starting a company is you have to have experienced the problems that you’re trying to solve. You have to. It can’t be, oh, I’m told this or I’ve read this. It’s you have to have lived through the problems you’re trying to solve because there will be moments where you will doubt yourself. There will be moments where you’re absolutely at rock bottom. If you can’t rely back on the fact that you have experienced the problem that you’re trying to solve, you’ll doubt whether that problem exists. You can talk yourself out of it in a way. I had many low moments. But I would always fall back on the fact that I lived through this problem, for years. And I know we can solve it. Then you snap out of it pretty quickly. We had many, many ups and downs. It’s another good thing about having a good team.
When I was out raising funds, one of our co-founders, Ronan Ryan, who is our president, he and I would go on these pitches together. And I think what was nice was we’d be riding the subway back and I would be totally bummed. He’d be, like, “No, man. It’s OK. We’ve got this. Don’t worry about it.” Then he would be totally bummed the next week and I’d be, like, “OK, man. We got this.” So I don’t even think we hit rock bottom at the same time. So, that probably kept us going too. If you can afford it, having partners, teammates, is really helpful. I think alone it would have been a much scarier situation than with a team.
Feloni: Because they share that vision and they could lift you up when you need that boost?
Katsuyama: Yeah, and people can focus on their areas of expertise, right? Like our CTO never left the office. He was coding nonstop and our COO was the one getting the phones set up and doing all these things, these thankless jobs, but he knew that’s where he was kind of best focused. So I think we had experts that were focused in their areas. And yeah, do I own less of the company than I would if I didn’t have [them]? Yeah. But 50% of zero is zero. There’s no way in the world that IEX would be where it is at this moment if I didn’t have that team alongside me.
Balancing ambition with patience
Feloni: Was it difficult building an exchange when you’re working with the Securities and Exchange Commission, the SEC, and things move gradually with federal oversight? Was that ever frustrating in terms of things had to move a bit more slowly than at other startups?
Katsuyama: Oh yeah. I mean, it took us two years to get our exchange approval. In startup language, two years is an eternity. It took us another year after that to get approval to list companies.
There are pros and cons of regulation. The pro is that the barrier to entry is really high. The expertise level is really high. A group of kids in college can’t create a stock exchange. You just can’t. You don’t have the expertise. You don’t have the understanding of the regulation. It’s just very, very hard to do. The downside is that, yes, there is a huge wall to climb over just for the right to compete. And I do think it’s why you don’t see a huge amount of disruption in our part of the world, because it is so heavily regulated. A lot of times innovators are allergic to regulation. And for good reason.
So for us it was about getting the right people, setting the right kind of long-term agenda. And I say this all the time, almost ad nauseam, I say, I believe we’re on the right side of this and I can predict we’re going to be on the right side of this. What I can’t predict is when that’s going to happen because it’s outside of our control. So we need to focus on the things we can control. I did my best to not over-promise, to not overestimate. It’s a matter of just trying to lay that plan out. I think in the early days we expected the regulatory process to go very smoothly and I think the second that we understood that that was not going to be the case, we adjusted pretty quickly.
Feloni: So you got your first company for the exchange in September, and it will go through in October. How did that feel and what does that mean for IEX?
Katsuyama: Yeah, it’s another huge milestone for us in a pretty long journey. There are 13 exchanges in the United States, but if you go on the street and you ask people who are the stock exchanges in the US, they will say New York Stock Exchange and Nasdaq because where a company lists automatically creates a connection to that company, and in people’s minds it validates those markets as exchanges. They have had a 40-year-old duopoly in listing major companies. They have kept people out through the regulatory process partly, partly by fighting them every step of the way. It’s been a battle for us. Whether it’s lawsuits, lawsuits threatened against the SEC, the lobbying, it’s all that. We’ve lived through all of it.
If you have a duopoly you don’t want competition, and I think for us, No. 1, it represents competition and, No. 2, when I look at companies and I look at the shareholders that they have, IEX’s big support and backing come from investors. Long-term investors. The big ones. We continue to grow because of them, and then I look at companies. And really these companies are listed on the NYSE or Nasdaq. They have been hugely underserved, right? All of the innovation in the market certainly benefited high-speed trading. But how has that benefited the company? So for IEX, our biggest value is taking the investors and the companies and aligning their interests with their exchange.
Interactive Brokers, as our first listed company, we couldn’t have written a better script. Here is company that has innovated in the market. It’s one of the largest brokers that there is. Their chairman, CEO, founder, Thomas Peterffy, for me, has been an inspiration. I followed his career. People call him the father of electronic trading. But, using technology to help investors, to help lower costs. That’s what Interactive Brokers has done. We’re on the same side of this debate to say, listen there’s a part of high-frequency trading that is not good whatsoever and the exchanges have essentially enabled that.
The problem with breaking a duopoly is there’s always risk to someone going first. Who is going to go first? The risk here isn’t actually that high, and it took someone sophisticated to understand that but I think having someone that knows the markets, understands market structure go first, it sends an amazing signal to a lot of other companies, whether you’re in finance or not, that this is a move you can make.
Feloni: Has it made those conversations that you’re having with companies easier?
Katsuyama: I mean, absolutely. The interest level after the Interactive Broker switch has been tremendous. What’s funny is that when people start to think about competition, if you do an inventory that says OK, what has my exchange done for me recently? And your answer to that is I don’t know. That’s a huge problem, right? They collect about $US750 million a year from these companies that are listed there. This is a sector that is in desperate need of competition. Overcharging for the service and underdelivering on that service. We see this as just a huge opportunity.
Keeping a healthy boundary between work and his personal life
Feloni: And as someone who’s building his own business and someone who’s served a long time in a big corporation, looking at all of this, how do you personally define success?
Katsuyama: What’s funny is that some people have that barometer where it’s about money. And I could not tell you if you asked me, if you had a gun to my head right now and said, “What’s the value of your stake in IEX?” I would miss it. I would be wrong. I don’t know. So that tells me it’s not about money.
I think success is about building a company that lasts, that people are proud to work at, that my kids could work at some day. And that’s not measured in dollars.
I think success is having a balance between what’s important to you inside of work and what’s important to you outside of work. And I think some amount of balance means that the most important thing in my life is not just work. I think people equate success to work. I actually don’t, and I learned the lesson early that identifying yourself too much with one thing in a way sets you up to be dramatically disappointed at some point.
If I defined my life around IEX, at some point in time I might not be the right leader for IEX. So I would step down if the company believed there was a better leader. I’d step down tomorrow if the company honestly believed that there was a better person to lead the company. I would do it. I actually think that’s what makes our company work. I’m the leader because I think I’m the best person for the job. I’ll hire people that I think are more talented than me and I’ll be very candid with people I’m friends with about whether they are doing a good job or not.
It’s a business. But it’s not the only thing in my life. It’s certainly not the most important thing in my life.
So I think success is a really, really broad term. It’s actually important to ask yourself that question as an individual because you can start to line up the things that you do on a daily basis behind what your view of success is.
Feloni: Well thank you, Brad.
Katsuyama: Cool. Awesome.
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