Brad Katsuyama was a Canadian living the American dream.
At just 33 years old, he was making $2 million a year leading a team of equities traders for Royal Bank of Canada’s New York branch. But after discovering widespread abuse on Wall Street, he walked away from his lucrative career and set out to overthrow the stock market.
Michael Lewis is getting most of the credit for exposing high-frequency trading in his best-selling book, Flash Boys: A Wall Street Revolt. But Brad Katsuyama is the man who blew the whistle on the $20 billion scam. He’s the hero who is prominently featured in Lewis’ shocking story.
So who is Brad Katsuyama? How did he become the Wall Street insider to expose such a massive scam?
For years, Katsuyama had noticed that many of the large orders he was placing weren’t being properly executed. He discovered the problem after months of asking questions, digging into financial data, and hiring a team of experts.
The problem, he discovered, was a new form of parasite known as high frequency traders.
These traders with faster and more sophisticated technologies were beating him to the punch by front-running his trades and driving up the price. When they saw that Katsuyama was buying a stock, they would automatically rush to the other exchanges and buy up the stock just before his original order reached the exchange. And they would then sell him those shares at a slightly higher price.
Brad Katsuyama asked around, and realized he wasn’t alone. High-frequency traders were scamming some of the largest and most advanced hedge funds in the world.
So Katsuyama decided it was time to do something about it.
“It didn’t feel right that people investing on behalf of people’s pension and retirement funds were getting bait-and-switched every single day,” Katsuyama told “60 Minutes” in a highly publicized recent interview.
After peeling back the curtain on high-frequency trading – and figuring out how the HFT firms did it – Brad Katsuyama quit his job at RBC in 2012 and set out to launch a new stock exchange. By October of last year, he had succeeded. He had founded IEX, an exchange dedicated to fair play in trading. In essence, he had created a market where high-speed traders don’t have the advantage over other investors – including hedge funds, mutual funds, and individual investors.
“I felt a sense of obligation,” Katsuyama explained. “We found this problem that was affecting millions and millions of people. And people were blindly losing money they didn’t even know they were entitled to.”
With the help of a very skilled and savvy IT team, Katsuyama made it so that IEX trades are impervious to interference from high-frequency traders. To accomplish this, they coiled 60 kilometers of fiber optic wiring in order to slow down all orders placed on IEX. This essentially makes it impossible for the stock exchange to be gamed by traders.
Few people knew about IEX until the “60 Minutes” interview. Now Katsuyama and his team are handling 58 million trades per day. The outrage over high-frequency trading has driven some investors to seek cover in IEX’s HFT-secure system. As Katsuyama says, being trustworthy goes a long way with investors these days.
“We’re selling transparency,” Katsuyama said.
To get the full story about how Brad Katsuyama is saving investors from being front-run by high-frequency traders, you must read Flash Boys. Ordinarily you would have to go and buy a copy of the book (retail price $27.95).
But through a special deal with the book publisher, we’ve arranged to give away just 500 free copies of the hardcover book. And I’m making them available to my loyal readers.
Click here to learn how to claim your copy. In just a couple minutes, you can get your free copy of Flash Boys. Given the media coverage of the book, we’ve gotten a great response. We don’t have many copies left – so if you want to be one of the lucky readers to get a free copy of Flash Boys, just click here now.