Invest Like the Best with Patrick O'Shaughnessy - Brad Katsuyama - What Happens When You Hit “Buy” - [Invest Like the Best, EP.61]

Episode Date: October 31, 2017

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.  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. Please enjoy my conversation with Brad Katsuyama   For more episodes go to InvestorFieldGuide.com/podcast. To get involved with Project Frontier, head to InvestorFieldGuide.com/frontier. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag   Books Referenced Flash Boys: A Wall Street Revolt   Show Notes 2:10 – (First Question) Brad’s original discovery of a latency problem in trading stocks 12:51 – how the business model of the NASDAQ and exchanges and how it may surprise people  14:16 – The edge that exchanges are now monetizing  16:46 – How Brad went from finding a solution to his current firm  20:18 – Types of high frequency traders that there are  24:33 – The formation of IEX  27:56 – Funding IEX 30:48 – What happens to the initial funding 32:30 – Describe what IEX is as it was sold to early buy side investors  34:31 – Explaining the concept of a speedbump  38:18 – Pitching companies so they will be listed on their index  40:37 – Explains maker-taker fees  44:47 – The sources of revenue for IEX vs traditional exchanges  46:53 – Most memorable meeting Brad has had in establishing IEX  49:39 – How did he do this with young kids? 52:38 – Has the pool of potential profits that high-frequency trading firms can earn gone down 53:53 – What has Brad most excited about the future in terms of helping the buyside 55:17 – What was it like to see Brad’s venture get turned into a best-selling book. (Flash Boys: A Wall Street Revolt) 59:00 – Biggest thing that Brad has learned 1:00:56 – What would Brad do if he couldn’t work in the investing world. 1:02:25 - Kindest thing anyone has done for Brad          Learn More For more episodes go to InvestorFieldGuide.com/podcast.  Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

This podcast is sponsored by CFA Institute, the Global Association of Investment Professionals whose mission is to lead the investment profession by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals working to build an investment industry where investors' interests come first, financial markets function at their best, and economies grow. The chartered financial analyst credential is the most respected and recognized investment management designation in the world.

The views expressed in this podcast do not necessarily represent the views of CFA Institute. Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com. Patrick O'Shaunicey is a principal and portfolio manager at O'Shaunicee Asset Management, all opinions expressed by Patrick and podcast guest. are solely their own opinions and do not reflect the opinion of Oshamacy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment

decisions. Clients of Oshonasi asset management may maintain positions in the securities discussed in this podcast. My guest this week is Brad Katsuyama, the founder of the IEX Exchange and the 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 for better and 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. Please enjoy my conversation with Brad Katsuyama. So, Brad, this is going to be an interesting exploration for me, for sure, because I think it's

interesting that a lot of buy-side PMs, especially on the research side, that are dealing mostly with companies, not so much with execution and trading, actually don't know a ton about this world. I think a neat place to start would be with the story of your original discovery of what we'll call a big latency R problem in the trading world back in your RBC days. and we'll weave into that discussion sort of the history and purpose of exchanges before we spend the majority of our conversation on IEX and kind of what things should look like in this world. Yeah, I mean, so the discovery of the problem kind of goes back to 2009. And I think that, you know, at the time, we had known a problem existed, but we really didn't have a good understanding of why.

And just for context, you know, my background, I was a program trader in Toronto. I grew up just outside of Toronto, moved to the U.S. in 2002, and I traded energy. and listed energy equities that, you know, listed mean the New York Stock Exchange. So my first interaction with U.S. stock trading was dealing with the floor of the exchange and spending time down there and just seeing the chaos and having, you know, people physically, like, running to crowds with tickets and that type of thing. You know, the Toronto Exchange market was purely electronic. So it was a very, like, kind of surreal experience and migrated from that.

I was the first trader at RBC to trade both listed New York and over-the-counter stocks when I, I started to trade technology stocks. And so got a kind of a sense of what NASDAQ looked like at the time, a market-making-driven market and then also dealing with the floor. And then in 2007, with the implementation of Regulation NMS, national market system, was really a way to take a manual market, a floor-based market. It was a way of automating the New York Stock Exchange, in so many words. And what we started to realize is that our ability to buy or sell shares that we saw on our screens,

on our Reuters screens, on our Bloomberg screens, you just could not buy or sell what you saw on your screen. And in 2006, you could. And in 2005, you could. Meaning orders that were shares available. Yeah, shares that were bid for or offer. If you pull up a quote, you know, any PM or trader goes into their Bloomberg or the Reuters, and you pull up a quote of a stock, you'll see there are X many shares offered at $75 in Microsoft. And in 2006, if that said 10,000 shares, you could buy 10,000. But by 2007, you'd see those shares. You would try to buy 10,000. and you'd get some fraction of that, and the stock would immediately tick higher. And then you would try to buy what you saw at the new higher price, and you'd get a fraction, a smaller fraction of that, and then it would tick higher again. And it started happening over and over and over and over again, and almost to the point where you felt like, you know,

someone knew what you were trying to do while you were trying to do it. So this went on for two years of asking questions, of talking to our tech group. And, you know, at that time, technology groups on Wall Street were computer, keyboard, office administration technology folks. And, you know, there weren't, there wasn't a heavy quantitative presence, at least not available to me at the time. And so in 2009, RBC asked me to run global electronic sales and trading. So that went from managing, I was running U.S. trading at the time, a group of traders, human traders, interacting with the market through algorithms and all sorts of things to actually running the group that built the algorithms. So, you know, managing

computer programmers, network engineers, et cetera. And it turned out in a weird way that these engineers knew more about how the stock market actually worked than my trading team did, including me. And partly, you know, when you said about, you know, portfolio managers don't understand, you know, as traders, as sector traders, you're worried about oil and the Department of Energy natural gas numbers and you're worried about production runs and you're worried about chipsets. And, like, you're worried about fundamentals of the stock market and you're not worried about market microstructure. And I think that moving into electronic trading, it got, it kind of gave me this window into learning about market microstructure from really people who didn't have a lot

of understanding about trading. What does a portfolio manager really do? Who are our actual customers? What are we trying to accomplish with these algorithms? And what these people did is they gave me a view of the market that really, in many ways, changed my whole perception of what the stock market is. I think CNBC and people running around on the floor gives this very false sense of what the stock market is. It's not that at all. No trading happens on the floor of the New York Stock Exchange. It's now happening in data centers out in Mawa, New Jersey, and NASDAQ's not in Times Square. It's in Carteret, New Jersey, in a data warehouse. And I think that it's, once you start to kind of learn that the stock exchanges themselves made more money selling high-speed data and technology than they did from actually trading, it kind of changes your perception of everything.

And that was the first kind of discovery. There's this weird relationship between high-frequency traders and stock exchanges that a lot of people didn't know about. And certainly we didn't know a lot about it and just trying to really dig to the hard. part of what was there. Let's go back to the super specific. So originally you're able to fill the orders that you're placing. And then over time over the next couple of years, you're seeing that you'll place an order and get a fraction of it. And the price starts going up. So what that would lead me to believe is, well, there's more people buying and selling. Yeah, absolutely. But that was not the case. Yeah, the first comment back when I was complaining about this, this is back now 2007,

is to say, oh, other people are trying to buy, you know, Microsoft or Intel at the same time you are. and I would say, okay, well, I'll prove you wrong. It's now trading at 7505. There's 8,000 shares on offer, and I'm not going to press this button to buy shares for five seconds. And I said, while I'm counting the stock trades and it moves for me, you are right, I'm wrong. It's just complete coincidence that someone else try to buy it exactly the same time I did.

So I'd count to 3, 5, 7, I'd change it up. The stock wouldn't be moving. I'd hit the button and then boom, I get, 2,500 and the stock gaps up even higher. So it was not a coincidence. Someone wanted to buy shares because I wanted to. As he started to drill deeper into what was happening, as we started to hire more of these engineers, they said, well, in reality, the 8,000 shares, and I knew this because I had level

two quotes, but your action of pressing the button creates a series of actions at RBC, at World Bank of Canada, where we have to look at all of the different exchanges, what they're offered. We have to send orders over fiber optic connections to these different exchanges, and just so happens that they're arriving at different exchanges at different times where the difference in arriving between one exchange and another was measured in milliseconds, thousands of a second. I'll never forget it. When we ran our first set of experiments, our order was arriving at Bats first and was arriving at the New York Stock Exchange last. And the difference was two milliseconds

in the arrival time between those two exchanges. Really because RBC was located in Manhattan, Bats was located in Weehawk and right on the other side of the tunnel. So basically our messages from RBC downtown would go up the west side highway of Manhattan, out the Lincoln Tunnel, and get to Bats simply because it was the closest to us. New York was up in Mawaw, New Jersey, which is roughly 30 miles north. It would get there last. And I said, well, two milliseconds seems pretty fast. The president of IEX, who's been a partner mine for a long time now, Ronan Ryan, was a network engineer working for high-frequency traders. And he came in and explained this network that he had just built where the time it would take him to pick up a message at Bats

and get his order over to the New York Stock Exchange was 476 microseconds, which was four times faster than our order just chugging along a normal fiber optic cable would get there. So at that point in time, it became totally obvious to me. What was happening was people were picking up the signal

that someone just bought everything on offer at Microsoft at BATs and was racing to New York ARCA to buy shares ahead of us to sell back at a higher price. And this is in 2009. amazingly, this morning I was reading a blog written by a high-frequency trader where he says in the blog, the point of his low-latency architecture is to detect institutional demand to acquire those shares before the institution can to sell back to them at a higher price. It's 2017 and it's still a strategy. Now, you say, like, how is that happening? Once it was revealed, why aren't people, you know, screaming bloody murder? Because obviously it's this interest, is really who wants to buy those Microsoft shares. Mutual funds and pension funds do. If you want to buy 100 shares of Microsoft, knock yourself out, the market's fine.

You can't move the market with 100 shares of Microsoft. If you're trying to put a $10 million position on in Microsoft, you're going to have an impact in the market. How big of an impact really has to do with how many signals are you leaving in the market? How aggressive are you moving the price? And really, how is that order being handled and routed? Who is it being routed to? It's going to have a tremendous impact on returns. And I think that what we set out to do once we discovered what was happening was first and foremost educating the buy side, the mutual funds, the hedge funds, the pension funds who are managing these large orders.

This is really what's happening in the market and the stock exchanges are the ones facilitating it. You know, we had a choice funnily enough. I remember like when we discovered it, we ran a series of tests. And the way we kind of solved the problem, so to speak, at RBC was we would measure the latency to each of the exchange. exchanges, and instead of, let's say, taking four Microsoft orders and blasting them all out at the same time and arriving at different exchanges at different times, we would send the orders out in a staggered fashion, spacing them out based on the latency between each exchange. So the Newark was the farthest away, send that order first. Bats is the one closest, send that order last, and try to arrive at all the exchanges at the same time to reduce the window that we could be basically electronically front run. We ran the series of experiments to do that. Our fill rates went to 100%. So that was like, this is a like this miracle moment where you're like, I cannot believe that it worked, number one, but number two, it validates that the problem exists. Then you're faced with a choice. Now that you understand that this has happened, I remember going home that night,

lying down and thinking, man, we just discovered this thing and thinking a little bit further and saying, well, why have I never read about this? Why is no one talking about this? Why is this not something that I can look up on the internet? Everyone that had figured that out became part of the problem. Once you realize that you can detect when people wanting to buy while they're trying to buy and get in between this execution that they think is instantaneous, people just went out there and started doing it themselves. So I think we weren't the first to discover it by any means, and we weren't even close to being fifth or tenth.

I don't know where we rank, but we were the first ones to say, you know what, this doesn't make sense, and we're going to try to stop it. And we're going to try to educate people and what's happening. And I think that's really been kind of the story all along is more people need to understand how the stock market works so that less people are on the wrong side of these trades. Can you talk about the business model of, say, NASDAQ or exchanges that people are most familiar with and how it might be surprising in terms of how they actually make their money? Absolutely. I mean, trading as a percentage of their net revenue continues to decline,

and they now make the number one revenue source for them is market data and selling technology. And if you think about market data, the industry sends them orders, and they send the industry's own orders back to them in a tiered fashion where the more you pay me as an exchange, the more information I'll give you and the faster I'll give it to you. The exchange doesn't create market data. The industry does. They just basically organize it and distribute it back to them, but they do it in tiers, which creates a serious fairness issue, but number one, it creates a monopoly on how they can price it. I mean, IEX's own market data bills, because we need to know what the exchange exchanges are posting and quoting and trading. Our own market data bills have gone up 300

percent since 2014 when the cost of technology is plummeting in every other industry. So they are in the business of selling advantages, of selling tiers of access. And in reality, it's shocking that more people aren't upset about that. And part of the other, I guess, issue that's linked to that is because they sell these advantages, like, why would anyone want to trade there? Why would you want to trade if a certain class of participant has such a strong edge over everyone else? Can you just define what you mean by edge and what those tiers literally are? Sure, yeah. I mean, if I want to run that strategy, I just talked about it, if I want to pick up a signal

at Bats and I want to race to the New York Stock Exchange, I need to be co-located next to the exchange to get that information that Microsoft just traded as quickly as possible. So I paid to co-locate. I need a connection to the exchange. They charge you for cabling. How do I get a message from Bats to the New York Stock Exchange? Well, they'll sell you a microwave connection as well. Some of them will sell you cabinets.

So there's a list of things that the exchange will sell you to, perform a strategy that needs to be executed in microseconds. You know, in reality, is that the business that the exchange should really be in and for whose benefit? If you think of like, even ask a bigger question, what's the point of a stock exchange? To me, the point of a stock exchange is to let buyers and sellers trade with each other at the smallest amount of friction. So I measure exchange in terms of like efficiency.

And people are saying, no, no, exchanges are about liquidity. Not really because exchanges don't provide liquidity. Exchanges can't buy or sell shares. Investors provide liquidity. High-speed traders provide liquidity. Brokers provide liquidity. Exchanges really should just be letting buyers and sellers find each other at the minimal friction. What they've done by tiering things, by selling these various kind of cables,

data, et cetera, they've tried to create the maximum amount of friction. The New York Stock Exchange runs three exchanges. That's creating friction. NASDAQ runs three exchanges. BATs runs four exchanges. runs four exchanges. So if the goal is to get buyers and sellers together, why are we trying to separate them? Well, because it creates more dependencies between each exchange. I can sell four sets of market data. I can sell four sets of cabling. I can do all of these things to try to,

in a way, create as much friction as I can to increase my take on the industry. So you have exchanges focused on maximizing their take from the industry when in reality in 2017, they should be about minimizing costs and minimizing friction. And I think what we're trying to do at IX in a way is simplify things. We have a speed bump. Nobody wants to pay to be in the other end of a speed bump. The point of the speed bump is to try to neutralize all the advantages that can be purchased at other exchanges. So I think it's almost the exact opposite business model, even though we're both exchanges.

They're competing in one way to try to make the market more complicated, which helps out very, very few people. and we're trying to make things simpler, which really helps everyone else who doesn't benefit from the complexity. Let's go back to the solution that you found at RBC, which is effectively play with the latency so that it arrives at the same time, all of a sudden the problem's gone. So you realize that. And then what do you do with that? Like, you don't go from that to starting IEX the next day. No. So we went and started to talk to the by side about here are the problems that we see.

And every bi-side firm that we talked to had experienced exactly what we were framing out. you see a quote, you try to buy it, you don't get it. And so we built that product called Thor, we sold it to the by side. In the Greenwich Associates Survey, we went from number 19 to number one in product quality, execution quality. So it was like an overnight success, which was great. The problem is, you know, as we grew business very quickly, it started to kind of grow at a much slower rate largely because the byside does trade with a bunch of different brokers. So one by-sider put it in kind of beautifully to me. He said, listen, we love what you've done.

We love your team. You've only solved 3% of my trading problem. He's like, what are you talking about? 3% is the amount of borders I send to RBC. What about the other 97% of my trading issues? And that kind of planted the seed to start IEX. Now, Iex was an idea that we conceived at RBC that I brought to my boss at the time and said, listen, the stock exchanges are the most culpable players here.

High frequency traders get demonized in a way. They take advantage of a broken system. Some people say it's unfair. Some people say it's fair. It's arbitrage. Yeah. They take advantage of a system that's broken. The exchanges are purposely breaking the system and then selling the solution.

They're purposely fragmenting the market to benefit people who can take advantage. They're selling different cable speeds so that people with a faster cable can trade against people that have a slower one. They sell microwave services because people that are using fiber optic cable. and are out of disadvantage to someone using a microwave connection. So they are purposely breaking. The line I draw in my own mind between what's useful and what isn't is I say, why does this arbitrage exist? If it's because you create an ETF,

which creates an arbitrage with the underlying securities that make up that ETF, that's totally fine because there is a purpose to creating this ETF, to give customers a diversified choice in a single equity versus buying the basket themselves. If you create an option against an underlying, a derivative product, against an underline, it's going to create a natural arbitrage for a purpose. Microwave connections create an arbitrage between fiber optic cable and a microwave. What is the purpose of that? It's so that the exchange can sell you a faster version of something and knowing that if one

high-speed trader buys this connection, all of them are going to have to. It's very much like the rent-seeking versus grow-the-pie mentality. Like this is classic rent-seeking on top of data. Absolutely, which is kind of shocking that more people, especially, you know, in the government aren't offended by the rent-seeking. Like, this is classic rent-seeking. They are inventing, there's a 10-gig LX cable that is two microseconds faster than a 10-gig cable. What is two-microse—the market is not two microseconds more efficient.

You can just upsell someone who's so paranoid that their competitor will be two microseconds faster than them. That is just classic rent-seeking. And you're seeing actually a lot of consolidation in the high-frequency trading space because the cost to be a high-frequency trader continues to go up as the exchanges continue to pull. the ratchet. The problem is as they pull that ratchet, they raise the cost of everything else as well. So even, you know, the brokers that aren't engaged in high speed trading microsecond level, their costs are also going up. It's all going up at the same time at all levels. And I think that's an issue. For context, before we get back to the formation of IEX and sort of its strategy and purpose

as an exchange that gets around some of these problems, or where the business plan isn't this kind of tiered access rent seeking structure. We use the term high frequency trading a number of times. And it's one of those terms that I feel like sometimes people are afraid to ask, like the details of what this entails, just because they don't want to seem like an idiot, the only idiot in the room that doesn't know what it means. So we've described one version of latency arbitrage. So your orders are taking a little bit longer to get to an exchange. They're literally jumping on the first exchange and beating you to the second or third and making a profit that way. Perhaps you could describe in a little more holistic detail the types of high frequency traders that there are,

whether or not, because you said earlier, like, every good story has a good villain, and sometimes they're the villain here, but I think things are more nuanced than that. So maybe describe the whole, the whole space in some detail. So, I mean, I think there's a broad spectrum. I think the most benign form is market making. Everyone loves to say they're a market maker. I've seen people on panels espouse the greatness of market making and high frequency trading, and I know they take liquidity 95% of the times on IEX, right? So it's kind of like, it's great to say you're a market maker. It's another thing to actually be a market maker. And I think there are very few high-frequency trading classic market makers out. Maybe even just that term market maker describe kind of the purest form of what that

would represent. Posting bid ask in names looking at a variety of factors to determine what you think fair value for that stock is and trying to buy low and sell high. You know, then you get into kind of the more statistical arbitrage, which again, I've got no issue with that, is you're just trying to take fundamental factors if you want to trade Coke versus Pepsi. If you want to trade, you know, one land driller versus another land driller if you want to just, again, trying to use fundamentals to agree using statistical signals and trying to kind of arbitrage like securities. ETF arbitrage, interlisted arbitrage. These are things where you're just taking correlated products and you're just trying to arbitrage pricing differences that will naturally

occur as different investors buy or sell different products. And I think all of that provides a huge service to the market because it makes the market efficient. It keeps prices of correlated securities in line. I remember back, this is in 2001, I sat next to the interlisted arbitrage group at RBC and when they explained to me what they did using computers with the Canadian USFX rate, there's a certain group of companies that are listed in both Canada and the US, and we buy and sell at rapid speeds in huge volumes to try to keep these two markets correlated. There was nothing about that explanation that offended me whatsoever. So I'm not anti-technology. I'm not anti-arbitrage. That's a perfect service. Maybe the buyer in Canada, who's paying a slight premium, doesn't want to go through

the hassle of converting the FX from Canadian to US, or maybe the same thing for the US buyer. They're providing a service. They keep a piece. Yeah, that makes the market, they make the market more efficient. The problem is that market making has become kind of like the word liquidity. It's the thing that you say just to stop the argument from anything else that's slightly less altruistic. And in reality, a huge subsection of high frequency charity is looking for these advantages, is looking for specialized order types to pick off investors, is taking market data updates from exchanges over microwave tower and using it to pick off unknowns buyers or sellers who are using slower fees. They're picking up signals at Bats and racing to New York. So that whole breed

kind of lives in the same category of high frequency trading, but they're dramatically different to make it even more complicated. And I know this because we've hired people from various firms. We have a good understanding. A lot of these strategies live within the same firm. So some people at a firm. We'll have one meeting with one group of the firm that loves IEX. We'll meet with another group of the firm that absolutely hates us. Same firm. So it's even hard to classify firms as market makers or others because really the technology that you would need to be a really good market maker could also make you a very good predatory high-frequency trader. So for us, it was most important to say, here are the rules that we're going to set at IEX

and whoever wants to show up can show up. That way, I don't have to say, is this firm good or is this from not good, do whatever you want. Just play by our rules. And somehow that's really offensive to some people, but it's not really to us or, you know, the people that support us. So it's a good excuse to go back to the formation of IEX, so the transition from Thor and the Thor system that you're selling at RBC to the idea behind IEX. So tell that kind of origin story a little bit, and then we'll describe the structure. So it was really about the by side saying we want a bigger solution. And I think more than three percent. More than three percent. And, you know, And to their credit, RBC continues to grow, but not at the pace we were growing at first.

And I think that it was very obvious to us that the exchange was the issue. That to do this, you almost had to build a different kind of stock exchange. And we were semi-naive on what that actually meant when we said we were going to do this. But it became obvious to us at the time when we were at RBC that RBC really couldn't be involved in the building of that exchange because of the competitive nature amongst brokers. Is Goldman Sachs necessarily going to want to use the RBC exchange? change and the answer that probably is no. And in fact, it's like, you know, direct edge was backed by some group of brokers. Bats was founded by some high-freezy traders and brought in some other brokers to that. It's always been this competitive consortium type dynamic where brokers

get together in clusters and support different venues. It wouldn't necessarily have succeeded if it had a particular broker owner, especially one. So kind of the by side in a way was like, if this is going to be done right, you can't do it at RBC. And so I think that led to a really tough decision in a way to say it was the only company I ever worked for. I was an intern there, so fairly comfortable. But are we ready to quit our jobs to actually go and do this? And I think that's something we pondered for a little bit, but we got to the point to say, yeah, this is something we want to do. And I think it's in a way, being committed to an idea means being totally committed to an idea. Was there a specific moment or day or breaking point that caused

the final decision that you can remember? There was a meeting where we had a group of are buyside traders, 10 byside customers in the room with myself, my boss, and some of like RBC's management from Canada. We got them all together. It was at the Parker Meridian here in New York to talk about the problem and to talk about this idea of an exchange. And I remember there were a couple of things that really stood out to me. One is that two byside traders who had been in the industry 25 plus years, two of the largest asset managers in the world, were meeting each other for the first time. And that to me was like amazing. Because like, the sell side all know each other. It's all like we're all clustered in New York. But here are like two

of the most powerful traders in the business, both been in the business long time, meeting each other for the first time. There was a lot of that. That to me was interesting. And to a degree, it said, wow, it's the bisonic could have a lot more leverage if they acted together. That was kind of like the first massive insight. And the other part to that meeting that to me was like a really big moment was that it was very clear that they all had conviction that something needed to happen, that there were some change that was needed and in a way that you have these very powerful firms whose interests are just being completely ignored by the existing stock exchanges. That's just such a huge opportunity.

So I think that was a big meeting. That was a big moment. And actually in that meeting, it was, that's really where the by side kind of voiced their opinion that we think this is better done without RBC. And in the long run, it's helped RBC. How did you fund the business to begin? So we made the absolute stupid decision. I don't advise this for anyone. We quit our jobs without having funding secured. So there was this kind of like, yeah, we can get this funded, no problem mentality. People on the outside, oh, we can give this money no problem. And so when we quit, there was no money. There was no term sheet. There was nothing. So we got to the other side. We seated it with our own money. A few of us put in like $425,000. We hired a white shoe law firm to draft up our offering memorandum. They spent time with a bunch of the buy side, talking back and forth, our very first bill was $275,000.

Oh, my God. Yeah. So that was like, you know, it's over before it even started. And so at that point, and we didn't, that offering memorandum never raised money. It was, it ended up becoming this monstrosity of, of demands. And so at that point, we went from kind of thinking we were going to make this transition into this established company. And then at that point, we are as startup as startup comes, you know,

Like we were, we had nothing. So we got, we got new lawyers. That was part one. And part two, we kind of had to start going door to door to the by side to see if people would fund this. The issue we had was that the amount of money we wanted to raise, it started $50 million. And we realized very quickly that that was not going to happen. And partially because a lot of the buy side aren't really in the business of making private

investments. The second part is that it's not, it's kind of like, oh, you're going to build another stock exchange, there's 12 already, and it was a bit of a challenge. And so we reduced that to 25 million to say, okay, we need this to start an alternative trading system. The problem with that is that it's not, people looking for venture capital, don't go around asking for $25 million, which we did not know at the time either. But private equity investors want to cut much bigger checks. So we're in kind of like no man's land. And so we managed to scrap together. It took us nine months to scrap together $9.4 million. And that was our first round. And that was just

to get us to the next round. And before that, you know, we ran out of that 425 quick. So we had to do a friends and family round, which is like the most, for any entrepreneur out there, it's the worst experience in the world. Because, I mean, you're asking, you may have gone through this yourself. Like, you're asking your friends and family to put money in knowing the chance of returning that money is not that high, especially for a venture firm, right? So it's kind of like in the email, my dad lasts at me like a little bit. My email basically said, you have to consider this money gone. Like the only way I'm going to take it is if you consider this zero right now. Like the second you commit, it's zero. Mark this to nothing. That's right. And if we can agree to that, then

we'll do this. So we did that. That was a million and a half. And then we did the 9.4. And then that got us into building something and being able to hire some people and start building the technology to kind of launch it. But it was those first few months were horrific. My second son was born three days after my last day at RBC, they were really, really hard times. Like, there's no question about it. So what does the 9.4 million literally go to? This is interesting to me, the actual infrastructure that you have to build out from scratch to start a stock exchange.

Yeah. So there's no such thing as a minimum viable product, right? Right, exactly. And you can't iterate on this. Yeah. And because it's regulated, there are certain things you need. So a lot of our money went towards like buying technology and servers and just trying to establish kind of the baseline.

you know, my salary is $2,000 a month for a very long time. And so it's, a lot of it goes towards tech and hiring people. For a large period of time, you know, the most, the highest paid people by large multiples were people that we ended up hiring like much later in the process because it's like, you need people to build this. And it's just trying to get to the right point. You know, Finro was was the first kind of regulatory body that we had to go in front of for, you know, for the ATS license and our broker license to be able to. the route shares. And so it was just this series of steps. We ended up getting additional funding the following year in May to launch the ATS. We couldn't have launched it on 9.4 to launch the ATS,

which we did. And then we ended up after, you know, when Flash Boys got written, it definitely helped us raise money. It was a little bit easier to raise money after that than beforehand. But that's when we raised a bigger round to launch the exchange. But there is no startup, you know, market. I think a lot of, you know, you've seen a bunch of ATS's startup. up and fail. It's if they're not backed by a broker, which most of them were. If you don't have deep pockets, it's a risky business to get into. So you have to do a lot of selling of the advantages of IEX versus other exchanges, both to the buy side to companies listing on the exchange. Maybe let's use those pitches as like a means to describe what IEX actually is. So maybe first to the buy side.

So you're going and sitting down and advocating order volume, go through IEX. What is that pitch? I mean, I think, you know, for the buy side, it's trying to give them. an idea that it benefits the buy side to be in one place. The buy side wants to trade against the buy side. Anytime you're buying from a seller who's going to turn around and start buying, that's not good for you. Anytime you show your hand to someone who may or may not have the same size as you, that sometimes hurt. So for the buy side, they're looking to minimize information leakage. And everyone says, I want to buy my order and I don't want to move the stock. So when you translate that into like how can a market help you do that it's really about creating the protections

necessary to not leak information and the more by side that you can convince to use you as the place that is protecting their information that is protecting their interests if they start aggregating and gathering in one place that will lead to more trading so a lot of what we sell the by side now is the statistics that prove we are the best place for their orders to rest we are the best place for them to find liquidity, especially on the exchanges. And we had earlier, you know, in August, we had a record day. We did $10 billion worth of trading, which is our first time clipping that mark. More astonishing was of block trades, of the 50 largest exchange trades that day, 41 of them happened on IEX. Wow. So, so, so, what explains that? By side. The buy side. Actually, there's two,

when I say the word buy side too, there are bank principal trading desks, risk trading desks, that look to me exactly like the buy side. They have large portfolios. They're looking to buy or sell stock. They're not looking to move the market. So any fundamental trader that wants to trade in larger size of their choices were a very good choice. You know, the speed bump protects them from elements of latency arbitrage that other exchanges are trying to accelerate. Can you describe what the speed bump is?

The speed bump is 350, basically 38 miles of coiled fiber in a box. that creates a 350 microsecond delay in and out of our exchange. So the whole benefit of co-location is to take your servers and put them as close to the exchange matching engine as you can because the closer you are, the faster you can get the signal, the faster you can trade. By pushing everyone 38 miles plus away, it's the opposite of co-location.

It takes away this advantage where by the time you get information from I-X, you can't go off and electronically front-run. You can't do what you're looking to do. if you pick up a signal from another exchange and you're racing it to IX, let's say the stock has gone from $10 to $9, and you're looking now to race to IEX to sell stock at the old price, $10 to some buyer who doesn't know that the stock has prices changed, well, it's actually IEX's responsibility to determine if $10 or $9 is the right price. So by forcing them through this speed bump, it means that they get information first, but as they're going through the speed bump,

IEX will realize 9's the right price and we'll make sure that the stock does not trade at 10, it trades at 9 because that is actually the fair price in the market. In a weird way, the exchanges sell, so exchanges sell microwave connections to high-speed traders. But when the exchange gets information from other exchanges, New York, NASDAQ, they use fiber optic cables.

That fact alone means that they are selling, people the ability to know information before they do. How in the world can they fairly priced trades? The speed bump is the basically the antithesis of doing that, is to say, I don't care how much technology you buy from the exchanges, I don't care what kind of microwave connected. I don't, I don't, we don't care. You can have an arms race until the cows come home, but we're going to set up an infrastructure to make sure that we as IEX, responsible for all the orders on our market, we have a, as good of an understanding about the the right price of this stock as we possibly can,

which means that when you send us an order on IEX and it's sitting on our market, we're using that technology to make sure you're trading at the right price, which means that you're not buying at 10 and milliseconds later, it's actually nine. And if you take that over and over and over and over again, it's going to lead to much better outcomes for Byside, who are accumulating stocks in large positions, selling stocks in large positions. And so over time, we're winning volume on execution quality metrics. This is about now taking the best part of it being,

exchange is that our data now is publicly available. So is the data from New York Stock Exchange. So is the data from NASDAQ. We can use publicly available data to show we're providing better outcomes for the buy side. That's really, really important. That's what's driving our business. New York Stock Exchange just opened a copycat market of IEX. They copied our speed bump after lobbying like crazy against us. They basically said the world was going to end if IEX gets approved with a speed bump. And then months later, they said, oh, by the way, we're going to have a speed bump. They copied a formula, a signal that we have built to predict quote changes to help again protect orders from getting picked off. They copied that as well. They opened their

market and it's not growing. It's 25 basis points of market share. It's because the buy side, we've been in this with them for almost a decade now, fighting this problem, helping them get better executions educating them they educate us it's been this constant like journey with them you can't just hang a shingle said we have a speed bum too on our third exchange you know and i think that's that for us a lot of this was about saying to the by side you know we want you to trust iex seeing that the by side's not reacting to the new york stock exchange is copycat that that gives me a lot of faith in trust in the by side what about two companies so companies can choose where to list we're not to list. What's the pitch there? I think for them, it's much the same way that we've pitched

the buy side. It starts with just an education. So we're not hardcore sales. You have to do this or that. It's about saying, do you understand how the market works? And do you understand how that affects your company and your shareholders? And most of them don't. Most of them have been kept in the dark. No one has any idea that the exchanges pay people to post liquidity in their stock. They have no idea the exchange makes more money selling data and technology than they do from trading. Most of them don't know that listing standards have come down. The listing revenues have gone up. The number of listed companies has dropped dramatically. How is that happening? So it's a lot of them just haven't been brought up the curve. So I think the starting point for us is much the same way as we started with the by side

back in 2009 is just here's an explanation of what's going on. And really, I think there's a group of early adopters that understand this problem a little bit more acutely or have had some kind of unexplained volatility event where they've gone to their exchanges and say, what happened in my stock and the answer is back were just nonsense. And we're actually now providing context to say, here's what we think may have happened. Here's how the market, broader market operates. Some of these companies, I think, are motivated. But once we get a group of companies to move, then it's about, again, using the data to say there is a better experience to be had, really, because the listing market, New York Stock Exchange used to be 80% of their listed volume in 2004. It's dropped 75% since that time. So,

They're not dominating trading in any particular name. They are responsible for opening and closing the stocks. And I think those are two events that, you know, we're very focused on, providing, you know, a better experience. I think I think NASDAQ has a better model than New York, you know, just because the human element isn't present. But I do think that, you know, there's ways IEX can be different. But most important is just a general alignment. You know, these companies pay $700 million a year, which is incredible. to New York and NASDAQ to list there, to be their clients.

What do they get back for that? So I think it's much the same way as the by side. It starts with education. And then as we get to understand their frustrations and problems and, you know, what they are or not getting, we can, you know, continue to tailor our solution to help them. So as a point of contrast, well, actually, maybe first, could you describe what maker-taker fees are? Yes.

So maker-taker is a really, in a way, the concept of maker-taker is almost the opposite. of what the exchange should be doing. They're overcharging one person to provide basically a rebate back to the other. So if you make liquidity, post a bid, post an offer, the exchange will pay you. If you take liquidity, meaning that you interact with the bid, you sell on the bid or you buy on the offer, we're going to charge you a take fee to take. And basically the taker subsidizes the maker. You know, it was invented by Ireland and, you know, kind of an ECN looking to break the duopoly of New York NASDAQ. It's the most prevalent business model in the market today. The New York, NASDAQ, and BATs pay $2.7 billion in rebates per year for people to send them orders.

Which sounds completely backwards, right? It's backwards when you think that if your order from your fund goes to a broker, you pay them a commission, they send your order to New York, New York gives the broker a rebate, they keep it. So they're your agent, but they're being paid to send your order to a broker. particular exchange, that's a kickback. And a lot of people get angry when I use the word kickback. But in reality, to not make it a kickback, they should give it back to you. I'll keep it. The challenge is it's the predominant model. And people are afraid that we need this scheme to create liquidity. And we just don't believe it. I mean, essentially what happens

though, and this is in public data. If you're paying people to line up to buy or sell on your exchange, the lines get pretty long. The longer the line, the lower the likelihood of executing when you go to the end of the line. So if you have a best execution responsibility for your customer to do the right thing, why would you ever drop them in the longest line? Would anyone ever line up in the longest line? And what we've proven in the data is not only is the line the longest, when you get executed, what happens afterwards, it has the worst execution quality. There's a very high probability that you just bought a 10 and the stock's just about to be nine. So, people are getting in, brokers are getting in the longest line for the worst outcome.

Why? Because they're being paid. So it's almost so obvious that it's hard, but when you say make or taker, that's not telling you what I just told you. When you say rebate, it sounds better than it actually sounds. It would be a rebate if you got it. Not if the broker keeps it. But fundamentally, there are a lot of brokers who don't want this scheme to exist either. And I think it's so deep embedded into the exchange structure. We've been complaining about it for a long time. And the answer that we'd get back in Washington is, well, every exchange does it. Like, what are we supposed to do? IEX, really, when we launched, we were the first exchange to not pay rebates. We're not paying them. We're trying to provide the customer with a better trading

experience, a better quality execution. So we don't think we need to pay them. We think they should come here for a better experience. But a lot of, you know, the five largest exchanges are all make or taker exchanges are paying the most in rebate. So it does create this conflict of interest, this agency problem. And, you know, I think now it's that that's the next frontier of the battle is about really challenging this, this paradigm. Now, some people will say, oh, it's an incentive. It's an incentive. Like free coffee is funny. This one by-side sent me this note and showed me this article and said, yeah, this person's defending Maker taker and saying, it's an incentive for people to come, just like free coffee. And he wrote back, yeah, but I'm not getting the effing free coffee.

He goes, I'm paying someone to get it for me. And by the time I get it, it's cold and I throw it in the garbage. It's kind of like, like people just miss this concept of, of you're taking, someone's paying you to do something and then you're going again and getting paid again. And they're not getting that. That's a problem in any agency relationship, especially when it can be statistically proven that you're doing a worse job for them than otherwise if the payment didn't exist. that is the issue. The public data is showing the harm. And that's why I think it's a big issue. That's why I think people are paying attention to it.

If you had to put rough, like if we have a revenue pie for traditional exchanges versus IEX, and there's a couple of major buckets of how revenue is earned at these places, you've described already a lot of the ways that the traditional exchanges are earning their revenue, they're net revenue. Describe the contrast with IEX. So what are the sources of revenue? Is it just one thing? Is it multiple things? And what does that pie look like? Sure. I mean, for the exchanges, it's, let's say, I mean, I think it's from 16 roughly. Again, I'm going to give or take, 1.2 billion in fees, New York Stock Exchange charge, They paid a billion in rebates, so they keep $200 million.

They'll make $500 plus million from collocation market data, et cetera, et cetera, $350 million or so from listings. So it's very clear that trading, because of the rebate, you're basically paying people to send you orders so you can't make a lot of money from matching orders. So they are heavily leveraged on the other side of this. And I think that's their model. For us, we charge both sides to trade. So 90% plus of our revenue is trading. Our data is free. We do get, the industry has this massive collection called the SIP where if you

know, you go on your Bloomberg, like it's just this public feed. So as in exchange, we get a piece of that. But the data that IEX provides through our own facility is free. We don't charge people for our data. We don't charge people to connect to IEX. And by the way, people aren't looking to set up high-tech infrastructures to connect to a 38-mile coiled cable. So it defeats the whole purpose. So we are primarily focused on trading. But it's like finding out the electricity company makes more money doing something else with your house than selling

you electricity. That's kind of the point of an exchange is to match buyers and sellers, period. What they have become are companies that try to increase and maximize the friction between real buyers and sellers finding each other to extract rents from a system that they essentially have a monopoly on the provision of their own services from a regulatory standpoint. It's almost the definition of rent-seeking. What is the most memorable meeting that you've had at IEX with, let's say, a by-side firm? The most memorable, I think there are two. One, and they're so memorable because at the time we were so vulnerable as an organization that it was tough. So one was with David Einhorn, Bruce Guckin, who's his trader,

Ronan and myself, and we're trying to pitch them for funding. And walk through the whole pitch, David had a ton of questions. David, actually, at the time, we wanted IEX to be like a routing model for the street to say, use our router.

Because, you know, once you've invented a nice hammer, you just want to start hammering stuff, right? So we had invented this great router at RBC. So our idea was that our exchange could be different because we have a better router. And David I. Horn said to us, he goes,

why are you so focused on sending orders to other exchanges? Why don't you focus on getting orders to kind of your own exchange? Why aren't we all trying to, like, why aren't you giving us all a reason to come to the same exchange? And so that was the first time anyone had said, explain the router in a way to say, like, why are you so focused on sending orders to other people? And that was before kind of the whole speed bump.

That was like kind of like we hadn't totally crystallized who IEX was. And that was a kind of a back-to-the-dry-in-board moment. And what made that meeting memorable is at the end, he said, I could give you all the money you need, but it'd be much better if you had a bunch of byside firms. And at that point, the only firm that had come through, God bless them, Capital Group had said, we'll do this, but we want some company as well. So David Einhorn helped set up a couple meetings with a few other folks.

So the second most memorable moment, Ron and I went to Pershing Square with Bill Ackman, met him. And again, he came back and said, this needs to happen. We take on large positions. We exit large positions. And we've been looking for ways that people are gaming our orders because it's become much harder to do that than it ever has in the past. And so at the end, he said, I think this needs to happen. This is really important for investors. Whatever you need will help you get at that. At that point, like, we're fighting for our lives. We have no money. It's about eight months in.

We think we're going to go broke. And I'll never forget, Roan and I get in the elevator, we start hugging. It's kind of like, it's such, I can't explain to anyone the emotion of having no money and every meeting you go to sitting across the table from people with tons of money and just being so desperate and saying, you don't understand, we will survive or die based on the outcomes of those meetings. And, you know, those two meetings plus capital group, that was kind of the basis of being able to get other people to kind of kick in literally. We were asking people for a million dollars. And then that kind of led on. But those, I mean, Ron and I rode the subway back and forth.

And on various days, he's like, this is never going to happen. And I'd be like, no, it's, no, man, it's going to happen. Then two days later, I'll be like, this isn't going to happen, Ron. him. He's like, no, it was kind of like, it was, it was not easy. How did you do this with young kids? So I, I have a kid that's three and a half and a daughter who's one of the half. And I just know, and I know tons of entrepreneurs who have gone through this. What was that like? How did you survive that? It was not, it was, it was, my wife has been incredibly supportive. I mean, she basically, when we talked about it when I was at RBC, she just said, like, this is the path I think you were

meant to be on. And, you know, we got to do this. So I didn't bring her into this, you know, yelling and screaming, she was, she was like totally supportive. So that helped a lot. Even despite that support, the psychological toll is incredible. It's incredible. It's just, there's no explaining it. And it's, it's kind of a, what I say now to any aspiring entrepreneur is that you have to have experienced the problems that you set out to solve, or you will not have the resolve to see through all of the valleys that you just aren't anticipating. You have to know this problem exists. You have to have felt it yourself. Because when everything's going wrong, you need to look back on that and say, is what we're trying to do a real problem?

Is this a real solution? Is this something real? And like, again, it's like you have to have that commitment in a way. And I think that got it, like having lived through this experience, having gone through the things at RBC, having sat with the customers and watched them trade and watch what happened to them, I knew this was real. So that powered us through. It wasn't like someone told me, hey, this is a problem. go look at it and I kind of like got around like we had lived it that was like the X factor but it was man it was it was it was hard it was unbelievably hard it reminds me of this kind of popular idea and

start up land these days of the missionary versus mercenary idea or paradigm and this is like classic missionary like you need to know what you're driving towards because so many on unforeseen difficult times yeah yes and also especially in our industry we're not creating a new market we're actually taking money from one party and putting it in the pockets of another. So the people you're taking the money from are really, really not happy about that. And so it's a tough battle to fight because the people that you're taking the money from have made a lot of money. They're making a lot of money. This is billions of dollars and they're really, really upset and they have a lot of money to spend. So it's kind of, you know, we went through this in our exchange application. It was an absolute

brawl. And so I think it's a really, really tough battle. So you have to, you have to, you have to to have a lot of conviction. And I think it's, that's why it's, you know, a lot of the stuff, especially exchange application was the hardest because this was our fate on the line in the hands of the SEC. The lies and all the things that were being said, it's like you just have to be able to see through that as people line because they're incentivized to do that. They have an incentive to see you fail. And they're going to do anything and say anything they can to make that happen. And so like, you know, through that lens, yeah, we expect people to not like us. It never, never feel is good, trust me. But it's just like, you almost have to like say this is par for the course

if you're looking to change the way things are done. For a time there, firms like Getco, you know, famous high frequency trading firms were making an insane amount of money. And it seems as though that some of that has been arbed away, that because of the rising costs and other inputs, that maybe the problem is still there, but the pool of potential profits that these HFT firms can earn has gone down. Do you think that that's true? think it's true to an extent. I think the costs have gone up, so there's fewer players, but they're presumably carving up a larger piece of it. I think we've patched up a lot of the holes. If you look at like the litany of fines, the SEC has lobbied on various dark pools,

etc. Like the easy money, some of that's going away. Like the, hey, why don't you set up this private trading room so I can tee off on your customers? I think that's hopefully going away. But I think there's still a lot of money to be made. I think volatility is one of the big issues. If the market gets volatile again, the cash register starts ringing, and hopefully we're giving people kind of an outlet or an alternative to protect them in those times. So I think that it's volatility, its costs, and it's regulation. I think the combination of those threes has made it harder, but I think volatility is probably the biggest driver. Cost is the biggest driver of the consolidation, but volatility will be the biggest driver of like how much money is being made. As you look to the

future, what has you most excited in terms of things that you and I, are working on to improve the experience for, say, the buy side even more and listing firms even more? Sure. Yeah. I mean, I think I look at 2018 as the first year that IX isn't building something specific. You know, we started off building the ATS. Then we transitioned the ATS to the exchange. Then we took the exchange and turned it into a listing exchange. It's basically been a five-year build. And, you know, we've been lucky. We've been profitable the last two years. We have a lot of capital. And I think we're out there now with the by side saying, you know, how can we be a better partner? And I think that it's really important for us to leverage the relationships that we have and to really look to continue to be a problem solver for them.

We've built all our own technology. We have an incredible talented group here. And I think there's a lot more we can do. So we're in the process of continuing to look and see what are the things we can do. And at the same time, there's a lot of wood to chop still in U.S. equities. It's, you know, we're 2.4% of the market. there's a lot more to do. The buy side does support us, but a lot of the by side still really just hands the order to the broker

and lets the broker do what they want with that order. So we need to educate the byside. We need them to take more control of their orders. We need to make it easier for them to take greater control. And I think so. We're always looking at ways to kind of enhance that. And it's definitely a focus for us going forward. So you've had a crazy experience, which is that you became the topic of a best-selling book

by an extremely famous author who turned a spotlight onto an extremely esoteric niche and opaque part, not just of the world, but even of the stock market itself, for those that participated in, it probably didn't know a lot of this stuff. Just talk a little bit about what that ride was like. How did you first, how did that begin? How did you and Michael first meet? So we got introduced to him by Danny Moses. Sure.

Yeah, who I know. Same person who made the introduction for us. Yeah. And Michael had gone to Danny and said that he was going to write an article about a high-frequency trading programmer that got thrown in prison, which was Sergei Alanikov. And so he kind of just called and asked a bunch of questions and said, you know, what is this? What is high-speed training, et cetera, et cetera. And, you know, we had a bunch of answers for him.

And then he came to New York and had dinner with Danny and invited us. So we talked a little bit at dinner and he said, I want to come to your office. And that was like a horrifying experience because our office was a small windowless room. room downtown where like it almost like you walk into that office no no you know no one who knows what they're doing is going to be sitting in that office and that that was you know us and so michael lewis came to our office and it's this is this classic michael lewis instead of kind of being like offended by how terrible our situation was he was completely intrigued why this you know why these 12 people were crammed in this little crappy room and i think that really piqued his interest to

say how are these people who presumably know so much sitting in this little crappy room and that kind of just started a longer discussion and then it went to, I might read an article about this to, as he got deeper into it, he said, I think there's a much bigger, deeply embedded issue here. So I think for him, it was, he went on the same journey we went on. Every rock you turn over has something under it that looks uglier than the last rock you just turned over. And I think that, you know, we still learn things today that continue to kind of, you know, shock me at various points about, about our industry in the state of it and the different actors in it. So I think, you know, from our perspective, it was,

we just try to treat him like we would any other byside firm or anyone else full access. You know, I think what was interesting, and he said it was similar to Moneyball, where you're introducing a new concept. The big short was reporting on something that everyone knew had actually unfolded. This was reporting on a new concept inside of an industry where automatically people are going to be taking sides. and I think that, you know, there was an overwhelming amount of support for Flash Boys, but there was also, again, the people that were trying to take the money from were really upset.

And I think that it's, it created this, like, huge controversy in a way. Now, what's amazing is that people that say the book's fiction never give you specifics about what specifically was fiction. If you look at the litany of SEC fines, if you read the fines and the sanctions and things, it's exactly what we had laid out, right? So the series of events kind of that have happened, you know, in a way, even the SEC approval. The SEC, our exchange application was a public debate about the merits of the things that we were saying.

And we won. And so I think the book was the start of it. And then it continued on with the exchange application. And, you know, again, but it's a constant, you know, daily battle for us every day. We're trying to help people. we're trying to transfer money in a way. Transfer money actually probably isn't the right way to think about it. We're trying to patch up holes that prevent people from extracting rents from where they shouldn't be extracted.

We're trying to make the market more efficient. You gave the one lesson of needing to be a missionary to know kind of what to have experienced the problem to be a successful entrepreneur. Maybe you could give one more, you could choose an entrepreneurial lesson or just since you're a much bigger business now, a business lesson that you've learned that's applicable not just to this corner. of the world, the small corner of the world, but more broadly speaking, kind of the biggest thing that you've learned. I mean, another thing that I didn't fully appreciate at the time, but I mean, how much money you raise means a lot less than who you raise it from. When you raise money from sophisticated investors, that's kind of the start of a longer

term relationship. And I think that a lot of people sometimes get blinded by the numbers and aren't as focused on the individuals or the people that they're choosing. And I think that we've made good calls on kind of the people we've decided to partner with. And it's made us more effective at running this company, to be honest. So I think that that's a really, you know, for us an important lesson. I think the other one is that, you know, just from my own self, you know, as companies grow, you just have to evolve with the company.

And for me, a lot of that is kind of like, I don't want to call it my own worst critic, but being not letting ego get in the way of improving in many ways. And I think that, you know, I've definitely evolved. I'm the first one to kind of know I grew up as a trader that automatically makes me reactive and makes me emotional at times. And sometimes those are good traits for a CEO and sometimes are really bad traits for CEO. So I think it's being introspective, especially for entrepreneurs that continue to lead the companies they started. You know, it's an evolution. What made you good at 10 people and at 20 people might not make you that good at 70 people.

100 or 1,000 people. And I think it's, you know, CEOs, I think have a responsibility to their companies to always be introspective in trying to kind of evolve with what the company needs. If you were not allowed to work in the investing world, what do you think you'd do? That's a good question. I kind of, you know, I do like, I love ideas. I love hearing people's ideas. I love helping people kind of execute those ideas. It's, you know, my sister-in-law, my brother-in-law, I'll have an idea and they'll come in and I will, like, vet it out and, like, map it all out. And so I do, you know, there's a part of like, you know, venture capital that I think is interesting just from a helping other people. And I think so that, I think that, you know,

in a way speaks, it's hard. You know, I've never, I've never had any particular attachment to finance. So it's odd that I've spent my entire career in finance, but I haven't known anything else. I mean, the diversity of job, it was Microsoft, Proctor and Gamble and RBC were my three kind of like final options in my last year. I cannot imagine what my life would have been like had I chose, you know, door one or two. So it's, I think, investing, I think, is interesting only because I think I can help people. I think I've been, you know, one of the great parts about Flash Boys is I spend very little time thinking about the decisions I've made or even myself or why I make certain decisions. And that was like a, it was almost like a, seeing a psychiatrist consistently who's asking you questions about why you do

things. And so I think that introspection has been super helpful in me being able to provide advice to others. because I think I have a much better understanding of where I've made mistakes and where we've made good choices. And I think that, you know, part of investing is not just giving money, but it's like helping people make good choices for the right reasons. In the spirit of introspection, my last question for everybody is always to ask what the kindest thing that anyone's ever done for you is. In business or in life or in anything? You get to choose. We got to choose. You talked about your wife. Yeah, we talked about my wife. That was very nice of her, kind of her.

What's interesting, so when I was four years old, my parents got divorced, but remained friends. And my stepfather came in and started living with us when I was like five years old. And I've actually never, there was no blip in my life that's ever been recognizable. And I think I look back, especially now, I have three kids now, seven, Brandon's seven, Rylands five, and Emmy is turning two. And I just can't imagine going into a situation with someone else's, children and making them feel like this is the way life should be and I've never known a different life and it's like he's a lot what's interesting is my my my wife now you're going to get me

all emotional here my wife has said I have so many attributes of my stepfather um oh my god can we cut we keep the tape rolling oh my that's terrible yeah it's it's it's an incredible incredible kindness. It's an incredible kindness. Absolutely. Well, it's a great place to close. Oh my God. You're like Jim Rome or something, right? Oh, my God. Well, this has been incredibly fun for me. I've learned a ton. When I came to visit the first time, I learned a ton then, too. And in preparation for this, I did some research, which exposed me to lots of parts of the market that as someone that spent my 10 or 11 years, only in this one space, I didn't know. So thank you for the time. Thanks for that awesome answer at the end. I Every parent can sympathize and appreciate it. So thank you so much. Cool. Thank you.

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