Meet the Canadian who is trying to save Wall Street

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If there's one thing Brad Katsuyama has learned over the past two years, it is that 60 Minutes isn't just for old folks. It was March 30, 2014. Katsuyama was 35 and had recently launched his own private stock exchange—one that wouldn't allow so-called high-frequency traders to fleece investors with what amounted to a hidden tax on trading shares. His interview with Steve Kroft for an item titled "Is the U.S. stock market rigged?" went well enough; Katsuyama figured he'd hear from a few older friends and relatives back home in Markham, north of Toronto, when the segment aired.

Instead, Katsuyama's image became seared into the minds of nearly 13 million viewers, who came to see him as a reluctant hero in the vein of Luke Skywalker, revolting against the evil empire of Wall Street. People started to recognize him—a waiter in Hong Kong, a guide at Disneyland who delayed the Katsuyama family's tour to phone his father and brag that he was hanging out with the guy they'd watched on 60 Minutes. And then there was the trip to Turks and Caicos, when Katsuyama and his wife shared a cab with a couple who'd clearly been arguing. Katsuyama, being an intensively inquisitive type, wanted to know the source of their discord. It turned out the husband wanted to quit his job in construction because he felt the business was inefficient and lacked integrity. What had sparked his sense of idealism? He'd been watching 60 Minutes one night when a Canadian guy came on and talked about quitting his $2-million-a-year trading job at the Royal Bank of Canada to "do the right thing."

Katsuyama's wife looked at him and shook her head—here we go again.

"That was me!" Katsuyama exclaimed to the man.

The cranky husband stared at him for a few moments, then punched his seat in excitement.

"He just went crazy," Katsuyama recalls. "We spent the next hour talking it through."

Katsuyama became famous in financial circles, too, of course—or perhaps infamous is a better word. He and his team formed the moralistic heart of

Flash Boys: A Wall Street Revolt, author Michael Lewis's exposé of predatory electronic trading practices. The bestselling book chronicles their mission to create a stock market, IEX, that would thwart the largely unchecked skimming that had come to contaminate equities trading. In Lewis's recounting, IEX Group Inc. could revolutionize the markets, bringing fairness and transparency to Wall Street.

Flash Boys hit No. 1 on The New York Times bestseller list, became required reading at the Securities and Exchange Commission, prompted lawsuits, spurred multiple federal and state investigations, and caused a televised fit of yelling and manic hand-waving by William O'Brien, president of the rival BATS stock exchange, that cost him his job.

At IEX, media calls poured in. Clients who were mentioned in the book wanted to argue about their portrayal. Old Wall Street friendships were shattered and new alliances grew. A wave of fundraising netted the company $75 million (all currency in U.S. dollars) from an array of investors, including Bain Capital Ventures, Vegas mogul Steve Wynn and Netscape co-founder Jim Clark, to fund IEX's transformation from a so-called dark pool—the sinister-sounding name for private exchanges where the size and price of trades are invisible to the broader market—into a full-fledged, SEC-approved stock exchange.

But that process is taking longer than Katsuyama anticipated, and time is not on his side. Just as IEX opened shop, market insiders began predicting a contraction in the number of trading venues in the United States—which, including dark pools run by the likes of Goldman Sachs, Credit Suisse and Morgan Stanley, numbers more than 50. At IEX headquarters, there's a diagram kicking around called the "Death Star Slide" that shows the many ways buyers can link to sellers. It looks more like an unravelling ball of yarn than a functional way to underpin the economy. "In the next couple years," says Ronan Ryan, one of IEX's nine co-founders and its chief strategy officer, "there will be less dark pools and potentially even less exchanges. Less is better. We're not saying bring this back to one venue. But we want to be one of the venues that remains, and please God, let that be the case."

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Gerald Lam is possibly the most relaxed person on Wall Street today. It is July 8, and at 11:32 that morning, Wall Street had plunged into a panic when the New York Stock Exchange, which handles one-fifth of trading volume in the United States, went dark. On CNBC, the exchange's president, Tom Farley, is trying, and failing, to explain what has gone wrong. Chinese terrorists? A glitch in the NYSE's outdated computer infrastructure? Analysts are talking in apocalyptic terms.

Lam, meanwhile, sits with legs outstretched and crossed just above his Birkenstocks, deep ankle tan on display. From his glassed-in perch at IEX's headquarters on the 44th floor of 4 World Trade Center, the company's head of marketing and communications can see baby-blue skies stretching from Tribeca all the way to Yonkers. An investment banker by trade, with an MBA from Columbia, Lam is trying to explain the basics of electronic front-running (more on that later) while keeping one eye on his Samsung phone. It's begging for attention, the little blue alert light flashing as his e-mail inbox fills with media requests. He ignores it.

He knows what they want—the same thing everyone has wanted since Flash Boys came out. Those early days, says Lam, "were absolute madness." Interview requests dropped by the dozen, forcing Katsuyama to criticize many of the very players IEX needed to woo. On its first day of trading, Oct. 25, 2013, IEX matched half a million shares and routed just under a million more to public exchanges—a virtually undetectable piece of the seven billion shares moved during the average U.S. trading day. To boost volume, IEX had to persuade brokers to steer more trades its way. It also had to remain in the good graces of the SEC. And if the regulator did finally bestow IEX with public exchange status, it would have to persuade investment bankers to list companies there—a lucrative business now monopolized by Nasdaq and the NYSE (which made $367 million last year off listings alone). But how could IEX keep everyone onside when Katsuyama was on TV saying things like "I believe the markets are rigged"?

Post-Flash Boys, everyone at IEX with any connection to Wall Street got blowback. Ryan, a native Dubliner and electronic trading expert who got his own chapter in the book, says his meetings with buy-side clients became "very argumentative.…A lot of people got their backs up over what was said in the book, and understandably so. People get defensive when you come and shit in their yard, and that's what happened." It took between six and nine months, Ryan says, before "people became rational."

So Lam won't take the bait this time, knowing the journalists want him or his boss to say that the 11 existing U.S. stock exchanges are rigged and broken, that they have sold out technological robustness in a quest for speed, that IEX would be different, so watch out, big boys.

"Glass houses," he keeps repeating. "We're not going to comment."

Soon, a yell comes from outside the conference room.

"Gerald!"

Jay Fraser, the sole Wall Street veteran at IEX who actually looks like a Wall Street veteran—complete with monogrammed shirt, monogrammed belt buckle and gelled-back hair—stands in front of a TV screen.

"Gerald!" he repeats. "Come here!"

Lam grabs his phone and springs to his Birkenstocks. "Sorry, I'll be right back," he says (because an unfailing Canadian politeness pervades the entire IEX office), and hikes away.

All the business news channels are broadcasting live from the floor of the NYSE, in full hysteria mode. IEX is pulling 1.7% of market traffic, compared to its regular average of roughly 1.4% (which, though still small, is a bigger piece of overall trading than dark pools run by the Street's major investment banks). If they hold at 1.7 all day, it will be a new in-house record.

IEX's traders keep glancing toward Katsuyama's desk, as if searching for guidance. But it's empty: Early that morning, he'd flown to Toronto to attend the funeral of a friend's father. A recent hire named Pat Healy is working the phones, politely nudging contacts. "As I'm sure you've seen, NYSE is down," he says. Healy's previous job was advising companies on where they should list stock. Katsuyama hired him to attract new listings to IEX. "They're trying to bring it back up," Healy continues over the phone, "but if they can't, there'll be hell to pay."

Lam stands rooted next to Fraser, staring at the screen. "This is going to be an interesting day," he says.

As the day wears on, though, IEX's share of trading begins to slip. The NYSE comes back online at 3:13 p.m. By the closing bell, IEX sits at 1.563%—good, but not the boost the team had hoped for.

As for the shutdown itself, the NYSE blames it on a "technical issue"—which, in this era of trader-less exchange floors, is kind of like saying the Leafs aren't winning due to a hockey issue.

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When Katsuyama started as a trader at RBC's New York office in 2002, swapping stocks was simple business. Four out of every five market trades took place on the NYSE or Nasdaq. Humans on the floor processed most trades. A single company traded on a single exchange. By 2009, a series of regulatory changes sparked mass fragmentation in the U.S. equity market. Suddenly, there were 11 SEC-regulated exchanges, and a single company's shares could be found on several of them. Heavily guarded computer servers had taken the place of human traders. When a single electronic buy request for 10,000 shares of XYZ Corp. passed through a trading router, it was diced up into multiple requests sent to multiple markets, all arriving at their intended destinations at fractionally different times.

There were upsides to this: tighter spreads, faster trades, no human error. But as Katsuyama and his team at RBC would discover, there were heavy downsides, too. As a fast-rising trader at RBC, he had taken over the electronic trading desk in 2009 and noticed that the act of buying shares electronically had become deeply mysterious. A simple click of the "buy" button was no longer a guarantee of securing a 10,000-share block at the posted price of, say, $31.01. Instead, Katsuyama found that his purchase attempt would yield only a fraction of the shares he

wanted. He could get all the shares available on one exchange, but the price would increase at other exchanges the moment he tried to execute the trade. It was as if the market knew his intentions and moved against him.

Someone was, indeed, front-running RBC's (and everyone else's) trades, a fact Katsuyama and his team discovered after deploying Thor, a computer program they designed to hack the problem. Thor programmed delays into the multiple buy requests contained in a single order so they would arrive at the various exchanges at the same time, down to the microsecond. Thanks to Thor, RBC traders could once again buy U.S. stocks at the price they saw on their screens.

At the root of the problem: speed, or lack thereof. High-frequency trading firms had spent billions developing complex algorithms that, in combination with hyper-fast computer hardware and data lines, provided a more up-to-date picture of market action and the ability to execute faster trades. The HFTs could see Katsuyama's XYZ order arrive at a single exchange and anticipate it was a small piece of a much larger order going out to all exchanges. In the microseconds' delay it took the XYZ order to arrive at the remaining venues, the HFTs could send identical buy requests ahead of Katsuyama, then sell him the shares at a higher price—a practice known as electronic front-running. They were gaming the system, earning, by Lewis's estimation, more than $160 million a day in the process.

Many dispute Katsuyama's conclusion. Flash Boys spawned a whole new advocacy group, Modern Markets Initiative (MMI), whose sole mission is to defend high-frequency trading. According to the group's website, its core principles are transparency, fairness and equal access—which sounds an awful lot like IEX's tagline, "A fair, simple, transparent market."

"So far, we haven't seen any data to support the anecdotes in Flash Boys," says MMI's CEO, Bill Harts. "If this is a debate about anecdotes, our market is not well served by that discussion. We are served by hard data."

There's no debating the exchanges encouraged the rise of HFTs, providing rebates to market actors simply for offering liquidity in a given stock. Furthermore, they sold speed. The NYSE earned $430 million in 2014 from selling co-location—preferred access to its trading data and matching engines—and proprietary market data, a 214% increase from 2006. Nasdaq, meanwhile, made $257 million from similar products for a 347% increase over the same span. To maximize profits, they prioritized speed in a manner that has been likened to car racing. You can rip out the airbags, the seats, the brakes and anything else not geared to making the car move faster, but you'll end up with a death trap.

At RBC, Katsuyama and his team began flitting from investor to investor, spreading the word about the unfairness that had been built into the market by the markets themselves. Katsuyama first met with Doug Schrank, senior trader and principal at Southeastern Asset Management, in the summer of 2009. "It was amazing. We were seeing the same problems Brad was seeing, and we hadn't been able to get any suitable explanations," says Schrank, whose firm manages nearly $29 billion in assets. What really shocked guys like Schrank was that Katsuyama had uncovered the rot in the market and, rather than exploit his new-found knowledge for financial gain, had decided to let everyone in on the secret.

The next logical step—at least, if you're Brad Katsuyama—was to quit RBC and start his own exchange.

Though RBC declined to invest in IEX—to ensure its independence—it executed the exchange's first-ever trade."We're happy to support Brad," says Greg Mills, RBC's global head of equities and the guy who hired Katsuyama. The bank still does a certain percentage of trades on IEX each day. "It's a less toxic pool of liquidity," says Mills. "We know when we execute our client orders there, we're less likely to be interfered with by predatory forms of high-frequency trading."

That's because Katsuyama and his eight co-founders—including a Canadian algorithm whiz and a group of puzzle mavens drawn from his team at RBC—devised a method of thwarting most front-running strategies by introducing a speed bump. All incoming orders would be routed through 61 kilometres of fibre optic cable, creating a 350-microsecond delay before orders are filled. The gap would give IEX's matching engine—the proprietary algorithm that pairs up buy and sell orders—time to update its prices based on feeds from other exchanges, foiling attempts by high-frequency traders to take advantage of stale prices. They also decided to ban co-location and rebates; revenue would come purely from shares traded and orders routed—$0.0009 per share matched and $0.0001 for shares routed to other venues. Forbes put IEX's revenue at roughly $27 million as of January, 2015, a one-year increase of 6,770%.

"Their growth is amazing in a world with great fragmentation and a large part of the industry likely rooting against them," says Schrank, who serves on a buy-side advisory committee at IEX but is not an investor. "But we felt strongly that if there was one guy who could pull this off, it was Brad. He has great integrity. Maybe it has to do with him being Canadian."

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Katsuyama returns to IEX two days after the NYSE outage. He is walking gingerly, wearing jeans and an IEX fleece vest, though it's 30 C outside. After the funeral, he'd been diagnosed with strep throat, which kept him away a day longer than expected. In the meantime, dozens of people have tried to reach him, including general news outlets like Fox and CNN—not the usual callers.

"I ignored it all," he says, leaning back in a conference room chair.

When I express surprise that he's overcome strep in a single day, he smiles wanly. "Gotta rally, right?" he says.

Two years after launching IEX, Katsuyama must be wondering if he'll ever get a break. He's had to forgo golf and give up TV, aside from the HBO comedy series Silicon Valley, whose episodes are parsed by IEX staff every Monday morning, and Ole Miss college football games (his wife, Ashley, is an alum). "There are things you don't want to give up," says Katsuyama. "But when you take an inventory and ask yourself what you're getting from it, you have to." He gets up at 5:30 a.m. most mornings, goes for a run in Central Park and is on the subway to 4 WTC by 7. Ten hours later, if all goes according to plan, he's on his way back home for dinner and bath time with his two sons. Granted, you get the feeling the guy was never exactly a hard-partying Wolf of Wall Street type, but when he was invited to speak at SXSW in Austin this past March (his talk was titled, "How to Disrupt Wall Street: The Flash Boys Blueprint"), he flew to Texas in the morning, skipped the conference's legendary parties and flew right back to New York. "I get invited to a lot of cool things now, but I can probably count on one hand the number of times I've been out past 10," says Katsuyama. "So I guess I gave up my social life."

He is determined not to succumb to the Michael Lewis Effect. During the reporting process for Flash Boys, he read an article in New York magazine about a tendency among the author's characters to morph into national celebrities with Hollywood doppelgängers (see "The Michael Lewis Effect," page 31). "I was just like, holy cow," says Katsuyama. He had no desire to change or be changed. "I thought, if I can behave in a way that's the same as it was before, then everyone else at IEX can follow that lead. Michael Lewis has an effect on his characters that can be larger than life. It can be easy to get caught up in that. We're probably in the second or third inning of the game we're playing. I didn't want to get off the rails so early."

IEX's 60 employees occupy a spare office with white walls, white furniture and a bird's-eye view of the Sept. 11 memorial. (The principals picked this location, according to co-founder and chief operating officer John Schwall, "because, f---ing America, man.") The place has a definite Silicon Valley vibe. In one day, I spotted six pairs of flip-flops, eight pairs of shorts, one Captain America T-shirt, a whole lot of fleece and not one necktie. A large kitchen and long table dominate the floor. "I spent 15 years eating at my desk in front of my screens," says Katsuyama. "At first, we had four small tables here, and I was just like, f--- it, I want one big table. It forces you to be part of the conversation. It creates ideas. It sparks an interaction. After work, people sit here and have a beer. You don't have to go to the bar. It creates conversations that are necessary to keep the company rolling."

Depending on the day, employees can find free fruit or bagels or doughnuts here, though no free lunch. That, says Katsuyama, would give investors the impression of fiscal irresponsibility. But once a week, Dan Aisen (better known to Flash Boys fans as Puz, so named for winning the 2007 Microsoft College Puzzle Challenge, and who now spends his days scrutinizing IEX trading activity for any trace of electronic predation), buys everyone soup or sandwiches. This week, he wanders into the office toting a plastic bag from Parm, a new favourite among Wall Streeters. "We like to keep it casual around here," he says as he plunks the bag down on the table.

Only when visitors walk past this spot can they see the entire floor—seven rows of open-concept seating, each desk fitted with dual-monitor computer terminals (some have three or four). The techies keep their heads down. Someone on the business development team offers me a beer.

The middle bank of desks is the closest thing IEX has to an executive suite. This is where Katsuyama and Ryan sit, their desks no bigger than those of junior employees. Katsuyama is the only IEX employee with an office, but staffers seem to use it as an extra conference room. It betrays hints of the CEO's personality: pictures of his kids, a few awards, a modest library of volumes such as How Successful People Think, Difficult Conversations, Kill the Company and The West Point History of the Civil War.

Katsuyama knew he couldn't simply will the company's pretension-free culture to remain the same post-Flash Boys. So he hired a chief culture officer, Brannon Skillern, to observe and, as much as possible, codify everything that was unique and beneficial about the IEX office environment. As a veteran of three tech start-ups (including the photo-editing software-maker Aviary, which was acquired by Adobe), Skillern had watched how nascent company cultures bloom with a small office full of like-minded idealists, then falter as soon as staff growth begins to dilute the original spirit. "We were always very un-siloed," she says of IEX's early days, "very collaborative. We welcome input, but we can't have 30 cooks in the kitchen because decision-making suddenly slows down and is super-inefficient. To stay agile, you have to start cutting people out of decisions, and that doesn't feel good."

Before she could devise a plan for scaling the IEX culture, Skillern had to define what made the place tick. A favourite saying around the office, spouted by various IEXers, is "We're capitalists, but we believe in responsible capitalism." And while every tech start-up claims to have a change-the-world, Peter Thiel-esque core mission that motivates everyone to put in superhuman efforts (a tendency brilliantly skewered in Silicon Valley), Skillern learned that, at IEX, there was actually some meat to the rhetorical altruism. "I loved my last company, but helping teenagers take better selfies—that's not what gets me out of bed in the morning," she says. "When I interviewed here, I realized people actually wanted to change the world, and that was quite new to me." After an initial inventory period, she came up with a set of core IEX values, such as "Be committed to the mission" and "Act with integrity."

Those values are what drew John Ramsay here. At age 55, Ramsay sticks out in the IEX office. His hair is whiter, his steps more laboured, his conversation delivered at a slower, more considered pace than most of his co-workers. He came to IEX from the SEC, where he'd first gone to work in 1989 out of a desire to "make a positive contribution, to do something that was more than just about making money." After a 10-year stint in the private sector, he returned to the SEC because he "lost and missed that sense of doing things I really believed in." Before leaving in 2014, he helped implement chunks of the Dodd-Frank Act, designed to rid the market of some of the risk that led to the 2008 meltdown. He also ran the group in charge of overseeing broker-dealers and self-regulating organizations like securities exchanges and, yes, dark pools. He assumed he would have to set his idealism aside once again and find a job in the private sector. "It never occurred to me that I could work in the private sector and make a positive change," he says with a slight Texas drawl, "which is kind of a sad commentary on Wall Street—for most people, it doesn't even occur to them that you can do that."

A few meetings with Schwall (who was part of the Thor team at RBC) and others at IEX disabused him of that notion. He was hired as chief regulatory officer last year and now oversees market policy. "I instantly fell in love with the group and what they were trying to do," he says. "They rescued me from a dull life in the private sector."

It's certainly not all la-di-da around IEX, though. "It might seem relaxed, but not every day is Sunday," says Jay Fraser, who worked at Deutsche Bank before joining IEX a year and a half ago. "We have all these people out there for whom our success isn't necessarily beneficial. We're coming into a market and taking share away. People literally tell us they don't trust what we're doing because they don't believe we would do this for the greater good. They don't believe anyone would behave like this in this industry."

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IEX skeptics like to point out the fact that 20% of its trading volume comes from high-frequency traders. It's proof, they say, that Katsuyama's conclusions about front-running were bogus. "It's a strange turn of events," says Harts, the HFT lobbyist. "HFT loves IEX."

Yet, Katsuyama has emphasized over and over that high-frequency trading is not empirically bad—just some of the predatory practices at some of the HFT firms. People on Wall Street, he says, are no worse than people in any other industry; they're just incentivized to do the wrong thing. "At different levels of incentive, people will stray from the path," says Katsuyama. "And the incentives on Wall Street are really, really high. That has created this friction between Wall Street and Main Street. And I think that is going to change. We're living in an ultra-transparent society where there is very little you can get away with any more."

The words "fairness" and "transparency" are appearing more and more often on the Street these days. In October, 2013, IEX became the first private exchange to publish its Form ATS, an accounting of its internal activities. Since then, more than a dozen competitors (including the pools run by Goldman and Morgan Stanley) have followed suit. In Canada, a firm called Aequitas Innovations is using something very close to the IEX model, with an exchange called NEO, to thwart high-frequency traders and take on the dominant Toronto Stock Exchange.

"It's fine, it's good," says Katsuyama of the increasingly crowded space for ethical markets. "More people are competing for the right things, and it's up to us to ensure we're one step ahead of everyone else."

Right now, IEX is focused religiously on snagging exchange status, which it's expecting to happen late this year or early next. The SEC, says Ryan, "has taken a very, very, very structured, data-driven approach with this. They don't just say 'Oh God, these guys got a book written about them by Michael Lewis, push them along the conveyor belt.' No. It was scrutinized, but scrutinized for the betterment of the market." When it comes, IEX will gain protected-quote status, which forbids trades from being executed at any price other than the best one quoted for a given security. "When we get that," says Ryan, "it will turn on a spigot of additional volume." It doesn't hurt that Norway's Government Pension Fund, the world's largest sovereign wealth fund, has publicly endorsed IEX or that the SEC has commended its transparency. By 2017, IEX hopes to draw 8% of trading volume and list as many as 250 companies, according to The Wall Street Journal (something IEX won't confirm).

While they wait, IEX—soon to be rechristened Investors Exchange—is working on some side projects. Its model, says Katsuyama, can move beyond stocks and into, say, private securities or digital currency. He's vague on details. "We built our technology from scratch, and it can apply to trading a lot of different things," he says. "Our brand extends beyond stock trading. It's about trust and using technology to create fairness. We feel like transparency is a major competitive edge, so we're willing to push the envelope to places where our competitors can't follow us."

It's a Friday afternoon. As the trading day ends, staff begin clopping out the glass door, but some linger at the table for a pre-weekend confab. Bottles of raspberry ale appear. Everyone's looking forward to the next office potluck—a sort of Iron Chef, where the business types battle the techies for culinary supremacy. Tech earned Katsuyama's deciding vote last round with a combination of cocktails and amuse bouches. "There is a level of respect accorded people as individuals here," says Ramsay, "and an ethic about the way you should interact with colleagues as people that is unique and, I think, stems from values I associate with Canada."

That last point bothers me. Lewis played up that Dudley Do-Right characterization to an almost patronizing degree in Flash Boys. I ask Ryan whether there's anything to it and whether this friendly vibe can survive IEX's inevitable growth.

During his time at RBC, he says, there was a strict "no-asshole" rule. That still prevails at IEX. "I was in Toronto recently and met up with a number of RBC people," he goes on. "It struck me that there was no arrogance to them at all. It must be you crazy Canadians. I don't know what's in the f---king water up there, but it works."