Before Flash Boys came along; before the 60 Minutes crew turned up; before, in short, all of Wall Street knew his name, Brad Katsuyama championed a controversial idea: the US stock market is rigged.
Today, after outmaneuvering some of the oldest, richest and most powerful names in the business, Katsuyama and his upstart company, IEX Group, finally got what they wanted: designation as a full-fledged stock exchange.
The news, announced by the Securities and Exchange Commission, puts the hero of Flash Boys, the best-seller by Michael Lewis, on equal footing with the 224-year-old New York Stock Exchange and a host of newer all-electronic venues that, to some, have allowed high-speed traders to profit at everyone else's expense. The establishment has countered that IEX's unconventional model to slow things down poses dangers of their own.
For the moment, Katsuyama, 38, can breathe easy. Friday's news followed months of a public, and often nasty, battle over whether to let IEX - which only started trading in 2013 - join the ranks of the nation's official exchanges.
"We are grateful and humbled by the support we've received from the investor community," Katsuyama said in an e-mailed statement. "Without it, we may have faced a different result. This is a milestone for all of those who have supported IEX and we look forward to becoming a stock exchange, which will provide us the opportunity to have an even greater impact on the markets."
The stakes are high. When IEX's Investors Exchange goes live in August, it will get the chance to prove itself and deliver on its lofty promises: to gain market share by fundamentally changing the way the $23 trillion US stock market operates and tilt the odds back in favour of investors. Katsuyama contends investors are being victimised by the proliferation of high-frequency traders, or HFT, that engage in predatory strategies.
While IEX handles less than 2 per cent of US equity trading in its dark pool, that could increase because, with exchange status, brokers would have to route orders its way when it has the best price.
"Any new exchange is a welcomed addition to us in terms of just there being another option to consider," Bill McNabb, chief executive officer of mutual-fund giant Vanguard Group, said this week at a Morningstar conference in Chicago. He declined to comment on IEX specifically. "You've got all the algorithmic traders and hedge funds trying to figure out and get in front of what big institutional players are doing."
To the naysayers, however, IEX's quirky model threatens to distort prices and inspire copycats, creating a "hall of mirrors" that needlessly adds to the complexity of a stock market already fragmented across 12 exchanges and dozens of private trading venues. That said, the SEC said Friday that any other exchanges that want to deploy a speed bump can't expect to get a rubber stamp - approval will be evaluated on a case-by-case basis.
At the centre of all the controversy is IEX's 350-microsecond speed bump, a coil of fibre-optic cable that all orders must pass through to reach its systems. While that's an imperceptible amount of time for humans, IEX says it's just enough to blunt the light-speed trading strategies that have undermined investor confidence. Big money managers, including Bill Ackman's Pershing Square and David Einhorn's Greenlight Capital, have supported IEX's ambitions, providing seed money for the venture.
Its campaign to gain exchange status has spurred intense criticism from the likes of Citadel Securities, which handles 15 per cent of all equity trades in the US and is owned by billionaire founder Ken Griffin's Citadel, as well as NYSE and Nasdaq. They argue that IEX's model risks undermining one of the bedrock tenets of modern market structure. The 2005 rule, known as Regulation NMS, requires that investors get the best available price when they buy or sell shares. IEX's opponents argue that its strategy of delaying orders will result in stale prices, putting it in conflict with the regulation.
The SEC's approval would also set a dangerous precedent, they say, by introducing more fragmentation and encouraging similar exchanges to open afterward. That would lead to multiple venues showing obsolete price quotes. It would then be almost impossible for brokers to get the best price for their clients, and could even provide new opportunities for gaming the system.
"Our markets work extraordinarily well for retail and institutional investors, and we need to be vigilant in identifying any unintended consequences of the approval," Jamil Nazarali, head of execution services at Citadel Securities, said in an interview.
Stacey Cunningham, chief operating officer of NYSE Group, said the exchange objected to IEX's proposal because they were "looking for exemptions to existing rules". She spoke in an interview before the SEC's decision was announced.
Katsuyama rose to prominence with the 2014 publication of Lewis's Flash Boys, which argued that HFT, banks and exchanges had conspired to rig the US stock market. Shortly after the book was published, Katsuyama sparred with then-president of exchange operator Bats Global Markets, William O'Brien, on CNBC, in an argument that captivated Wall Street.
During the debate, O'Brien pressed Katsuyama on the book's claim that markets are tilted in favour of the fastest traders.
"It's a 'yes' or 'no' question," O'Brien said. "Do you believe it or not?" "I believe the markets are rigged," Katsuyama responded.
