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Brad Katsuyama: 'I believe that the markets are rigged'

An exposé of high-frequency trading in Wall Street has given the whistleblower a platform. And he's pushing for reform

Toby Green
Thursday 24 April 2014 06:13 BST

Despite being under constant attack since he was thrust into the global spotlight less than a month ago, Brad Katsuyama remains defiant.

"We still to this day haven't seen a practical counter-argument other than just people throwing mud back and forth," says the 35-year-old, who has divided the financial world with his battle against the murky side of high-frequency trading.

Before the publication of Flash Boys, the latest exposé of Wall Street by the best-selling author Michael Lewis, Mr Katsuyama was little known on Wall Street and certainly not known outside of it.

Mr Lewis – whose earlier works include Liar's Poker and The Big Short – changed that by choosing the mild-mannered Canadian as the unlikely hero of his new book.

Flash Boys centres on a discovery by Mr Katsuyama, who at the time was working in New York for Royal Bank of Canada, of what he believed was a way traders were rigging stock markets and ripping off the general public.

The use of computer algorithms by firms to make trading decisions in thousandths of a second – so-called high-frequency trading – has been around for years. But Mr Katsuyama discovered that some computer trading programs were not just reacting to shares being bought; they seemed to be pre-empting the orders. He would go to buy a share, and in the time between clicking the button and the order being completed – a fraction of a second – the price had risen.

His journey to find out what was happening led him to discover that traders were exploiting the fact that different stock exchanges received orders at slightly different times – a matter of milliseconds, but still enough for the super-fast computers to jump in ahead of the trades.

Convinced this was creating an unfair market, Mr Katsuyama decided to shine a light on it by telling Wall Street what was going on – much of which he found was oblivious.

The decision to stick his neck out rather than keep quiet, he says, wasn't a hard one: "I had spent my career trading on behalf of clients and it just seemed natural to take this information to them."

When he was approached by Mr Lewis about helping with his latest book, Mr Katsuyama knew this would raise the profile of his fight. "I talked to my wife and said to her, 'Are you OK if this doesn't work, if I never work on Wall Street again?' And she was OK with it, and so was I."

Still, Mr Katsuyama – who has launched his own market centre, IEX, designed to stop the negative aspects of high-frequency trading – says it has been "kind of shocking to see how many people within this industry are fighting back".

In one memorable moment, Mr Katsuyama was accused on live television by William O'Brien, the president of the exchange operator BATS Global Markets, of scare-mongering in order to create publicity for IEX. He took a while to find his words, but eventually fought back: "I believe the markets are rigged, and I also think that you're a part of the rigging. So if you want to do this, let's do this."

The critics, Mr Katsuyama claims, "come into this with a bias and they don't want the market to change. They don't want the market to be more transparent – a lack of transparency is how a lot of these people make their living."

There has also been a lot of support. Mr Katsuyama has received thousands of emails and phone calls and says the book has not only "struck a chord with Main Street" but also with many on Wall Street who see "that changing the way the market operates is better for everyone".

The problem, he says, is that a society used to having free access to information through the internet is at odds with financial markets "which have always been about private information, knowing more than the person that you're trading against".

But he feels it doesn't have to be this way: "I think part of why Michael wrote this book, as sceptical as he was, is that there are actually people on Wall Street that are trying to restore trust and hope and faith that people can actually make money and run businesses and serve a greater purpose and serve society."

The City of London has been just as gripped by the debate over high-frequency trading, and asked whether there are the same issues here as across the Atlantic, Mr Katsuyama is careful to clarify that his knowledge of the UK markets is limited, but points out that Wall Street and the Square Mile have many similarities.

Certainly the furore around Flash Boys doesn't show any sign of dying away. On the day of its publication, the FBI announced it was investigating high-frequency trading and a number of other bodies have followed suit.

Flash Boys also looks likely to be turned into a film, which wouldn't be a new experience for Mr Lewis, whose books The Blind Side and Moneyball have been turned into Hollywood films starring Sandra Bullock and Brad Pitt, respectively.

As for who would play Mr Katsuyama, "we'll leave that to Hollywood if that ever becomes a possibility," he says.

If it happens, it would be yet another surreal turn for Mr Katsuyama and his fight. "The whole process, everything that's happened, has been pretty unbelievable," he says. "I just feel thankful to be in this position."

'Flash Boys' by Michael Lewis is out now (Penguin, £20)

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