Brad Katsuyama - What Happens When You Hit “Buy”

**Patrick O'Shaughnessy** (0:00)
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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.

**SPEAKER_3** (0:59)
Patrick O'Shaughnessy is a principal and portfolio manager at O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (1:21)
My guest this week is Brad Katsuyama, the founder of the IEX Exchange and the protagonist of Michael Lewis' 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 and 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.

**Brad Katsuyama** (2:45)
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 US in 2002, and I traded energy equities and listed energy equities that, you know, listed mean the New York Stock Exchange. So my first interaction with US 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 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 regulations 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.