1.21.16 An Evening with Brad Katsuyama and Michael Lewis

the clip that you just had the opportunity to see from 60 minutes nicely sets up the topic of our churchill club discussion tonight a quest to bring fairness to the markets welcome i'm karen tucker ceo at the churchill club we are very privileged to have with us tonight brad ketzeyama ceo of iex and michael lewis the acclaimed author of flash boys a wall street revolt and the big short among many other very important works and here to lead them in conversation is romney bernicki from sapphire ventures their conversation will cover evolving trends challenges and opportunities for disruption on wall street but first of course as always some thanks are in order to rami and the wonderful team at sapphire avengers shruti anas and also gerald lamb of iex and finally but importantly rbc capital markets without the help of these individuals and companies this program would not have been possible thank you a few words about churchill club now in its fourth decade this is the premier non-profit technology and business forum serving the innovation community here in the silicon valley region and i have to say i've been in this role now as ceo i'm in my ninth year and it is so gratifying to see so many people here tonight past speakers our present speakers and i think probably some future speakers also these are the people who care about supporting and sharing in the mission to encourage innovation economic growth and societal benefit and these are people who are willing to contribute their views they see about the opportunities ahead tonight's hashtag is churchill club and you'll find other twitter pointers in your program our moderator romney bernicki is a managing director at sapphire ventures which by the way is an investor in iex romney is also a long time churchill club board member he was previously a startup ceo and he held many senior executive positions at sap please welcome ramy berninski yeah so uh great i didn't know that's my part but uh welcome good evening uh so again my name is ramy bernicke and i'm going to be the uh moderator uh and uh it's really a pleasure and an honor to have two wonderful speakers with us tonight and i think when it comes to michael lewis uh i can speak for myself i'm a huge michael lewis fan and i'm sure there are many many uh like me in the crowd there you go um and obviously going back to my nba days when liars poker was was a must read still is a classic uh but then again the wonderful books that came after whether it's moneyball obviously made it to a great movie the blindside the big short which is now nominated to five academy awards which which is phenomenal so congrats michael for for that as well and last but not least one piece of anecdote michael joins us tonight after pretty much a 20-hour flight from israel and so i really appreciate the fact that you're out here with us tonight and uh hopefully we'll make it worth your while please join me on stage thank you thank you michael and i want to introduce you to bread and uh it's interesting at sapphire ventures uh we we talk to a lot of entrepreneurs and we obviously invest in some great companies as well um and we usually and i'm i know that there are some venture capitalists in the room as well when you normally look at the business you look at the fundamentals you know is it growing quickly is it a good team you know do you believe in the business and so on uh and really every once in a while a long while comes along an entrepreneur that really wows you and every time i had a chance and the pleasure to talk to brad i was just so impressed by his courage and his ability to stand up for what's right and also figure out how to make it a great business as well and as you'll see tonight brad is just a wonderful wonderful speaker and someone who's truly on a mission to change the world and to change our lives for the better so with that brett why don't you join us thanks thank you okay so before we talk about flash boys michael i have a question i'm sure many folks here uh would be able to relate to which is when when you think about a book when you sort of like start embarking on a journey to write a new book do you have a thesis in mind is it do you have an idea as to how the book is going to play itself out or do you let the story take you where it's going to take you much more in the latter than the former i never would i never go in it always surprises me when people ask me when i'm like when i sit down with him in the beginning of us trying to figure out whether it's a book spend an awful lot time trying to figure out whether it's a book if anybody when they ask me what's your angle because i never have an angle and i don't know i don't know you know it we get gets me going usually is some combination of a character who interests me in a situation that i find riveting and uh and and then i just you know i spend a lot of time with them trying to figure out what the story is and um and do a lot of work around them so in the ca in this case i went up and spent time with his mom in canada and his old heist member and his old high school friends and trying to sense i thought he was too good to be true right so i was looking for i was actually the problem with his story was i could not find any dirt i mean there was like nothing and uh it was uh and it's hard to bring a character to life when he's just a good guy um so uh so i spent i spent a lot of time but i spent a lot of time just kind of trying to figure out what i don't know what the story is i'm just interested in the situation and the person um and eventually you know i have to figure out what the story is but often that doesn't happen really happen until i started to write it and and things start to happen on the page and then it starts to take shape and i'm off how long did it take you by the way to write the flash book flesh boys well he probably knows better than i do i think from the time i met him to the time the book came out a year and a half about a year a year and a half yeah all right brett the good guy so i think that the notion of the book is about really and what iax is doing is about leveling the playing field as you were sort of like kind of working your sort of like as during your career and obviously as you were kind of exploring what's going on with the stock market and that's described beautifully in the book at what point did you have the sort of like the epiphany the understanding that something's awfully wrong and i gotta i gotta figure out what the truth is yes so um i guess a bit of background so i grew up in canada and worked for the world bank of canada which was kind of it was the place to work when you live in canada and moved to the united states in 2002 and i traded energy stocks i traded tech stocks and in 2007 just realized that when i pull up my trading screens and i'd see an offer for 25 000 microsoft and i would try to buy it in 2006 i could buy 25 000 but in 2007 i could only buy 15 of that 25. uh and by 2009 i could only buy 10 000 of the 25 and um it was it it drove me crazy and it wasn't you know i i tell people a lot i'm i'm the accidental entrepreneur i could have retired at rbc i love the company uh i love the people um they sponsored the event tonight that's right thanks to my former team um i never really wanted to start a company i just never had that desire um but what happened over you know i guess the course of my career at rbc we end up building great products we went from number 19 to number one in electronic trading but you realize that we were only helping people trade with rbc we weren't fixing the systemic problem um in this very bizarre relationship that developed between stock exchanges like new york stock exchange and nasdaq and a group of high-speed traders that people most people in this room will have no idea who these firms are um why are these the most important customers of the stock exchange and that's kind of the the the mission that we went on um and then continued in into iex so really it was it was kind of and i i think it kind of was very similar i saw michael go through this same mental exercise because at first you're turning some rocks over and you find some stuff um and actually i met michael he was writing a story about somebody else um there was a guy sir sergey alanikov gets thrown in prison for taking right high frequency trading computers he's also featured in the book yeah right so so uh can i explain how this book came about because i'll spell him for a sec when i was working on the this starts with the big short i was working on the big i was finishing the big short how many people have seen the movie of the big short there we go pretty good right yeah pretty good so um so in the movie the guy vinnie danny and porter the three guys who you know they make the jokes about the testicles and they're all just funny the guys who got out of florida and the alligator gets them and those guys um they're just wonderful sources about wall street generally and uh they they as i was finishing the big short they said we got your next book for you and i said i can't tell you how many times people tell me that i said yeah yeah yeah they said no there's this guy from the royal bank of canada who's running around who's explained to us what we're seeing on our trading screens which is bizarre and it's just the story of the century kind of thing because they were stock market investors um and i said yeah yeah yeah and i ignored them uh and then you a year and a half later i'm reading about this russian computer programmer high frequency trader trading programmer for goldman sachs who is thrown in jail uh for stealing high frequency trading code from goldman and in my state of mind at that moment was you're telling me the only person on the back end of the financial crisis who gets thrown in jail from goldman sachs is the person goldman sachs once thrown in jail i thought that's a story and then i realized so i went and i happened to know the guy's lawyer so i had some access to him and i realized then that i had to also didn't know about high frequency trading which vinnie and danny porter were trying to tell me about 18 months earlier and i called him up i said that guy you said i was going to write a book about could he explain to me how this works because until then nobody even mentioned high frequency trading this is the beginning of the mentions in the newspaper and so we all went out to dinner vinnie danny porter and uh and me and brad and ronan right ronan where are you there he is yeah there he is the irish comic relief yeah but also all an impressive character uh ronan he was uh but anyway so um and at the end of the dinner i thought my god they were right this is a book you know i mean this is where i started to listen to these and and it took a while to figure out how to do the book but that's how it began so so i have a question which i reserved for later but i'm i'll probably ask it now what kind of perils do you find between uh flash boys and other books you wrote in the past about wall street there's one that's really clear it's not wall street uh it's the closest so this book i never you never want to write the same book twice uh the big short interested me because it's it was it seemed i thought that was i thought when i wrote liar's poker 25 years ago it was only a book i was ever going to write about wall street because i never have access again because everybody hated me after the book came out but then they all loved me because the next generation all read it and so they so i had access to write the big short and i thought that was the book end i was describing kind of the beginning of this new structure on wall street in liars poker without knowing that's what i was describing and how it came to grief you know 20 years later 25 years later and then i thought i was really done this was different because this is the first hope hopeful sign i felt in how wall street might be reformed it was so depressing watching the watching the post-financial crisis action in washington i found that so depressing i thought the system's never going to fix it here we have market-based change this could work this could work and and but more than that market-based change that was laced with idealism people actually wanted their life to have meaning and purpose in the financial sector which was a novel idea and uh and and he was attracting people like himself right they didn't just want to make money he wanted to make the world better in the financial sector uh that's just great the thing that was mo the book that's the most similar in my experience is moneyball and because it was in both cases you have a disruptive entrepreneur creating a shitstorm because he's exposing the problems of the industry at the same time and um and the response to the two books very similar interesting the outrage on the back end of it very i also think that i saw somewhere maybe on a charlie rose interview where you compared it to the lord of the rings right so i thought right i i was thinking of getting the great the this had a mythical dimension to it and i thought what is this like and i thought that he actually is frodo in lord of the rings but he's he's sitting in the middle of of this what is going to be a war of the worlds and on one side are the orcs which are high frequency trading and and and uh and uh the public exchanges that have sold themselves out to high frequency traders and on the other side are uh our you know hobbits and elves and dwarfs and these are these are small investors these are institutional investors is he and he was there was no their interests are so opposed on this issue the actual actual investors who are serving a social function um have are their interests are so opposed to the existing structure and the question was how the collision was going to happen and he was the he's the mechanism for the collision so so as long as he survives where the world is home and thrives and thrives so survive let's just start with survive so uh brad i think that you know specifically here in the valley you see a lot of obviously disruption is is one big buzzword and it's somewhat different i think if you are coming from the outside taking elon musk right one of the greatest entrepreneurs of our time disrupting automotive or or sort of like uh space exploration but he's an outsider right so you come in and you disrupt from the outside you're an insider you were working for the same some of the firms or you dealt with some of the firms that now have a very different uh interest than yours what is it like to be an insider who is disrupting it's definitely a lot more uncomfortable you know i think the the hard part about about flash boys was that when it went off a lot of time people on their way out say things and right and do things and the next day i had to show up again and face a lot of the people that that absolutely got destroyed in the book and uh so it was uncomfortable to appoint but i think in general i've never really had an attachment to wall street in particular um i didn't i didn't follow it when i was a kid um in college i really had no desire to go there i just kind of ended up at world bank because you know my dad thought it might be something interesting um so i never really had this like strong i i guess in a way i never felt like it defined me um in the financial crisis actually and i believe this was in the book i i sat down with my wife uh in 2000 2009 um and i said i think i'm done i said i think i want to i think i want to change um it's stressful my blood pressure was through the roof i just i just didn't rbc really i mean i think we're 55th on the on the list of write downs so we weren't a major cause of it it just didn't feel like something i wanted to do with my life and then i got switched into a job where i started to surround myself with computer programmers and engineers and and and that's what led down this quest but i was literally months away from just quitting just walking away without even a job we actually were trying to decide what city we wanted to live in um and i said i'll just find a job somewhere else so i think there's a general detachment from it yeah um and i think that kind of let me again before when michael got interested uh again i had to sit down with my wife and i said you know as this is kind of heating up um and really you're either all in or you're not it there's no there's no such thing as kind of like telling michael some things and not telling him other things it's either you're all in or not and i said to my wife i said is this are we ready to kind of do this so you knew the consequences of going with that book this probably even to this day is probably this this will be my last job on wall street and whether i'm in this job for 20 years or whether i'm in this job for another year um this will be my last job on wall street i'm almost convinced of that and you kind of have to come to terms with that before you really in a way kind of go to work as your own industry um so yeah i i've been i've been fine with that the whole time and for those of you who uh who watched uh uh i think it was the ceo of bats and and you uh going at it right i think michael how was the spectator your respectively actually it quickly becomes clear every time i write a book especially when it creates a firestorm like this one did her money bowl that at the at the ham and eggs breakfast i'm the chicken and he's the pig yeah and so uh it's it it feels it feels a little like you going onto the school schoolyard and you pick a fight with a bully and say go get them brad you know and and that's that's what happened and it happened the first day it happened with it so so along these lines do you feel or are you surprised by the outcome by the consequences i mean iex obviously we'll talk about iex in a second but in terms of the the public attention to the topic do you feel that that has been sort of like well served as far as the book going goes in as far as what you were made yesterday yeah i think we're at a really really important moment in in the history of the financial sector i really do think that this is a this is a way forward this market-based reform and if they are stymied by anything other than their own ineptitude if they were just bad at it like the exchange didn't work that would be one thing but right now the sec is contemplating not letting them become a public exchange because a cabal of high frequency traders and and public exchanges uh who hire sec people when they come out of the sec to work for them uh are trying to shut it down and and and finding all kinds of really bad arguments to do so and so so i'm i was going to answer your question there is a minor uprising in response to this you can if you google it you can read all about it david swenson the head of the yale endowment wrote an article in the new york times saying look the market's rigged these guys can fix it uh it may not be the the ideal solution would be if if the regulators actually did something but these guys will fix it get out of the way regulators let them fix it and uh it's it's outrageous to me there's not more of a public uprising i mean i think this is you remember occupy wall street yeah you should multiply that 20 times and they should be marching around the sec right now it's that big a deal it's that big a deal and uh at staker issue issues of fairness and justice and decency i mean it's just it it's it's like putting the financial sector back in its box and this is a mechanism for doing it so i've been disappointed i mean there was lots of controversy when the book came out but i i'm surprised there isn't more public outrage on this subject so maybe brad uh why don't you walk us through what exactly is ix about and how are you going to level the playing field and why is it that the big other the other exchanges don't like what you proposed sure um so so at a very high level one of the biggest issues in the market today is that stock exchanges like new york stock exchange and nasdaq sell two things they sell high-speed data meaning if you want to learn about the a price change in a stock before someone else you have to pay for that ability and then part two is that they sell what's called co-location or low-latency technology which means that you can take your servers so when you turn on cnbc and you see a bunch of people running on the floor no trading happens on that floor all the trades are beamed out to a data center in new jersey and what they do is they sell you the ability or a high speed trader the ability to take their servers and put it in that data center right next to the exchange servers so that when information is broadcast they're not only are they getting it first but they can trade thousands of times before the last person in line actually finds out what's happening in the stock market um and it's it's essentially created a form um of scalping that affects anyone who's not a part of that game and that ends up being pensions and retirements and it ends up being 401ks and a bunch of things and it's not um it's not happening a dollar at a time but it's happening pennies at a time and if anyone's actually seen the movie office space it's you know when you round those into the bank account it grows it's uh so in a way it's kind of diffuse harm you're harming everyone little bits and you but it's concentrated benefit you're amassing a very small number of firms or amassing this huge huge wealth and i think one of the problems is that um when we started iex we said well how do we take some of these advantages away we didn't want the regulator we didn't want to ask the regulators to change the rules uh we didn't want to go down and say this should be legal or illegal and and we're free market entrepreneurs i mean that we believe in in market-based solutions um so what we did is we took an idea from the existing exchanges and what we did is we coiled 38 miles of cable in a box and what it did is it's the opposite of bringing someone close it's actually pushing people far away and coiling cable in a box created a speed bump that's now measured 350 microseconds millionths of a second explain how that works explain how why when you coil the cable in a box that that that diffuses the advantage that high frequency sure so so when so sorry so essentially when the price of a stock goes from ten to nine um and that's broadcast out there is a race for people that know the stock is trading at nine to want to go out and sell to a buyer at 10 if the buyer doesn't know that the price has changed um that trade has to happen on an exchange or on a dark pool so what happens is you're you're racing around to try to do that is an exchange it's a problem it's kind of a lightly regulated private exchange so so not only do you want to sell to a buyer at 10 because that's not the price anymore you want to do that transaction on an exchange that also doesn't know what the price is so what you have now is you have exchanges actually and the fight i got in on cnbc was was with an exchange ceo who is taking in the slowest possible data feed into their market and selling high-speed traders the fastest data feed which means that the the traders are faster than the exchange itself which means the exchange is just printing trades at the wrong price um so iex did is first thing we did is we we went out and built the fastest possible exchange we could but we knew that high speed traders would always be have a leg up they're always going to be faster they're they're always refreshing their technology so by slowing them down by 350 millionth of a second the stock goes from 10 to 9 and they place an order on iex to sell stock at 10 and it has to go around the coils and as it's going around the coils it gives iex time to realize the price has changed to nine which means we won't let any trades happen at 10. so in a way any investor anyone in this room that has an order on iex every time a trade happens on iex both the buyer and the seller are properly informed of what the right price is millions of trades are happening every single day between someone who knows the price and someone who actually doesn't on exchanges that don't and now the what you say well why would an exchange do that exchanges do that because the people pay hundreds of millions of dollars collectively to put their servers in the building and to buy the fast data new york stock exchange actually makes more money selling the data and technology than they actually do from trading so exchanges don't make money from trading they make money by selling stuff to other people um but no one wants no one wants to pay to be on the other end of a 38 mile uh coiled coiled box of cable um so that technology is technology in a sense i mean it was technology and regulation that created a problem and now you're trying to use technology to in a sense solve the problem yeah you know technology brought a lot of great things to the stock market and and so i think you know it's cheaper it's faster et cetera et cetera so there there were natural efficiencies technology was going to bring but in classic wall street fashion that technology is being massively abused uh to the benefit of very few people at the expense of everyone who doesn't understand what i just told you um so so the challenge becomes and you know it's interesting when we found out this stuff at rbc because we first discovered a lot of this stuff when i was working at rbc um i went home one night and was very happy we made this huge discovery and it felt like kind of we really figured it out and then i actually realized that there's no way in the world we were the first people to figure it out because everyone who realized what i just told you went to the other side and was the ones no one had talked about it um so you realize maybe we're 20th or 25th you're the first canadian maybe that that's the secret here he's canadian and this is what's left of solid midwestern american decency is in canada yeah yeah but you know yeah so so but we were the first people to talk about it and so so that that 350 millionths of a second has caused a massive controversy and and to give you a con context it's 1 1 000th the speed of you blinking your eye yeah and i i read in the wall street journal there was an op-ed written uh two days ago by a former sec commissioner actually yes and he said that iex slowing the market down by 350 millionths of a second is going to reduce investor confidence in displayed quotes is that the uh paul atkins yeah i felt like saying who first of all who can actually tell the difference between a quote show we'd have now or 350 microseconds but what he said was and i think it's it's it's important to pause and maybe kind of play i'll play the contrarian for a second what he said was you guys are a band-aid what you need is like a major overhaul as far as legislation it's the classic it's the classic incumbent partnering using regulation to prevent the new entrant from disrupting it is it's classic and and what they're doing is um regulation nms went in in 2007. people have been complaining about it since 2007. we had the flash crash in 2010 where trillions of dollars were wiped out and you know so uh we we we debated it back then so now all of a sudden they want to fix all of the market debates let's settle all that before we approve a 67-person company that's trying to help investors um of course they want to do that they that that debate could rage on for 25 years um so i think that it's it's just it's it's they're using the machine yeah uh against the new entrant which is interesting i mean when i think about an equivalent company i would think what you see against some of the i guess the uh the movement again uber is as an example it's like you know that you're really disrupting when you create that kind of antagonism antagonism in the market what's funny is when flash boys first came out the very easy thing to say was it's fiction none of this is true brad's full of you know you know what um it was very easy to say that over and over and over fiction this none of it's true it's all all that um i testified in front of the senate and basically said everything i said to michael i said you know no one else from from the cabal was next to me then right um but now all of a sudden if it was all a marketing gimmick if it was all fiction why is everyone fighting so hard to prevent us from competing new york stock exchange and nasdaq who are two absolute bitter enemies formed a lobbying group in december that says a lot it it's when when when those two when those two competitors join forces you you realize that can i understand the question that's right please because where we are so when i was thinking of him as frodo and i was thinking of the forces right that one of the forces i mean one on the force of good i thought invest big investors that you know big mutual funds kind of thing would obviously rally to this cause but i also thought silicon valley because one that identified with his place in this particular market in the market but also because silicon valley has a big interest even though even though the the stock market is 3000 miles away it has a big interest in the integrity of that market and uh the question i want to ask you is what could silicon valley do to to speed the change yeah so so i mean right now we're in what's called a public comment process and and anyone can write the sec and voice their opinion about what they think is happening right now the last four exchanges all owned by bats coincidentally um have been approved in the last 10 years and they've had they had a total of three comment letters between four of them uh iex has now 330 and growing but that not even 330 i don't think is enough to really kind of take on take on the establishment i think you know every time we come out here it feels like our story falls on more receptive years um than back home because there are so there's there's so many entrenched interests that don't want the system to change um they just you know they they heavily resist so how is how is it actionable as far as the audience here you have you have some ceos here you have cfos and then you have all of us you know with our portfolio i mean how is it actionable what can i do tomorrow to support you so i mean there's probably there's public companies that want to list on iex and that's very helpful so we're meeting with a lot of companies um someone started a website called supportix.com and when you go to that website it sends you to the sec site um to to submit comment letters um you know i think you know info at iex trading is is a place you can come in and figure out ways to help so you know there's a lot of different pockets of influence you know the cio from from yale um i i did a talk at yale and and he was in the luckily he was in the crowd and so in in those kinds of voices and michael says that has major influence when when people that understand the market or that come from positions of influence um you know when they speak up it's actually very very important um and you know we just we just need more of that so i want to switch gears a little bit and i think obviously your story is is is a very courageous one but michael mine is even more well yeah i mean you're taking on big banks yeah big banks mortgage industries sports i mean aren't you concerned or ever worried about i mean these are big powerful bodies are you you're not concerned about sort of like making enemies within those industries well i do i have made enemies but it doesn't you know what can happen i can get shot or sued and i've been did anyone ever dissuade you from writing does anybody ever do what dissuade you from writing you know it's funny the only time that i can think of someone who was kind of a powerful rich person trying to talk me out of writing a book was moneyball and it was it was john henry who had just bought the boston red sox and he was trying he was assuming he was going to hire billy bean to run it and that he saw that there were these huge advantages he got he came from wall street he understood how you could use data to get advantages in marketplace he saw what they were doing and he was going to do it himself and he basically he didn't say he'd pay me but he basically said please what can we do to to to talk you out of writing this book so that we can go exploit the market with real money uh but and nobody because if you write this book everybody's gonna know yeah so that was the only time anybody's ever done anything like that to me um the you know walsh wall street uh the answer is no i mean i get i've i have people who are what they do what they do um the villains in this case what they do is they get journalists who are friendly to them talking a pocket journalist who will write kind of slimy articles and uh they might they threaten lawsuits but that's kind of it and i do think that i'm in a nice place where i feel like the truth will out i mean no matter eventually people will figure out what's what's right it's not that they're not mistakes in books i mean you know there are there's a mistake in every book i've ever written but they they're they're relatively trivial and so the uh the the what i face in the way of opposition doesn't feel very serious um and the you're talking about from his point of view from brad's point of view when he goes in to try to change this market he just put it very well the benefits are concentrated in the hands of the few and those people have enormous interest in preserving the status quo and enormous resources to do to do so and the the the costs are imposed across the society and no one person really has that much incentive it's a problem with the comments to stand up and and and and take a stand against the status quo but with with me it's a little different because i'm addressing a mass a pretty big audience uh and so the handful of people who are pissed about what i've written are drowned out by the you know millions of people who read the book and appreciate being informed about what's going on so i i don't i really am the chicken at the him at the ham and eggs breakfast today i don't have i don't i don't feel that threatened yeah and and so so brad what did the i mean what did the book do to you personally and how did it help the company so i mean for the strange to be all of a sudden like a star in a michael lewis book yeah i i mean it was i i had i had read everything michael had ever written before i actually met him that's not true you'd read moneyball and you'd read no it's true you didn't read the fatherhood book you didn't write and write there you go see okay almost don't exactly i didn't and i didn't and i didn't read you wrote a book called pacific rift yeah japanese and american business culture which which i read after we had met you were really because mike michael really liked the fact that i that i was japanese for a bit until you realized i wasn't really much of a japanese person right i was looking for an angle into your character it's just like yeah one funny story is that is that uh i remember when michael was kind of digging around um i told him that my parents were divorced when i was really young and i remember you you sat on your seat you start right here tell me tell me more about that and i said well you know they're still friends um of course we still golf together sometimes he's like he's like scratches it out he's like that doesn't help me that doesn't help me i need trauma um so uh which is funny no so yeah my biggest concern um was that having read a lot of his books that he he has encountered a lot of characters and i just never felt like i was a character um and so that kind of made me uncomfortable like i i didn't i wasn't sure and um you know he did do a ton of research and he flew to canada i met my friends and family and i remember he flew back and we sat down and he basically said i figured you out did i say that yeah reverse engineer i figured you out i was like okay okay here we go like what would you figure out he goes you were never looking for the fight and he said the fight found you mm-hmm yeah and he goes and he goes you just he's basically said you uh he said and you decided to fight back and and that that was actually the time where i just became very comfortable with this because because it becomes hard if i feel like i'm portrayed in a way that that i am not yeah um and now it's it's it's uh well you've made many friends along the way you told me about your meeting with the former president right yeah so george george bush had read flash boys 43 um had read flash boys and and was a fan and i was actually i got invited to an sap ceo conference and uh he invited ronan and i out to have lunch with him in uh in dallas which was which was awesome there you know michael's got such a huge audience that you know running into pockets of people that have that have read it's been it's been it's been it's been great um but i feel like he really captured the characters like he nailed the characters yeah um in a way that i think you know we you know we kind of can all kind of behave the way that we did before so so just for sick because we want to get into a q a and then let michael go to sleep at some point um so let's talk a little bit about the the big short phenomenal movie great book of course what kind of an impact were you looking to have with the big short you know i don't really think that way usually about the books uh i i was just i didn't i started i wanted to explain to myself uh how the crisis happened in particular it was a very narrow question that started it i wanted to explain how these the big banks that had call on the best and the brightest for three decades and uh it seemed to be like filled with really smart self-interested people had committed suicide that that interested me it seemed like like a puzzle a question that needed to be answered and so what i want to achieve when i got in the middle of it i realized i thought like with this one i had a story that was really significant for the culture to absorb and i suppose in that case i wanted to explain the i wanted to explain what had gone wrong in the financial system but um but achieve the effects after it comes out it's not i move on yeah i really don't think i'm really not what i'm not it's a natural although you are passionate about the cause here well yeah but you know it's only because it's so irritatingly obvious which should happen and it hasn't happened yeah uh the uh in irritating you how do you think it's unbelievable to me i mean i would go here i want to go punch people i can't believe you thought but uh in the case of uh what happens what has tended to happen is i'm just writing i'm just a narrative non-fiction writer i try to understand the thing as best i can and tell a story that interests me and then i'm i'm done with it i'm bored with it and i really am bored i don't i don't go re-read it or think about it again and then i if it the big short got politicized very quickly i met all these senators calling me up and want me to explain what how wall street worked and uh the the financial crisis inquiry commission kept calling me and i every time they call you ever seen life of brian the monty python of course i tell you something i said i'm i'm not jesus you know i'm i just happen to live in the manger next door and uh and and uh and the the uh and that these the book has the people in it who can explain to you everything i know plus more because everything i know i know from you feel that the movie did a good job of of staying true to the to the movie did a spectacular job i mean it's so hard you gotta you have to appreciate when people really love books they tend to think the movies aren't as good as the books yeah um and uh if they really so i think sometimes movies are what is that with brett pete in your your your books by the way uh it was it it's a bit of a coincidence he didn't own moneyball he just wanted to play billy bean and then we hit it off i really liked him so i did sell him the big short okay yeah i trusted him with it yeah but the the um uh the follow-up after the it's not really not i i don't i don't really it's not i'm not thinking what's going to happen next it goes out in the world let the world deal with it yes and so the inevitable question i have is uh flesh boys movie and who's going to be playing brad katsuyama it's actually a funny question because um the big short movie's done so well and that it's probably created some momentum for the flash boys project i don't have anything to do with it you know so those the hollywood people will either do it or not it's a it's it's some ways an easier movie to make in some ways a harder movie to make but uh the one of the obstacles is that he's asian canadian asian but they don't they're not there there's no movie star anybody knows who's asian uh so and that actually i can see him thinking about that i think that's an opportunity i think the whole point is to take someone no one knows like and and make him i can see christian bill doing anything pretty much but but but you know i i i really don't i don't think very much about it you go the the movie people they they really it really is true they're much happier when the author's dead yeah they don't they don't they don't want you there they don't and they if you're alive you're this inconvenience they need to be kind of polite to you and pretend to be interested in what you think yeah and i don't and and it's just an awkward false relationship they take the book and they do it and they don't do it um i'd say there's a 50 50 shot this thing gets made and it would be especially if the sec does not let them go ahead it would be very useful if it got made well i'm sure no one wants to play the villain in that movie uh it's so funny that people want to play the villain in real life i mean in this case it really is the villainy that took place in the big short there was in the financial crisis there were some actual really bad behavior where people were very conscious of essentially the fraudulence they were engaged in uh but a lot of it was stupidity and it was a lot very hard often to figure out the difference between the stupidity and the and the fraud and that was and i left that to the reader i mean i said one of the things i was thinking is leave to the reader describe what happened leave the reader to decide whether this is fraud or this is just stupidity in this case this is not a question of like is it fraud these are really smart people doing really crooked and they and they should be strung up and uh and they know what they're doing and they think they can get away with it because it's complicated and there's so much money at stake they persist but but i mean they've asked to be portrayed as villains they really are villains in this story strong wards and it's a a wonderful way to conclude the conversation the formal conversation so we're going to open things up as far as q a my only request is the first few minutes if uh you have questions from michael let's take questions from michael first and then bread will stay on the chicken is going to fly the coop that's right do we have mics yeah good uh yeah my question is um it seems like a very cut and dry case of insider trading where the exchanges are the tippers and the people who buy those and trade on them are tippies why is it simply not regulated that way it's a really good question i've wondered why why the these are questions any anything that requires actual knowledge should be directed to brad and ask me the things that require no knowledge at all um but i wondered that myself it was one of the first questions i asked is this just seems like an insider trading case in this case it's much purer than insider trading is right insider trading cases are usually i tell you something material about the company i'm not telling you the price of the shares you're getting in this case you get advanced word of the price of the shares that seems it does seem like a no-brainer so the i don't know why you want to sure yeah so a couple of the challenges so regulation that was created in 2007 had to define what increment of time was immediate and immediate at that point was defined as anything less than one second the other challenge is that since when things are happening in microseconds in exchanges clocks will drift some exchanges aren't time stamping to that level of granularity uh a trade that actually occurred as a b c d if you try to gather that data and see the way it played out it actually might look like d b c a um so it's very hard to put together a chronology of what's happened given how this is happening in micro time increments so i think that it's become difficult to uh to kind of to kind of pin down unfortunately the real answer is they don't wanna they they they don't the same people who would prosecute it for insider trading are deciding whether he can be in exchange or not and you can tell from their behavior here that they certainly don't want to open that can of worms other questions from michael so one comment one question on the comment side you might take a look at glenn the uh the guy from the walking dead the guy that plays glenn for the role of brad that's a compliment yeah i think so so so on the question so michael i full disclosure i work in the financial markets i actually work for a company that's invested in iex i'm curious to know you've sold a bunch of books sold a couple movies given the fact that you've sort of gone through the wall street looking glass and taken a bunch of people with you how do you invest with confidence um well for starters one of the i you know one of the things that worried me right when the when flash boys exploded when the book came out was that people would think this means you're supposed to take your money out of the stock market and that's not that's not the conclusion you should draw from this it's uh so though yes it's true the stock market is unnecessarily complicated and probably and prone to things like flash prices they shouldn't be the the basic like the value of a share turns on the expected corporate earnings of the company you're invested in that this has little to do with that this is so um the broader question of how i invest my money i'm really not interested in it i mean i wasn't interested in it when i was on wall street and i wasn't i didn't ever think of myself as particularly good at it so i do as little as possible it's it's making some broad allocation decisions about stocks versus other things and then once it's in stocks i buy two things i buy low-cost vanguard funds and i buy berkshire hathaway shares and the berkshire hathaway shares i buy because he has the one he's the one person in the market buffett is the one person in the market whose capital is priced differently from everybody else's that he gets he gets deals that nobody else gets and when times of real disruption like i mean maybe now but if it was the worse it gets the better it is for buffett because he's a very cool hand in difficult environments so uh so those are that that's it i don't know i i never reviewed my money as something i was supposed to turn into a whole lot more money i just try not to lose it yeah maybe someone why not put a tax on transactions all right this is a this is something he's answered a lot more than i have and you should probably just answer it so yeah i think you know the the challenge is there there are a lot of productive forms of high-speed trading so if you look at etfs against the underlying stocks at times if a big buyer in the etf pushes the price up you can short the etf and buy the underlying stocks let it settle back to fair value and flip that trade out so you know there are productive means of high-speed trading and then there are also unproductive means and i think you know transaction tax just ends up becoming this broad swath um there's always unintended consequences yeah it's it's a broad swath solution i mean iex really we're a precision solution to a precision problem which is really why we feel that you know we fit within the regulation and we should have a chance to compete but yeah i think i think the market is better served with precision solutions and especially ones that are made that don't involve the regulators because any solving things by rule always leads to more loopholes more inefficiencies and you know more exploitation so you know try to we should really try to do that as little as possible where's the mic michael you do so much research into your books and sometimes it seems like you can make anything interesting um i'm curious to know if my wife doesn't agree because the actually opposite i'm curious to know if you've ever kind of gotten halfway down the road towards writing a book and then decided ah there's no story here or you know it doesn't work the way i want it yes a specific example is i got a long way never i've never actually put the words on the paper but i've done an awful lot of reporting kind of research and then abandoned projects the most dramatic example was i was going to write a sequel to moneyball and in fact i sold moneyball when i decided i was going to write a book about baseball i can remember the email i sent my publisher late at night when i figured out that moneyball was a book i said they're two books the bad news is i'm writing a book about baseball because i've never written about sports and the worst news is it's two books and you got to buy two books and the first book is only i'm only doing so i can write the second book the first book is going to be called moneyball and the second book's going to be called underdogs and it's going to follow the kids that the oakland a's drafted in 2003 who were drafted by you know algorithm basically as opposed to scout judgment and a lot of them were shocked that anybody thought they were professional baseball players um or at least the caliber that the a's judged them to be i wanted to see what happened to him so i spent years three four years out every minor league season on buses in motel rooms i mean just just following these guys lives and i've got a massive amount of material and i can never figure out quite what to do with it and i think what happened was the conception of that book was i was going to do a lot more of what i did in moneyball in that book there was going to be it was going to follow the development of the analytics movement in sports alongside these guys career and moneyball was such it ended up being so noisy that it it it ate everything that was going to come after it and so i just i ended up i've ended up walking away from it um it's so hard to do ignoring sunk cost is like it's one of those things that a wise person you should teach your children how to ignore sunk cost because people don't actually do it and people have like all kinds of mistakes in life you know not ignoring it and i try to tell myself sometimes you just gotta cut but it's hard to do when you've done a lot of work i mean you know it seems like you just wasted your life but that's some it's happened several occasions that's the biggest occasion so um michael i know you you have to take off and i really appreciate them the time and we're not regarding this as sunk cost by the way i'm not walking away because i because i just figured out that i shouldn't be here yeah 24 hours on the road that that's definitely a good enough excuse for us we're going to leave him here for you absolutely so thank you very much back here in the back straight back chuck jones from forbes brad what are the arguments that the cabal is using to not have iex be a public exchange sure um so so the regulate there's two regulations one's the exchange act of 1934 and the other one's regulation nms and nms is a 500 page document and in there um there's two words intentional device and what it says is that an exchange can't use an intentional device to delay access to quotes um and if you read it literally you would think that a box of cable is a device and we're intentionally slowing down people's ability to trade on iex except for the fact that we got the idea from existing exchanges so existing exchanges when you're paid to be in the new york stock exchange data center what happened was that people that were in the back corner of the data center started to complain that the people that were closer to the matching engine actually had a shorter cable and their cable was longer every foot of cable is one billionth of a second uh so it gives you a you know a sense of why what people were fighting over um but it was a legitimate enough argument where the new york stock exchange nasdaq and bats the three major exchanges all did this where they measured the farthest corner of their data center gave everyone the same length the cable and the person closest had a coiled cable this has been happening for years so when we decided you know at iex and this is the you know we read the regulation front to back and we said great exchanges are a lot of coil cable we're going to coil cable the other thing that it says is back to this word immediate you know the fact that people making the statement that 350 microseconds is not immediate i think kind of has have uh have lost kind of a sense of reality in a way because the market isn't acting in this instantaneous uniform motion when you measure things in microseconds things are happening randomly all over the place if you know an exchange that's located in a different geography is sending messages and you're seeing that at a different time than exchanges that are closer to you um so in a way intentional device is is one of the crutches but it just doesn't hold up because existing exchanges under the current regulation are allowed to coil cable to equalize latency they just coil cable to make it fair for people who have paid them hundreds of millions of dollars for that privilege we coil cable for free for everybody um so actually you would think that our coiling of cable complies with the regulations slightly more than theirs uh does and and ultimately and i guess i guess what gives us a lot of confidence is that regulation nms makes a very clear statement where they say when the interests of short-term traders and long-term investors conflict it's the commission's responsibility to uphold the interests of long-term investors so we do feel like in principle what iex does doesn't require any rule change uh it doesn't require any special treatment um we fall squarely within the regulation and the challenge is that they're trying to change the rules on us um as we're applying meaning that historical precedent doesn't have a lot to do with with uh letting in a new entrant compete on the same terms and i think that's that's really what the crux of this argument is going to be and there have been a lot of suggestions through this process some of them made conveniently by high-speed traders on how iex should adjust our model eliminate the speed bump stop slowing this down or do that and unfortunately these things would all compromise our ability to protect investors so we're unwilling to do that which actually makes this a very very tough negotiation on all sides because what's the next milestone for for iex so march 21st is when we expect a decision and um you know it's in our best interest to get that decision made as soon as possible and you know they have you know our market's grown tremendously our first day of trading we did 568 000 shares and we were pretty excited about that yesterday was our our newest record we did 466 million shares we almost traded 10 billion dollars in notional the market has taken off um but there are limits to how much we can grow if we're not in exchange and that that's really we're trying to remove those limits so uh but march 21st we expect there to be a decision and and you know that gives you know we have 60 days to try to talk to as many people as possible try to garner as much support as we can and you know ultimately whatever that decision is hopefully we've gained a large enough amount of support that it gives you know whether it happens on march 21st or some point after that you know we'll be given the right to compete where's the mic well thank you hey brad question here in sign valley we talk about strategy and competition and risks what happens if they do approve you and a month later the existing exchanges just meet the exact same coiling i assume it's not a very big technical challenge right yeah it's funny so so ronan we were talking the other day and he said we've spent millions and millions of dollars on technology our system processed 1.8 billion messages yesterday and all this fighting's over an 8 000 box of of coiled cable the reason exchanges won't coil cables because they make hundreds of millions of dollars selling fast access no one will pay hundreds of millions of dollars to be on the other end of a 38-mile coiled cable so really it's in their economic best interest to not do that and that's really why i think they're such a huge fight you know the fight really if ix is approved as an exchange what that means is that exchanges don't have to compete on speed it actually makes speed less relevant if an exchange is approved that has actually even by 350 microseconds has slowed itself down so if speed is less important that's bad for people who need speed to make money and that's really bad for people who sell speed for hundreds of millions of dollars um which is really why this this fight has kind of taken the shape that it's taken is because they know they know what it means if ix is approved as an exchange and it means a lot of money out of their pockets next question um yeah this is a highly political issue obviously you know wall street is the talk of the presidential elections is this something that's come up in the course of political debate have people aware of this and how it could impact wall street and is that a way to get some advocacy yeah it hasn't come up yet um you know in general we've been pretty conservative through this process um you know it was a process that and again maybe mike would probably make fun of me for for saying this but you know we tried to play by the rules in a way where uh all of ix's comments during this process were through comment letters we submitted to the sec our first one was 26 pages because we answered every addressed every comment and our second one was 50 pages because we addressed every comment and then we found out that no one read those no one read our responses and meanwhile we're getting you know you know smeared all over the place in you know kind of in in the general public et cetera so we're just now starting to talk more openly about what's happening and why it's important uh but it hasn't made its way to the to the presidential um debates we've we've been kind of provoked in a couple different ways to give information but you know i think that those debates are you know i i'm not sure but it so it so the short answer is it hasn't um maybe at some point it does get there though yeah next question brad you know the you brought up the issue of silicon valley my guess is that some of the people in the room actually paid for the technology that's used for high frequency trading and created that much of that technology yeah where do you think the role of silicon valley and what they do having public good associated rather than now you having to create a problem that was caused by investments that were made here yeah actually i was sitting next to someone that that was telling me about all the servers they were selling wall street you know part of it is you know technology has has created so many benefits i really you know i i can't i can't fault people for wanting to make trades go faster and wanting to create efficiencies it's really when it's misused and i think it's up to the industry to ensure that it's not misused i don't think it's um you know it's it's a vendors or it's the people kind of creating the chipsets or or supplying the servers it's up to the industry to in a way police itself um you know uh romney made the the the um the comparison to uber and i read an article about uber and london and they talked about okay we'll let uber in london if you can't show a car on an app and you have to you know administer a five-minute waiting period before a car can come and all the and what ultimately what they're doing is these conditions are making it worse for the passenger that's right right um and in a way the industry loses sight of why the stock market exists in the first place the stock market exists is to help companies raise capital and to help investors allocate that capital none of what we've talked about today has anything to do with that and really our focus is about trying to turn this back on um companies and back up towards investors and the shareholders and and all of the money that's being wasted building this technology is is it's societal waste the diminishing returns of one incremental microsecond of speed or three new york stock exchanges now put laser beams on their roof to shoot messages back and forth faster than subterranean cable all of that money is just um it's really not helping anyone other than the people who sell it and the people who buy it at the expense of other people so so you know do you think that other than technology is there room for legislation uh changes i don't think so because really you can't get in the game of regulating speed um you know the in 2007 they thought less than one second was a reasonable time frame and now we're talking about millions of seconds i have no idea what i'll be talking about you know eight years from now so i do i do feel like um the market needs to solve a lot of these a lot of these issues um you know i did when i was at rbc we went down to the sec and said hey here's everything that we've discovered and here's what we found um it just didn't seem like there was a lot of movement and so so that's part of why we decided to start iex was to say let's let's let's reform this ourselves um but do it in a way that fits within the rules it was really important for us to be a market-based solution which is why it's so frustrating um that people are trying to change the regulation to stop us from competing or reconsidering the entire let's let's reconsider the entire rule set yeah before we let this company i mean it's years and years it's it's the polite way to not attack iex but to absolutely attack ies and that that's been the common rhetoric um and it just gets us nowhere it's another form of a speed bump uh yeah question uh yeah hi so first of all brad thank you and thank all your team for creating iex that's really inspiring uh i had a question about your management style having read the book and actually i listened to it on audible like over and over and over again every night so you have very eccentric people that at least initially you hired right you have schwa and you have sualism and you hired puzzle masters like really you know unusual people but you were kind of okay with it like if shaw called you up and said hey i'm not showing up today i'm totally fine with that still happens actually no so how do you decide like this person is smart enough or yeah is productive enough that i'm just gonna let them lose for a while and then at what point do you bring them back right so so i think um so i guess there's two parts number one is trust um we have an immense amount of trust in each other so if if um ronan or john says this is important to me whether whether i know what that is or not um it immediately becomes important because it's important to them management style has always kind of been an appreciation for for people and in in general and this has kind of been true of almost everyone that i've ever managed is that their greatest strength is also a part of their greatest weakness people that are extremely passionate um have a huge amount of energy and have a huge amount of driving force but that passion can work against them by being reactive and getting emotional about things et cetera you know john john schwall is our ceo and he uh he he gets he has an obsessive streak about him but he also knows every single detail of our business and every single detail of regulation i've never known anyone to sweat the details as much as him but it it it comes with prices and so when you realize that the weaknesses that at times i have to manage are actually a derivative of the reason i hired them in the first place it actually gives them the room and it gives me the headspace to let them be them and and it's funny because i didn't really learn that my job at rbc first was to run trading and it was it was human traders um and a lot of them kind of are the same you know they're they're they're most of them are a lot of them are former athletes they're very type a they're very aggressive and um but when i moved over to electronic and started amassing this team i said well i'm surrounded by a lot of like different kinds of people um but i found that the skill sets were so unique um each person was bringing such a unique talent to the table and i found a common theme in trying to find ways to get them to get along with each other and and there's a lot of people at rbc here or from iex i've had this talk with everyone your greatest strength is your greatest weakness and so is the person across from you um and that i think gives a sense of appreciation for people in the room and and lets you work it out in the bad times by the way another form of asking the same question is are you guys hiring so yeah you know we we've been kind of adding people you know it's funny so so so this after the 60 minutes episode aired before the end of 60 minutes we literally had 500 resumes sent into our our careers inbox um and and so when we have openings we actually go through you know we've divided them up and and we we have we have we have over a thousand resumes now um or thousands uh but yeah i mean we've hired a lot of people um i actually look for people now that that that haven't worked on wall street i find that kind of the diversity of opinion is really important in the room um there's certain skill sets you need to hire from wall street and there are certain ones that that you don't so um so yeah we're always looking for for kind of you know the right people which again i mean i made a reference earlier to tesla and i think that that's their philosophy as well hire outsiders or people who can bring a very different philosophy yeah you know the hardest part about what we do is trying to make something extremely complicated simple because the simpler i can make it the better the more you can understand what it is that we're trying to do and how it benefits how it benefits you and um a lot of times outsiders are the ones who aren't lost in the right you know kind of in the details yeah so we have time for one more question i believe are you guys finding uh that you're getting any support from the large institutional investors the big mutual fund companies or the large pensions and they kind of counter that yeah absolutely so so we're actually owned by a lot of large investors so cat carl from capital group and uh you know brandes is here too so uh franklin templeton um mass mutual so we have huge support from the institutional community a lot of them have written letters to the sec texas teachers retirement just wrote a really important one last week where they essentially said to the sec we have data that shows iex has saved our constituents who are teachers and public school employees in texas millions of dollars you know those are really really powerful statements um that that hopefully you know the sec considers when they decide whether we should be allowed to to kind of grow the way we think we can grow um so yeah we've had a lot of support from the institutional community nor just bank who's one of the largest pension funds in the world wrote a very complimentary letter so we're getting we're getting that support you know it can it can always be bigger i'd say that you know there's thousands of funds out there we probably had 30 or so write letters um but again it's it's you know we have we have a really good kind of group of partners and you know part of it you know part of the hard part is that we're kind of in a battle and people have day jobs people care about the markets it's it's uh you know on a day like yesterday when the market's getting devastated the last thing i want to do is ask someone to write a letter on behalf of iex when you know portfolios are getting destroyed so i think it's um you know we haven't really asked for a lot of help um simply because you know it's it just really hasn't been our our thing but i think um you know given that you know this is this is a real battle we are out manned and outgunned and we're being outspent in dc um you know now's the time where we really we really got to kind of get out there and start asking for help like you know now's the time we need it we really haven't asked for but you know now's the time we need it well i think you've made about 300 new fans here so good work thank you thank you like to thank you brad and rami and we've thanked michael for sharing your views so candidly this has been a wonderful evening as a small token of our appreciation we would like to present you with the churchill club speaker t-shirt thank you thank you very much thanks thank you appreciate it great thank you thank you and you have been a wonderful wonderful audience thank you so much

Channel: ChurchillClub

Views: 59,867

Keywords: Churchill Club, Business, Technology, Innovation, Brad Katsuyama, IEX, Michael Lewis, Author, Flash Boys, The Big Short, Moneyball, The Blind Side, Rami Branitzky, Sapphire Ventures, RBC Capital Markets, Wall Street

Id: 7Olf2TiuAos

Length: 71min 31sec (4291 seconds)

Published: Mon Jan 25 2016