Invest Like The Best
Episode 61 What Happens When You Hit Buy
Invest Like The Best

Episode 61: What Happens When You Hit Buy

What Happens When You Hit Buy

Brad Katsuyama is the founder of the IEX exchange and the protagonist of Michael Lewis’s famous book, Flash Boys. We cover the business model of the financial exchanges, what IEX is and the problem they are solving, and what it was like to be the topic of a best-selling book.

This episode is brought to you by:

CFA Institute. CFA Institute is a global association of investment professionals, whose mission is to lead the investment profession by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals working to build an investment industry where investor's interests come first, financial markets function at their best and economies grow. The Chartered Financial Analyst credential is the most respected and recognized investment management designation in the world. The views expressed in this podcast do not necessarily represent the views of CFA Institute.

[00:01:50] – (First Question) Brad’s original discovery of a latency problem in trading stocks

[00:10:41] – How the business model of the NASDAQ and exchanges and how it may surprise people

[00:12:06] – The edge that exchanges are now monetizing

[00:14:36] – How Brad went from finding a solution to his current firm

[00:18:08] – Types of high-frequency traders that there are

[00:22:23] – The formation of IEX

[00:25:36] – Funding IEX

[00:28:38] – What happens to the initial funding 

[00:30:20] – Describe what IEX is as it was sold to early buy-side investors 

[00:32:21] – Explaining the concept of a speedbump

[00:36:08] – Pitching companies so they will be listed on their index

[00:38:27] – Explains maker-taker fees

[00:42:37] – The sources of revenue for IEX vs traditional exchanges 

[00:44:43] – Most memorable meeting Brad has had in establishing IEX

[00:47:29] – How did he do this with young kids?

[00:50:28] – Has the pool of potential profits that high-frequency trading firms can earn gone down 

[00:51:43] – What has Brad most excited about the future in terms of helping the buy-side

[00:53:07] – What was it like to see Brad’s venture get turned into a best-selling book

[00:56:50] – Biggest thing that Brad has learned

[00:58:46] – What would Brad do if he couldn’t work in the investing world.

[01:00:15] – Kindest thing anyone has done for Brad

What Happens When You Hit Buy

Introduction

Patrick
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 discussed 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.

Latency Arbitrage in Trading

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