Brad Katsuyama

Picture of Giraffe Brad Katsuyama

When you blow the whistle on your own profession, bad things may happen. Brad Katsuyama blew the whistle on not only his fellow financial traders, but also on the entire system of buying and selling stocks. He's been pilloried by some of his former colleagues, but he persists—not to make money, not to gain fame, but to right what he perceived as a serious wrong.

Katsuyama worked on Wall Street for the Royal Bank of Canada, trading stocks and eventually running the bank's equity-trading group. He was an up-and-comer, highly valued and commensurately paid by his employer. But he was seeing something that troubled him: When anyone on his team placed a large stock order, it wouldn't be completely filled right away; when it was filled, he'd have to pay a higher price than he had been offered moments before. Katsuyama investigated and discovered the reason for the higher price: Traders operating on computers far faster than his bank's would intercept the transaction, buy the shares he was trying to order, and then re-sell them to his team at higher prices. It was all done in milliseconds, but it was costing his clients a bundle.

Katsuyama knew that this wasn't fair to investors, but a great deal of money was being made by the traders who had rigged the system. They were powerful and crossing them could sink his rising career. The safest thing to do would be to just keep quiet about what he'd discovered. The profitable thing would be to get in on the system and join them in ripping off investors. Or he could stand up for what he knew was right.

He told his wife: "It feels like I'm an expert in something that badly needs to be changed. I think there's only a few people in the world who can do anything about this." So Katsuyama blew the whistle, making sure people knew about the rigging of the current system. Then he set about devising a new one that would treat everyone fairly. "I had spent my career trading on behalf of clients," said Katsuyama, "and it just seemed natural to take this information to them. . . . The system has let down the investor."

He gave up his high-paying job, pooled his savings with a colleague who had joined him, and started a new stock trading system, the IEX Exchange. IEX guarantees that all orders arrive at all the exchanges at the same time; the high-speed operators cannot get that millisecond advantage they've been using to make vast fortunes.

The publicity was overwhelming. Katsuyama appeared on 60 Minutes and was the central figure of a best-selling book, Flash Boys, which details what Katsuyama discovered about high-frequency stock trading. Both the FBI and the Justice Department began investigating these trades. And threatened traders tossed a lot of mud at Katsuyama. The president of one exchange accused him on live television of scare-mongering in order to create publicity for IEX. Katsuyama looked at him and said, "I believe the markets are rigged, and I also think that you're a part of the rigging."

Others have come to his defense. IEX is processing trades for companies and private investors who want a fair shake. And IEX has received hundreds of resumes from people who want to work in an ethical company. It's also received whistleblower accounts from inside other trading companies.

As for the guy who figured out what was going on, Katsuyama would like to downplay all the personal publicity and he doesn't agree with critics who say computer trades should be stopped. "We're not against computerized trading," he says. But he does want transparency, and that level playing field for all investors.

"Changing the way the market operates is better for everyone," says Brad Katsuyama.