Brad Katsuyama – CEO of IEX

Market Structure Flaws and Latency Arbitrage

• Latency arbitrage occurs when high-speed traders purchase faster data feeds to detect market-moving events before other participants, allowing them to bet against investors who are still processing older information.
• This dynamic creates a multi-tiered market where hundreds of versions of the same stock trade simultaneously, depending on the speed of data delivery and the physical proximity of the trader to the exchange.
• Exchanges have shifted business models from matching buyers and sellers to generating significant revenue by selling high-speed data and co-location services to traders.
• Brad Katsuyama identified this issue in 2005–2008 while at RBC, observing that liquidity on the screen would disappear (e.g., 10,000 shares offering would drop to 6,000) when he attempted to execute orders.
• Analysis revealed that orders sent simultaneously to multiple exchanges arrived at different times due to varying network latencies; co-located high-frequency traders used this delay to front-run incoming orders.
• Approximately half of the trading volume missed by Katsuyama's firm was trading ahead of them, a practice technically distinct from front-running because traders were buying the "ability" to execute this advantage from the exchanges.

IEX Launch and the Speed Bump

• To neutralize the speed advantage, IEX implemented a "speed bump," a physical system coiling hundreds of miles of fiber optic cable to introduce a 350-microsecond delay to all incoming orders.
• This mechanism ensures all market participants, regardless of location, hit the same price at the same millisecond, effectively leveling the playing field against faster competitors.
• The concept was developed in 2012 and launched in 2013; IEX has since moved beyond this initial innovation to deploy machine learning signals (now on version 6) for predictive analytics.
• By the following year, over a dozen exchanges in stocks, FX, and treasuries were expected to adopt speed bump-like products, signaling broader industry validation of the concept.
• IEX's growth strategy prioritizes execution quality over market share volume, refusing to pay trading rebates that are paid by 80% of US market share.

Regulatory and Public Impact

• The publication of Michael Lewis's Flash Boys in 2014 and a concurrent 60 Minutes segment catapulted Katsuyama into the national spotlight, generating intense public and industry hostility.
• During a live CNBC interview on the NYSE floor, Katsuyama faced aggressive questioning from then-BATS CEO Bill O'Brien, who challenged the necessity of the speed bump; Katsuyama noted O'Brien refused to answer direct questions regarding private data feeds versus SIPs.
• Katsuyama testified under oath before the US Senate and Congress, maintaining that his approach was grounded in factual evidence of widespread liquidity evaporation.
• The SEC has since proposed a pilot program to test the elimination of payment for order flow rebates, indicating a shift in regulatory sentiment that aligns with IEX's long-held criticisms.
• IEX has been profitable since 2015, trades approximately $15 billion daily with fewer than 100 employees, and holds roughly 3% of US equity volume, making it larger than the London Stock Exchange.

Data Strategy and Future Outlook

• IEX provides its market data for free, operating on the philosophy that data should empower researchers and journalists rather than serve as a rent-extraction tool for exchanges.
• Unlike traditional exchanges that rely on data sales, IEX generates revenue exclusively from trading fees, avoiding the conflict of interest associated with controlling data distribution.
• IEX's design goal often involves preventing trades from occurring when predictive signals indicate that market-moving information is already known, effectively reducing speculative betting rather than maximizing transaction volume.
• The company views the recent merger between the London Stock Exchange and Refinitiv as evidence of the industry's recognition that exchanges must control their own data to remain viable.
• Looking forward, Katsuyama suggests that the industry is moving past the speed bump concept, with IEX focusing on the next generation of predictive analytics and market structure innovations.