Raw Transcript
I've been shaking my head a lot quite frankly the last uh the last 36 hours and I think first thing I'd say is you know Michael and Brad shame on both of you for falsely accusing literally thousands of people and possibly scaring millions of investors in an effort to promote a business model now Sue it's it's a very very old tactic to try to build a business on the planks of fear mistrust and accusation this is certainly taken that to a new level um and it reflects either a unwillingness a continued lack of understanding about how the market operates or just an unwillingness to acknowledge it because you're trying to launch a new business and you want to get you want to get volunteer platform Brad let me let me try to weigh in here bill and we want to get more on what what you thought you're very respected on the street I've known you a little while you you're thought very highly of do you think the markets are rigged I think it's really hard to put a word he said it in the book okay you said it in the book that's when I knew the markets were rigged and I disgusting that you're trying to parse your words now do you do you think quoted you are quoted that way in the book but let okay let's let's walk let's walk through an example do do you say Do you believe it or not cuz you said it let me walk you through an example it's a yes or no question do you believe it or not I believe the Market's a rig okay so there you go and I and I also think that you're a part of the rigging so if you want to do this let's do this I I I really do so let's walk through he's talking about the the the technical operation of an exchange right so when you look at an exchange or a dark pool um the responsibility of that venue is to fairly price trades between slower participants and faster participants right so you have some some participants have microwave Towers some participants are collocated some participants are are not they're trading over an internet connection they're slower and you'll never you'll never Bridge the speed the battle is not between fast and slow traders that for in order for a disadvantage to happen in order for someone to get scalped the fast and tra uh slow Traders have to trade against each other that trade happens on a market okay it's the Market's responsibility or at least it should be the Market's responsibility to fairly price trades between fast and slow Traders how how does it do that it does that with its understanding of the broader Market the information that the exchange is taking into fairly priced trades my question to Bill if he's launching these accusations what I'm launching accusations what Market data do you use to price trades on Direct Edge we use the direct feeds and the Sip in combination no no no I asked you a question not what you use to Route what do you use to price trades in your matching engine on Direct Edge we use we use the direct feeds no yes we do and you had a 300 page commercial okay let me talk let me talk for a few minutes okay the direct you respond and then you respond and then Michael I want we're going to bring Michael back in in a minute the the direct feeds that you're talking about that you're claiming is the source of this vast inequity okay 96% of the volume executed on our system is by customers using those data products and that runs the gamut from bul bracket firms retail brokerage firms in their Advocates and intermediaries you don't understand that the market has always had intermediaries since the beginning of financial markets at scale there's going to be someone who at the time needs to be in the middle they're using technology to manage the risks of providing that service to the market and we help them and other types of Brokers and investors use technology in a way that's consistent with their business model to manage the risks and the desires of their customers can can I can I tell you whether this is incorrect this is 96% you're referring to is the proprietary feeds that you're saying that everybody's been arguing about and then Michael there's a difference between a subscriber using a proprietary feed versus what the ex the a pegged order uh a priced order price sliding anything anytime The Exchange is responsible data that we do absolutely not you you guys use use the Sip to price trades and that is not what is the Sip for those who don't know it's a feed what what I'm saying is that the exchange's view of the market is slower than that of some of their fastest participants their view of the market is slower they are looking at a different price than the fastest Traders and therefore and and some in concert when you allow collocation to occur your ability to fairly price trades is diminished you can't do it because you don't even know what the market is bats uses direct feeds NASDAQ uses direct feeds feeds let me let me jump in if I might gentle direct feeds can can I finish just one second okay what what IEX has done we use direct feeds to price trades we are not as fast as the fastest hfts what we've done is we've slowed down hfts ability to react on our exchange which means if anyone in this room if anyone at home if if a mutual fund or a hedge fund gives an order to I ex and it's our responsibility to price it hft cannot make that they have the same hft customers that we do only we say they're providing a valuable service to the market they they ripping off the market Brad you want to be in exchange you aspire to be exchange is that right do you think you have a model for how you want your exchange run do you think all the other exchanges models should be should be legislated out of business there should be a law against them what do what do you feel should happen it it to say that you know someone's not allowed to sell a microwave Tower I don't think that's you know it's again it's capitalism right I think to render a microwave Tower irrelevant is exactly what we're trying to do it's not about Le technology legal versus illegal it's about the market providing a solution again just to respond to what bill just said do we have computerized trading on our Market absolutely I think the word high frequency trading should be eliminated from the industry vocabulary you used it 20 times in the book there's computerized trading not his book there's computer yeah it wasn't my book you're quoted computerized trading and computerized scalping people can trade with computers they will till the end of time people use computers to scalp they've always looked at game the markets you cannot scalp trades you cannot scalp orders that are on EX so what we're saying okay guys I'm going to jump in folks I'm going to interrupt for a minute I want to bring Michael Lewis back in you've been sitting yeah who you you've been very patient enjoying that I've seen you I I could tell you were enjoying it and it sometimes got a little bit of a pained expression on your face I want you to react to What You've just heard the very beginning it's so this it's great to see see Bill instantly throw at Brad the idea that all he's doing all this to promote a business model well he said that and he also said shame on you how do you react so so so so I think he's outrageous I think he's part of the problem I think it's not just Brad uh there there's a an investor in Philadelphia named Rich Gates who managed to get himself picked up picked off on the bats exchange numerous times because the bats exchange didn't update their prices fast enough it's uh so this isn't just Brad katayama talking but what's great is that like the story I mean so Brad is now kind of cast as this Troublemaker right and I'm partly to blame for that but this this trouble found him I mean this is a guy this is a guy who is who could be very happily being part of the problem he was being paid lots of money to work at a big bank to and be part of the problem if he wanted to be that that he actually he what he's actually trying to do is solve a problem it is at the heart of capitalism right now the unfairness in the public exchanges and uh and and he's taking great risks to do it I mean yeah he'll make some money if if it works out but but uh the instant questioning of his motives is kind of incredible Mike I want to go back to this final Point here before we go should we have hearings around reg nms this law that this regulation that came in in 2007 I've been saying that the SEC should conduct public hearings into what is working and what is not working they haven't done that yet would you support something like that well so look this is what I think that the regulatory process always seems to generate something that ends up being gamed by smart people what I love about this moment right now in Market history is that you have this exchange that found a market solution to the problem and if people just get out of the way the big the important thing is that investors get more information about how their or their stock market orders are being handled that's a big problem are you an investor in Brad's exchange no Michael I'm just asking for full disclosure call me Cookie I'm being a journalist are you insane I didn't I didn't even go looking to write a book about him I was just trying to figure out what the hell was going on in the stock market and and big investor after big investor said there's one guy who's an honest broker in all of this he's come into office and explained how this all this works and and go talk to him he's the only bu only guy on Wall Street who can actually tell you the truth about for the record you're not insane and what I take the biggest issue with is bats direct Edge they didn't exist 10 years ago and we became the biggest stock market in any given day in the United States by going to our customers proving we had a value proposition and winning their business we didn't do it by trying to scare people and I don't think it's true and I don't think it's right what about Bob's question about the SEC revisiting nms and the rule that really created the current market structure that we are now all kind of grappling with For Better or For Worse you know I applaud both of you for trying to do you know to run your businesses um but do we need to re-examine the market structure I agree with I do agree with Michael that I think it's time to do that we've actually called for a holistic review of Market structure for a couple of years and uh Mary Joe White commission chairman of the SEC and Dan Gallagher have made statements recently that they're prioritizing that I think that's a good thing but it has to be done in a constructive way that listens to the perspectives of all Market participants don't view what they're doing as inherently corrupt and focus on data and analytics not accusation and misinformation Michael's right and and you you uh your model you think is a superior one what's the phone calls looking like I mean are are you is your business picked up noticeably you're very SCE ofet we're start uh yeah I mean it's there's been thousands of calls um people have responded posi just back to the you know the investor confidence I mean you've gone from 65% households owning equities to 52% over the last 6 years every year declining the S&P tripled since the lows in 2009 SO trading at TDM trades at an all-time high in February and March I dispute that Michael Le Michael Lewis did you talked to Mr O'Brien as you reported your book if so what did he tell you if not why not and what would you you like to ask him right now so so first this Market confidence point I will answer that question the market confidence point is interesting because Goldman Sachs is now has has now thrown its weight behind Brad cat because let me finish this no no you had Pages you investment in my exchange as a sign of corruption and his backing of his exchange is a sign of virtue the same thing there why is there a difference cuz the cuz my the backing of me is bad and the backing of you is good how is it different because they they're a financial they invested in your the investors in our exchange don't trade on our exchange this is part of the problem right I mean bill again I say the sky is blue Bill say the sky is red right this company this this building was owned by people who traded here for 200 years like this on the show this is insane um this what you say is insane all right let him finish and then you get a response Bill's talking in his book okay he is owned by intermediaries owned by hfts I'm talking my own book right we're owned by mutual funds hedge funds Etc right so it it is one of these things where at the end of the day what is the purpose of the market why are all the people in this room right they're in here to help companies raise capital and to help investors allocate that Capital do intermediaries play a role absolutely should you build a market specifically just for intermediaries you shouldn't so we have the buy side behind this we have Brokers like not just Goldman but Morgan Stanley or JP Morgan or Bernstein or RBC you have people in this room you have computerized Traders like virtue that aren't coming here to scout people and you have the general public behind a solution like what are we talking about here right it's about the industry getting behind a solution that's exactly what's happening so so I'm I'm I'm all for people competing we we we started from we started from nothing 10 years ago just like you're doing now and that's fine and you're right the purpose of exchanges is to bring together buyers and sellers in a way that works for them Micha jump back what we're saying is it's not a zero some game everybody can win and you don't need to build a market on the premise that one group group is ripping another group off Michael go ahead so I missed most of that my I didn't hear it I didn't actually hear the exchange but uh so so I don't know what I'm jumping into sorry well I I asked you earlier did you speak to Mr O'Brien uh in the recording of your book so so I visited bats I interviewed people you do not that that is false absolutely false that's not false I I toured it I had to tour the place that is untrue it's maybe it's untrue I was there give me a date what date February 5th 2013 okay we're going to follow up with CNBC about where Michael Lewis was on February 5th 23d were youas city or New York I was with Brad catama when I visited can't hear them you were in Kansas City on February 5th 2013 okay CU that's where we're located by the way if you wonder about no no I visited I wanted to see where the M where the high frequency Traders hooked hooked up you go to a DAT Center going to a data Setter and standing outside and saying you talk to us is not the same thing okay so be honest with yourself so the other thing that we so the so the question was you you there's actually no point in talking to someone who's just throwing dust in the air and he was he wasn't actually the head of bats when the stuff I was describing occurred I tried to get to Dave Cummings who is who was one of the founders of bats uh because I want I was curious why they position it outside the Lincoln Tunnel I mean Brad cot IM discovers that he's being front run from bats to other exchanges that's what that's what gets him involved in this in the first place in this kind of Journey of Discovery you figure out how this Market works and uh and so I was curious if they had intentionally put the exchange on the other side of the linol tunnel just so they could pick off orders just stop manipulating the audience because talking to an ex employee is not the same as saying you talk to so the person who you weren't even there at the time so so the person who uh who I wanted to talk to uh you wouldn't talk to me but I did talk you didn't try to contact anybody at bats okay the answer is no you didn't try to contact any employee your book is ridd with inaccuracy for and many re true it's not true uh you can get on there and you can shout all you want but it's but it's just not true sorer Traders I interview people from all the exchanges I I interview people sorry no to that point Bill though he does have a very big um platform which I mentioned earlier um and this book is getting an awful lot of media and an awful lot of press and uh for Better or For Worse it doesn't make some of the high frequency exchanges look good so how do you combat that how do you clear the air how do you forward the conversation because once Flash Boys goes to the general public which it is going to do shortly and once you have as Bob Pani said the megaphone of 60 Minutes it becomes a Main Street topic right so how do you combat what is going to be a negative image for for your company and for your industry let's start with the facts and I think David Kaminsky put it really well a couple of hours ago right 15 years ago the spread between the best offer to buy and sell was 12 cents or 25 cents now it's a penny 15 years ago what an Institutional Investor paid Brad at RBC to execute his trade was 6 cents now it's 90 to 95% less than that so I think a lot of people who really focus on the data um which really doesn't exist in the book uh will understand the benefits of electronic trading generally how it's taken a lot of risk out of the system but that doesn't mean the Market's Perfect Right saying it's not rigged and saying it's perfect are not the same thing and we did we did we did need a wakeup call from the flash crash we had not invested in the technology to make our critical infrastructure more resilient to manage the complexity and it is complex but you know what the internet's complex a factory is complex there are ways to manage that risk we need to work very hard to do that I think that's a very interesting point when you say the market is not perfect there are imp whoops there are imperfections in the market and Brad that's sometimes called an edge right that's how hedge funds and Pension funds and other companies make their money on the trade right on that edge on that difference it's about it's about that if you're providing a service right there's never going to be a market that's only natural buyers and natural sellers especially a very very large shares so you're going to need an intermediary to help cushion the blow right and that is a service right and you know what it's a service that people deserve to get paid for they used to get paid for it by earning a quarter a share or charging six cent a share you know what now they get it by earning a tenth or hundredth of a cent a share and that is a that is a good thing we've taken risk out of the market people don't need to rely on the balance sheets of the Bear Sterns and the Leman Brothers anymore they can use this technology to manage the risk and that's a good thing Brad you're not against intermediaries you're not against people who charge a penny for their services people been doing that for a long time I don't want anyone to misrepresent your position you're not saying that there's something in the book he says he wants to build a market without intermediaries except for him he wants to be the intered we're not we're not even a broker ask you are a broker you run an ATS if you have a market are you a broker dealer are we a member of are you a broker dealer we trade on our are you a broker dealer again yes or no question you are a broker dealer okay this is this is the answer look it up on let me ask the question don't trade on our own Market okay can we Bill ruins we don't trade on our own Market you have a model that you think is better than other people's models you don't necessarily believe though that everybody else should be banned for example you don't think that if somebody wants to charge a penny to be provide some kind of liquidity Phantom or not computerized TR probably the only time Bill and I will actually agree computerized trading has delivered benefits to the market you're for you're for competition and you believe your model is superior you will win out and and again we're not we're not just don't say everybody else is corrupt but you we're not we're we're not saying that either right you said it's rigged do you know what that means well let me go back why you trying to summarize all this why are you trying to summarize the entire Market in one word because you started 60 minutes with it Michael let me just ask you one thing about this I started 60 minutes with it you did Michel I 60 minutes let me let me just ask you talk I think a lot of this concern here is with the emotion that has been generated by the term rigged and the average person watching the 60-minute show I know my wife turned to me and said honey is it safe to invest in the stock market it's rigged and I not I'm sure you didn't mean that but are you willing to clarify the idea that it is safe to invest in the stock market because that's what a lot of people came away thinking you were saying that was the question simple thing the book lays out the story very clearly go read the book and you decide whether it's R all right you know Brad do you worry though about the use of the word to Bob I asked that question of Michael at the beginning of the show um you were quoted as saying in the book that the markets are rich he said it again here that and you did say it again here but the implications of that is worrisome to me um I I take your point I read the book um it's a brilliant read but are you worried that you are going to convince Main Street that they have no role in a rigged game we don't have it's exactly I think it's exactly the opposite right people want to know the truth right so when the flash crash happens or Facebook happens and then people like bills show up on TV saying the Market's great it's never been better and blah blah blah that's where people where that is where that is where people lose confidence in the market people just sitting around talking that everything's fine everything is not fine right people want the truth what Michael Lewis did is he lit a torch okay it's the industry's job to light more torches and carry them forward whistleblowers have been calling us I mean things are happening right so all you want to do is provide the public with the truth everyone makes their own decisions more information better information better decisions that's what it's about it's not about obusca it's not about using words it's not about tweeting about you know BS this is just about providing information to the public let them make their choices all righty Bill Brad Bob thank you very much thank you I'm going to turn back to Michael Lewis for some final thoughts here uh and I guess one that that pops into mind is do you invest in the stock Market if so how and how after you did the reporting on this book has your attitude about those markets changed so it's funny the subjects in the book when they learned how the market functioned actually withdrew their their investments from the market I I've I've always been a boring and very conservative investor I own index funds and not and and uh and I don't like time the market and I don't I put it away I don't think about very much I think that the story of the book doesn't tell you don't it doesn't follow from the story in the book that you flee the market what what follows from it is you try to fix the market uh so you know it's the point is not to incite Panic it's to incite action reform all right Michael let me let me ask you one F further follow-up question in in thinking about high frequency trading is there anything that you think they do well that you applaud them for are prices lower than they might otherwise be because of the liquidity they they Supply liquidity if you hear liquidity please you have to I'm sorry the word liquidity is so misused liquidity is not the same as volume uh and and you're not really providing liquidity if you're not taking Market risk uh so it's a it's a that I think that's a Canard what I do the great question I mean it's not a question I can answer I don't think it's a question anybody can answer is like to what what portion of the Hall of high frequency trading is generated by essentially scalping activities and what is generated by just clever strategies that that actually do a service to the market by bringing prices in line where they should be so and I don't I don't have an answer to that I can tell you this that if you when people go to sell speed to high frequency Traders uh when exchanges cell speed to high frequency Traders when spread networks the uh the the the uh the story that open opens the book tries to sell speed to high frequency Traders not all firms respond the same way to it some of them turn up their noses and say we actually are not that speed is not that important to us because we're actually adding something we're actually clever we're not just we're not just like beating everybody else to the prey uh so I think that obviously there some of this stuff is really very useful it's just very hard to parse it and figure out which is useful and which is not so we're going to hear from Cong from Senator widen in just a minute uh uh uh Mr Lewis and I wonder is there anyone in DC who is on your side and why does Congress seem so silent on this I don't first I don't this book has been out for 24 hours and I don't know who's on my side and who's not on my side what I know is the FBI has launched an investigation since the book came out and the New York attorney general seems to be very interested in the subject so I believe the FBI investigation was going on uh for a while they announced they announced it I don't know if yeah so it was announced yesterday right so so who I don't I can't tell you who is on my side and who is not I don't really think of myself as having a side I really would just like a clean and and fair Marketplace all right on that note Michael thank you so much for a lively conversation yes always a pleasure