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IEX Cofounder Brad Katsuyama On Disrupting The Investment Industry

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Brad Katsuyma and his cofounders story about building their new stock exchange, IEX, was immortalized in the Michael Lewis book Flash Boys. The exchange, which received regulatory approval to operate a year ago, now trades between $5-7 billion a day in a way that undermines the high-frequency trading that gives some investors a leg-up. IEX is hoping to get into the listing business next.

Katsuyama addressed a crowd of interested financial pros at the Forbes Under 30 Summit, handing out a few nuggets of insight about the investing business and what it means to disrupt a system.

On disruption:

IEX’s whole mission statement is about using its technology and insight to level the playing field for regular investors. That’s why mutual funds, pension funds, and other investors, who gave the firm a lot of support in its bid to become an exchange. Lined up against them are high-frequency traders and the traditional stock exchanges. Which made perfect sense to Katsuyama.
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“When you try to level the playing field, people with an advantage will line up against you,” he said.

But getting pushback from traditional players doesn't bother him. In fact, it’s getting that kind of criticism and antagonism that lets him know he’s on the right track.

“When you’re trying to disrupt a system, the system will do everything it can to reject you. If you take that personally, you won’t keep pushing,” he said.

Regular investors' expectations versus Wall Street:

One thing that Katsuyama is passionate about is the fact that the types of trading practices that are standard on Wall Street would shock most people you asked.

"Things that Wall Street thinks is normal, normal people can’t believe," he says.

But it matters, he says, because most people are traders.

"If you have a 401k or a retirement account, you’re trading if you know it or not," he said. "Whether people know they’re being affected, they’re being affected in some way. When an advantage is being bought, it’s being bought at the advantage of people who aren’t trading by the microsecond."

On regulation:

Despite the fact that Katsuyama aims to level the playing field for investors, he's actually pretty enthusiastic for deregulating investment markets - if that deregulation is done well.

"A lot of regulation in place right now hurts the little person," he noted. "The most sophisticated people understand regulations better than anyone else.

"Regulations are where a lot of money is made," Katsuyama continued. "Wall Street has lots of scandals. The response to scandal is regulation. But then people lobby for loopholes so they can exploit them, and then go on to exploit them to such a degree that it becomes the next scandal. But as regulation goes on top of regulation, the only people left inside are the people perpetrating scandals - because only they know how to navigate the regulations!"

That said, Katsuyama warns that it's important that the right regulations are removed, not ones that benefit everyday investors. Which is one reason why IEX does its own lobbying.

"You need to ask, is this good for the individual investor?" he said. "... As regulatory changes happen, want to make sure they benefit the most people."

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