Here’s the bottomline: As an investor, you’ve probably been helped by high-frequency-trading, but it is equally likely you’ve been SCREWED by high-frequency trading.

As a market participant–even a long-term investor that rarely trades–we should think about questions related to market liquidity and integrity.

Consider the following:

Do you consider high frequency trading to be socially useful, and if so, how much?

This question was posed to Jim Simons, the founder of Renaissance Technologies, at a talk he gave at MIT in 2010. Simons responded, in part, as follows:

…I think the research shows that the costs of trading – spreads and market impact – have come down a great deal, and it’s all due to high frequency trading. So is it socially useful? Well if you think that highly liquid markets are socially useful, then I think so.

The enhanced market liquidity caused by increased HFT activity is an important economic and social good–few dispute this fact. However, there are many market participants who hold a more nuanced view on the costs and benefits of HFT activity. The emerging consensus seems to be that there are “good” forms of HFT activity and there are “bad” forms of HFT activity.

To help us better discern the various elements of HFT, we decided to enlist some pros…

We recently had the opportunity to learn about HFT nuances in a talk given by Brad Katsuyama of the IEX Group, a trading venue owned by buy-side investors. Brad became a cult figure of sorts in financial circles, when he was cast as the protagonist in Michael Lewis’s book, “Flash Boys,” which chronicled the emergence of high-frequency trading in financial markets.

In his talk, Katsuyama explained that he is not an opponent of high-frequency trading per se. But he does think there are forms of dubious and even predatory high-frequency trading which are decidedly not in the best interests of investors. In response, he created IEX, an exchange that seeks to level the playing field for the buy-side versus the more pernicious forms of high-frequency trading.

Always curious about financial innovation, we reached out to IEX, and they were kind enough to allow us to interview Ronan Ryan, who readers of Flash Boys will know, has been Brad’s right hand man since they worked together at the Royal Bank of Canada. Along with Brad, Ronan was another principal character in Flash Boys, and has become a bit of cult figure in his own right.


Ronan Ryan is IEX’s Chief Strategy Officer and has come along way since first moved to the U.S. from Ireland when he was 16. A networking infrastructure expert, Ronan rose to become head of Electronic Trading Strategy at RBC, before joining Brad as a co-founder of IEX. As Brad put it, when he first met Ronan:

I learned more from talking to him in an hour than I learned from six months of reading about [high-frequency trading].

Ronan offers a highly technologically informed perspective on high-frequency trading, and we’re happy to share his insights in the interview below.


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Michael Lewis put it pretty succinctly in Flash Boys, when he described how life changed for Brad after RBC acquired Carlin Financial, and its trade execution platform: “Until [Brad] was forced to use some of Carlin’s technology, he trusted his trading screens. When his trading screens showed 10,000 shares of Intel offered at $22 a share, it meant that he could buy 10,000 shares of Intel offered at $22 a share. He had only to push a button. By the spring of 2007, when his screens showed 10,000 shares of Intel offered at $22 and he pushed the button, the offers vanished…This was a big problem.”

What big problems did this market development cause for you at RBC in 2007?

Ronan: The primary problem was that clients could no longer buy or sell what they saw on their screens. It was shocking. When we later learned what was going on, it seemed unacceptable that a client could lose money because an intermediary had just jumped into the trade. It seemed unfair that a buyer or seller had to bear the cost of an intervention that neither party signed up for, or even knew about. Part of this is questionable behavior but a lot of it is just the state of the markets. However, the investor shouldn’t be taxed because the market is so complicated.

The bigger implications for our clients were also concerning.  We’re talking about mutual funds and hedge funds, who would much rather focus on investment problems and opportunities, but what Brad experienced in the markets were market anomalies that escaped even experienced traders, but which was hurting the trading experience.

I suppose the most concerning bit of all was that our trading screens were our window to the market and we couldn’t trust them. It’s like a pilot not trusting their navigational systems. How could we expect society to trust financial markets, if a trader in the thick of it did not?  Fortunately, Brad addressed his own lack of trust, and dug into its source.

When you developed IEX, you created a “speed bump,” or “magic shoebox,” that creates a delay of 350 millionths of a second, and recently introduced the Discretionary Peg Order Type (D-Peg), in order to level the playing field versus high frequency traders looking to exploit market plumbing.

How do these innovations benefit investors and address structural inefficiencies?

Ronan: We’ve designed technology that consistently delivers the fairest price to our Subscribers and, ultimately, their investor clients.  Innovations like the “magic shoebox” and D-Peg help investors avoid trading at worse prices.  Put another way, if some high-speed traders have a first look at market movements — we make it so that they don’t have an unfair advantage at IEX over traditional investors.

A core insight behind our market philosophy is that price changes are valuable opportunities, especially for those strategies fast enough to detect signals from price changes.  This is a problem when you factor in structural inefficiencies – particularly the discrepancies in market data speed transmission among market participants.

D-Peg protects investor orders that have been entrusted to IEX (we call them orders “resting” at IEX) from adverse selection as the quote (NBBO) is changing.  The “magic shoebox” protects orders resting at IEX from adverse selection after the quote has changed.

The economic benefit is that investors aren’t paying (or selling at) a worse price to a predatory strategy that is aware of quote changes before they are.  Also, IEX has made substantial investments in technology to protect investors so that investors don’t need to. That way, investors can stay focused on what they do best, which is investing capital.

Thomas Peterffy, CEO of Interactive Brokers, stated in a shareholder call last year, “…now customers have the option to route their orders directly to IEX who will use our smart router researches for the best price at the time of the order and fix to immediately execute the order electronically…We made IEX available, but we believe that our customers remain to be better served by our smart router, which now includes IEX also.”

How has the integration been going with Interactive Brokers, and do you agree with how they have chosen to offer IEX on their platform?

Ronan:  Reaching IEX as one of several router destinations is how some of our Subscribers have chosen to offer our liquidity to their clients.  The key to measuring how this execution compares with a direct route strategy is more data and transparency around execution metrics.  It also depends on the client and the situation.  It’s an ongoing challenge not just for IEX and IBKR but for the industry overall…but we are seeing progress there.

More importantly, we’re excited that Interactive Brokers took the lead among retail brokers to allow their clients to trade at IEX through their platform. Providing end users with more meaningful choice is important for the evolution of the equity markets.

So far, the integration has been encouraging but it’s evolving by the day.  They’re currently preparing to consume the IEX aggregated top-of-book market data feed (“TOPS”) which is an exciting development.

IEX subscriber Jeffries has instituted an Information Content Factor benchmark to measure market movement following order execution at IEX. Unfortunately, this benchmark is proprietary.

What are the prospects for a publicly available, transparent benchmark that would provide investors a tool for evaluating IEX versus other exchanges?

Ronan: The lack of data consistency from brokers and venue operators is an issue that the whole market faces.  We definitely support the idea of a public benchmark for execution quality, not just for routing decisions but for things like venue toxicity as well. There’s almost a dozen exchanges, and 40 dark pools, so it would certainly be useful for participants to evaluate past performance and adapt their strategies accordingly.  Dave Lauer and Chris Nagy over at KOR Group and Jeff Alexander and Linda Giordano at the TABB Group are looking to build offerings around this and we’re looking forward to seeing their work.  Of course, it’s important for a tool like this be neutral, so maybe a regulatory solution would have even more credibility. If the SEC offered a benchmark solution, it could be impartial and very effective.

IEX is beginning to focus on quantitative investors and ETFs. What does the future hold for IEX within this area of the market?

We’re a fair access venue which means we welcome participants from all corners of the trading ecosystem.

That includes not only traditional buyside such as mutual funds and hedge funds, their executing brokers, but also quantitative trading firms including market makers.  Our proposition to all of them is the same: we protect your trades by providing consistently fair prices.  The interesting thing is that this protection actually encourages the market makers to make larger correlation bets on IEX than in other venues due to their ability to avoid market data vagaries.

But you’re right, quant-focused funds and ETFs are on our radar and we have made targeted hires in order to most effectively work with these constituencies to optimize their experience on IEX.

One of the blessings of being involved with Flash Boys is that it created broader awareness among a broader swath of market participants, including many who don’t actively trade.  We find ourselves talking through market structure issues with a broad set of constituents including pension funds, issuers, RIA’s, etc. and frankly we welcome it. Everyone is a stakeholder in our markets.

All of this is work that will never cease no matter our market share.


Thanks, Ronan. Always a pleasure to hear thoughts from market innovators such as yourself. We look forward to watching how IEX evolves in the coming years.

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