Brad Katsuyama says his aim is to make trading fair

Canadian Brad Katsuyama is taking heat from high-frequency traders for his assertion that the way they do business often gives them undue advantage.

The former trader with RBC now runs IEX the Investors Exchange a new Wall Street trading platform he founded which he claims can level the playing field for all market investors.

• Canadian Brad Katsuyama in spotlight over 'rigged' markets allegation

Michael Lewiss new book,Flash Boys: A Wall Street Revolt, is built around Katsuyamas investigation of how U.S. trading worked during the years he was atrader for RBC in New York.

Once you realize those screens are kind of an illusion of what you can buy and sell, it does kind of undermine your confidence that the markets are operating the way that they should.Brad Katsuyama

Lewiss contention that the U.S. stock market, the most iconic market in global capitalism, is rigged has grabbed headlines. But Katsuyama says hes not a whistleblower on high-speed traders so much as an advocate for fair trading for every player, no matter the speed of their system.

In an interview with CBCs Lang & OLeary Exchange, Katsuyama described his frustration as he tried to make trades forRBC clients.

I realized around 2007 that the prices and the quotes that were displayed on my screen [werent] actually what I could buy or sell in any particular stock, he said.

When he investigated, he found that his orders travelled along fibre-optic lines and hit theclosest exchange first, where high-frequency traders would use their speed advantage to buy the shares he wanted and then sell them to him at a slightly higher price all in milliseconds.

Revising the 'plumbing' of the markets

When we started to look at the plumbing of how markets are set up, we realized that intentional or not, certain people were able to get an advantage understand our need to buy the stock, able to race us to those venues and either cancel trades, cancel offers or buy stuff ahead of us, Katsuyama said.

During his time in the electronic trading department at RBC, Katsuyama began looking at the plumbing of trading systems and talking to RBC clients about their own trading experiences.

What he also found was that some of the biggest, most influential hedge funds and pension traders were justas easily undermined in attempting to complete their trades at posted prices.

Once you realize those screens are kind of an illusion of what you can buy and sell, it does kind of undermine your confidence that the markets are operating the way that they should. That became a frustration, not just for myself, but for thousands of traders that weve talked to. Its a system-wide issue, Katsuyama said.

He said its been a collective learning experience, one that showed him that parts of the market are indeed rigged, he said.

On Friday, the U.S. Justice department confirmed it is investigating high-speed trading practices, with a view to see whether they contravene insider-trading laws.

Part of the advantage high-speed traders gain is related to where they set up those closest to the exchanges have the biggest advantage and how they use technology.

In establishing IEX, Katsuyama attempted to put a mechanism in place to referee trade between fast traders and slow traders by slowing down the fastest traders.

Fair for fast and slow alike

Someone will always be faster and someone will always be slower the key point is, is the fastest participant faster than the exchange itself? he said.

What weve done at IEX, weve made sure the referee can always keep up to the play,fast and slow traders alike its a fair market, he said.

Katsuyama said hes looking to the day when other exchanges take the same precautions in an effort to protect their investors. The issue requires a deep and thoughtful discussion from investors, mutual funds, exchanges and high-frequency traders, he said.

In the meantime, some people are making a lot of money out of the way the system operates now, he says and thats meant a lot of flak for both Katsuyama and Lewis.

Both engaged in a heated debate on CNBC withBATS Global Markets president Bill OBrien, a high-frequency trader who accused Katsuyamaof wanting topossibly scare millions of investors to attract business to IEX.

The fireworks included an exchange in which Katsuyama told O'Brien that his firm was part of the problem.

U.S. federal agents are investigating whether high-speed trading companies violate U.S. laws by using fast-moving market information not available to other traders, an FBI spokesman confirmed to the Wall Street Journal on Monday.