Canadian Brad Katsuyama in spotlight over 'rigged' markets allegation

A Canadian who works on Wall Street is emerging in some quarters as a hero for revealing the inner workings of high frequency traders who critics have accused of rigging the stock market and taking investors for billions.

Brad Katsuyama now runs IEX the Investors Exchange a new Wall Street trading platform he founded. But it was in his former capacity as thehead trader in New York for RBC Capital Marketsthat he caught the attention of popular financial writer Michael Lewis, author of the bestsellers Moneyball, Liars Poker, and The Big Short, among others.

Katsuyama gets star billing in Lewiss new book, Flash Boys: A Wall Street Revolt, which was released on Monday.

The United States stock market, the most iconic market in global capitalism, is rigged- Financial author Michael Lewis

Katsuyama told Lewisthat he had uncovered the methods high frequency traders use to get what he considers to be an unfair advantage over other investors.

Katsuyama noticed that when he would send a large stock order to the market, it would only be partially filled, and then he would have to pay a higher price for the rest of the order.

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.

Financial speed bump

Katsuyama and an RBC colleague then created a system that would effectively nullify the advantage of the high frequency traders by creating what amounts to a financial speed bump.

"Essentially, our fill rates went to 100 per cent, he told CBS s60 Minutes last Sunday. Wecouldn't believe it when we actually figured it out."

High-frequency traders use sophisticated computer programs to execute huge numbers of orders at blindingly fast speeds.The programs are legal and are used by many banks and trading firms. More than half of all trading in some markets is carried out by high-frequency traders.

"They are able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price," Lewis told 60 Minutes. The United States stock market, the most iconic market in global capitalism, is rigged.The main thrust of Lewiss new book is that high-frequency traders use their speed advantage in predatory ways that end up cheating market participants small and large.

For their part, high-frequency traders defend their actions.We completely disagree with allegations that the U.S. equity market is rigged, BATS Global Markets president Bill OBrien said in an email to Bloomberg News. BATSis one of Wall Streets biggest high-speed trading firms.

While we should never stop trying to improve our market structure, it is unfair and irresponsible to accuse people simply because they use technology and enhance competition. This has helped make our market the most competitive and liquid in the world, greatly benefiting individual investors.

OBrien and Katsuyama got a chance to debate their differences in a heated panel discussion Tuesday on U.S. financial channel CNBC.

O'Brien challenged Katsuyama to repeat his assertions and Katsuyama was more than happy to oblige.

"I believe the markets are rigged and I also think you're part of the rigging," Katsuyama said. CNBC reported that the 20-minute debatestopped trading on the floor of the New York Stock Exchange.

OBrien accused Katsuyama ofwanting topossibly scare millions of investors in an effort to promote Katsuyamas own IEX trading exchange.

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, a FBI spokesman confirmed to the Wall Street Journal on Monday.