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i have been shaking my head a lot the last 36 hours. first thing i
would say, 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. sue, it's a very,
very old tactic to try to build a business on the planks of fear,
mistrust and accusation. this has certainly taken that to a new
level. it reflects either an unwillingness -- a continued lack of
understanding about how the market operates or just unwillingness to
acknowledge it, because you're trying to launch a new business and you
want to get volunteer platform. let me try to weigh in here. you are
very respected on the street. i have known you a little while. you are
thought very highly of. do you think the markets are rigged? i think
it's really hard to put a word on it. you said it in the book. that's
when i knew the markets were rigged. it's disgusting that you are
trying to parse your words now. okay? you can't say that -- you are
quoted that way in the book. okay. let's walk through -- do you
believe it or not? because 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 markets are rigged. okay. there you go. i also think that
you are part of the rigging. if you want to do this, let's do this. i
really do. let's walk through, he is talking about the technical
operation of an exchange, right? when you look at an exchange or dark
pool, the responsibility of that venue is to fairly price trades
between slower participants and faster participants. right? so you
have some participants have microwave towers, some are colocated, some
are not. they are trading over an internet connection, they are
slower. you will never bridge the speed. the battle is not between
fast and slow traders. in order for a disadvantage to happen, in order
for someone to get scalped, fast and 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 does it do that? it does that with its understanding of
the broader market. the information that the exchange is taking in to
fairly price trades. my question to bill if he is launching these
accusations -- i'm launching accusations. what market data do you use
to price trades? we use the direct feeds and the sip in combination. i
asked a question. not what you use to route. what do you use to price
trades in your matching engine on direct end? we use direct
feeds. no. yes, we do. you had a 300 page commercial, okay? let me
talk. let me talk for a few minutes. you respond, then you
respond. then michael, i want you to weigh in. we will bring michael
back in in a minute. the direct feeds you are talking about that you
are claiming is a source of this vast inequity, okay, 96% of the
volume executed on our system is by customers using those data
products. that runs the gamut from retail brokerage firms and their
advocates. you don't understand that the market has always had
intermediaries since the beginning of financial markets at scale,
there is going to be someone who at the time needs to be in the
middle. they are 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 their risks and the desires of their
customers. that's a good thing. can i tell you why this is incorrect?
this 96% you are referring to is the proprietary feeds. right. that
everybody has been arguing about. there's a difference between a
subscriber using a proprietary feed versus what the -- a pegged order,
price order, price sliding, any time the exchange is responsible for
pricing data -- you use the same data we do. absolutely not. you use
the sip. for those who don't know, what is that? what i'm saying is
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. therefore, some
investors are at a disadvantage. in concert, when you allow colocation
to occur, you ability to fairly price trades is diminished. you can't
do it because you don't even know what the market is. nasdaq uses
direct feeds. let me jump in, if i might, gentlemen. can i finish?
just one second. okay. we use direct feeds to price trades. we are not
as fast as the fastest hfts. what we have done is slowed down hft's
ability to react on our exchange which means if anyone in this room,
if anyone at home, if a mutual fund or hedge fund gives an order to
iex and it's our responsibility to price it, hft -- they had the same
hft customs we do only we say they're providing a valuable
service. they start ripping off the market. you want to be an
exchange. you aspire to be an exchange. you have a model of how you
want your exchange run. do you think all the other exchanges models
should be legislated out of business? no. not at all. what do you feel
should happen? to say that someone is not allowed to sell a microwave
tower, i don't think that, again, it's capitalism, right? i think to
render a microwave tower irrelevant is what we are trying to do. it's
not about technology legal versus illegal. it's about the market
providing a solution. just to respond to what bill just sa, do we have
computerized trading on our market, absolutely. i think the word high
frequency trading should be eliminated from the vocabulary. you used
it 20 times in the book. it's not his book. it wasn't my book. you are
quoting. computerized trading and computerized scalping. people can
trade with computers until the end of time. people use computers to
scalp. they always look to game the markets. you cannot scalp
trades. you cannot scalp orders that are on iex. it's not gaming the
market. i'm going to interrupt for a minute. i want to bring michael
lewis back in. you -- who, me? who, you. you have been very patient. i
was kind of enjoying that. i could tell you were enjoying it and
sometimes got a pained expression. i want you to react to what you
just heard. it's great to see bill instantly throw at brad the idea
that he's doing all this to promote a business model. he said that and
also said shame on you. how do you react to that? i'll say it
again. so i think he's outrageous. i think he's part of the problem. i
think it's not just brad. there's an investor in philadelphia named
rich gates who managed to get himself picked off on the bats exchange
numerous time because the bats exchange didn't update prices fast
enough. so this isn't just brad talking. but what's great is that like
the story, i mean, so brad is now kind of cast as this troublemaker
and i'm partly to blame for that, but this trouble found him. this is
a guy who could be very happily being part of the problem. he was
being paid lots of money to work at a big bank and be part of the
problem if he wanted to be. he actually, he's actually here to solve a
problem that is at the heart of capitalism right now, the unfairness
in the public exchanges. and he's taken great risk to do it. yeah, he
will make some money if it works out, but the questioning of his
motives is kind of incredible. i want to go back to this final point
here before we go. should we have hearings around this law, this
regulation that came in in 2007? i have been saying the s.e.c. 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? so look, this is what i think. 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 important thing as
an investor is get more information about how their stock market
orders are being handled. that's a big problem. are you an investor in
brad's exchange? no. no. i'm just asking for full disclosure. i'm
being a journalist. are you insane? no, i'm not. i'm trying to do my
job. i didn't even go looking to write a book about him. i was trying
to figure out what the hell was going on in the stock market. big
investor after big investor said there's one guy who is an honest
broker in all this, he's coming to explain how all this works and go
talk to him, he's the only guy on wall street who can actually tell
you the truth about how the stock market works. you're not insane,
sue. thank you. bats, direct edge didn't exist ten years ago. we
became the biggest stock market at any given day 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. i don't think
it's true and i don't think it's right. what about bob's question
about the s.e.c. revisiting mns and the rule that really created the
current market structure that we are now all kind of grappling with,
for better or for worse? i applaud both of you for trying to do, you
know, to run your businesses, but doing it to reexamine the market
structure. i agree -- i do agree with michael, i think it's time to do
that. we actually called for a review of market structure for a couple
of years, and mary joe white, chairman of the s.e.c., and van
gallagher made statements recently they are prioritizing that. that's
a good thing but it has don in a constructive way that listens to all
market participants, don't view what they're doing as inherently
corrupt and focus on data, not misinformation and accusation. if
michael's right and your model you think is a superior one, what's the
phone calls looking like? is your business picked up notably? you are
a tiny slice of the market. we know that. yeah, there has been
thousands of calls. people have responded positively. just back to the
investor confidence, you have gone from 65% households owning equities
to 52% over the last six years. every year declining. the s&p tripled
since the lows in 2009. i dispute that. michael lewis, did you talk to
mr. o'brien as you reported your book, if so, what did he tell you, if
not, why not, and what would you like to ask him right now? so first,
this market confidence point, we will answer that question, the market
confidence point is interesting because goldman sachs is now -- has
now thrown its weight behind brad precisely because -- hold on, let me
finish this. no, no. let me finish. you used his investment in my
exchange as a sign of corruption and his backing of his exchange is a
sign of virtue. you didn't call me. why is there a difference? the
backing of me is bad and the backing of you is good. how is it
different? because they have invested -- the investors in our exchange
don't trade on our exchange. that's part of the problem, right? bill,
again, i say the sky's blue, bill says the sky is red. is it always
like this on the show? this is insane. let him finish. then you
respond. bill is own intermediaries. we are owned by hedge funds. 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 are here to help companies raise capital and help investors
allocate that capital. should you build a market specifically just for
intermediaries, you shouldn't. we have the buy side behind this, not
just goldman, morgan stanley, jpmorgan, you have computerized traders
that aren't coming here to scalp people and you have the general
public behind the solution. what are we talking about here? the
industry getting behind a solution. that's exactly what's
happening. bill? i'm all for people competing. we started from nothing
ten years ago just like you are doing now, and that's fine. you're
right, the purpose of exchanges is to bring together buyers and
sellers in a way that works for them. michael, jump back in here. what
we're seeing, it's not a zero sum game. everybody can win. you don't
need to build a market on the premise that one group is ripping
another group off. michael, go ahead. i missed most of that. i didn't
hear it. i didn't actually hear the exchange. so i don't know what i'm
jumping into. sorry. i asked you earlier, did you speak to mr. o'brien
-- no, no, no. so i visited b -- no, you did not. that is absolutely
false. that's not false. i toured it. i toured the place. that is
untrue. what do you mean, untrue? i was there. give me a date. what
date? february 5th. what year? 2013. we will follow up with cnbc about
where michael lewis was on february 5th, 2013. were you in kansas city
or new york? i was with brad when i visited. you were in kansas city
on february 5th, 2013? that's where we're located, by the way. no, no,
no. i wanted to see where the high frequency traders hooked up. you go
to a data center, going to a data center and standing outside and
saying you talked to us is not the same thing. be honest with
yourself. so the other thing, so the question was, there is actually
no point in talking to somebody who is just throwing dust in the
air. he wasn't actually the head of bats when the stuff ias describing
occurred. i tried to get to dave cummings, one of the founders of
bats, because i was curious why they positioned it outside the lincoln
tunnel. brad discovers that he's being front-run from bats to other
exchanges. that's what gets him involved in this in the first place,
in this kind of journey of discovery to figure out how this market
works. so i was curious about they had intentionally put the exchange
on the other side of the lincoln tunnel just so they can pick off
orders. stop manipulating the audience. talking to an ex-employee is
not the same as saying you talked to us. so the person -- you weren't
even there at the time. so the person who -- just being dishonest. --
i wanted to talk to, wouldn't talk to me. you didn't try to contact
anybody at bats, okay? the answer is no. you didn't try to contact any
employee of bats. your book is riddled with inaccuracies for that and
many other reasons. not true. not true. you can get on air and shout
all you want, but it's just not true. you have a much bigger soap box
than i do. to that point, bill -- i'm sorry. no, to that point, bill,
he does have a very big platform which i mentioned earlier, and this
book is getting an awful lot of media and an awful lot of press. and
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 pisani said, the megaphone of 60 minutes it becomes a
mainstream topic. how do you combat what is going to be a negative
image for your company and for your industry? let's start with the
facts. i think david kaminski put it really well a couple hours
ago. 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 six
cents. now it's 90% to 95% less than that. a lot of people who really
focus on the data which really doesn't exist in the book 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. saying it's not rigged and saying it's perfect are
not the same thing. we did need a wake-up 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 is 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 imperfections in the market. 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 if you're
providing a service, there is never going to be a market that's only
natural buyers and natural sellers. especially of very, very large
shares. you are going to need an intermediary to help cushion the
blow. that is a service. 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 cents a share. now they get it by
earning a tenth or hundredth of cent a share. people don't need to
rely on the balance sheets of lehman brothers anymore. they can use
this technology to manage the risk. brad, you're not against people
who charge a penny for their services. people have been doing that for
a long time. i don't want anyone to misrepresent your position. you
are not saying that there is something wrong with -- he says he wants
to build a market without intermediaries except for him. we're not
even a broker. you are a broker. if you -- are you a broker dealer?
are you a broker dealer? are you a broker dealer? again, yes or no
question. you are a broker dealer. look it up. let me just ask the
question. we don't trade on our own market. you have a model that you
think is better than other people's models. yes. you don't necessarily
believe that everybody else should be banned, for example. no. you
don't think if somebody wants to charge a penny to be -- provide some
kind of liquidity -- computerized trading has delivered benefits to
the market. no question about it. you believe your model is superior,
you will win out. yes. just don't say everybody else is corrupt but
you. we are not saying that, either. you said it's rigged. do you know
what that means? let me try to summarize -- why you trying to
summarize the entire market in one word? because you started 60
minutes with it? i started 60 minutes with it? did i produce 60
minutes? what are we talking about here? a lot of concern is about the
emotion that's been generated by the term rigged and the average
person watching the show, i know my wife turned to me and said honey,
is it safe to invest in the stock market. it's rigged. 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 i asked in
the beginning of the show. the book lays out the story very
clearly. go read the book. you decide whether it's rigged. all
right. brad, do you worry, though, about the use of the word -- i
asked that question of michael at the beginning of the show. you were
quoted as saying in the book that the markets are rigged. he said it
again here. you did say it again here. but the implications of that is
worrisome to me. i take your point, i read the book, 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? i think it's exactly the
opposite. people want to know the truth. so when the flash crash
happens or facebook happens and people like bill show up on tv saying
the market has never been better, blah, blah, blah, that's -- that is
where people lose confidence in the market. people just sitting around
talking that everything's fine. everything is not fine. people want
the truth. what michael lewis did is lit a torch, okay? it's the
industry's job to light more torches and carry them
forward. whistleblowers have been calling us. things are happening,
right? all you want to do is provide the public with the
truth. everyone makes their own de cisions. more information, better
information, better decisions. that's what it's about. it's not about
obfuscating or about tweeting b.s. this is just providing information
to the public, let them make their choices. thank you all very
much. i'm going to turn back to michael lewis for some final thoughts
here. i guess one 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 investments from the market. i have always
been a boring and very conservative investor. i own index funds and
not -- and i don't like time the market and i put it away and don't
think about it very much. i think that the story of the book doesn't
tell -- it doesn't follow from the story in the book that you flee the
market. what follows from it is you try to fix the market. so you
know, the point is not to incite panic, it's to incite action,
reform. michael, let me ask you one further follow-up question. 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 supply? if you
hear liquidity, please, i'm sorry, the word liquidity is so
misused. liquidity is not the same as volume. you're not really
providing liquidity if you're not taking market risk. so i think
that's a canard. the great question, it's not a question i can answer,
i don't think it's a question anybody can answer, is what portion of
the hall of high frequency trading is generated by essentially
scalping activities and what is generated by just clever strategies
that actually do a service to the market by bringing prices in line
where they should be. i don't have an answer to that. i can tell you
this, that when people go to sell speed to high frequency traders,
when exchanges sell speed to high frequency traders, when spread
networks, the story that 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 -- speed is not
that important to us because we are actually adding something, we are
actually clever. we're not just like beating everybody else to the
prey. so i think that obviously, 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. we are going to hear from senator wyden in just a
minute, mr. lewis, and i wonder, is there anyone in d.c. who is on
your side and why does congress seem so silent on this? first, this
book has been out for 24 hours. i don't know who is on my side and who
is 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 very interested in the subject. i believe the fbi
investigation was going on for awhile. they announced it. i don't
know. yeah. it was announced yesterday, right? so 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 fair marketplace. on that
note, michael, thank you so much for a lively
conversation. yes. always a pleasure.