DealBook: Trader Who Called Markets ‘Rigged’ Tempers His Critique

Doug Mills/The New York TimesBradley Katsuyama, chief of IEX Group, at a Senate hearing on high-speed trading. Related Links

Updated, 10:43 a.m. | WASHINGTON – Bradley Katsuyama, chief executive of the stock trading upstart IEX Group, made waves on Wall Street by playing the part of a disruptive innovator who said he believed the markets were "rigged."

But he adopted a softer tone on Tuesday in testimony prepared for a hearing before the Senate Permanent Subcommittee on Investigations. Mr. Katsuyama, who rocketed to prominence after being featured in Michael Lewis's recent book "Flash Boys," voiced more measured criticisms of the market and defended the regulatory status quo.

"We want to emphasize the point that IEX was created within the current regulatory framework, which shows that the spirit of the rules governing our market allow for different types of solutions to emerge if participants are properly incentivized to create them," Mr. Katsuyama said in the prepared remarks.

The testimony showed a different side of Mr. Katsuyama, who had accompanied Mr. Lewis on a media tour surrounding the publication of "Flash Boys" in March.

In one appearance on CNBC, Mr. Katsuyama addressed the president of the BATS Global Markets exchange company, William O'Brien, and said: "I believe the markets are rigged. I also think you're part of the rigging."

With the book tour over, Mr. Katsuyama is trying to gain legitimacy for IEX by registering it as a full-fledged exchange. On Monday, IEX said it had hired John Ramsay, a former acting head of the trading and markets division of the Securities and Exchange Commission, to oversee regulatory compliance.

The Senate hearing on Tuesday, examining possible conflicts of interest in the stock market, will provide an opportunity for Mr. Katsuyama and other financial executives to recommend new policies while simultaneously promoting their business models. They will be subjected to questioning by the members of the Senate panel, which is led by Senator Carl Levin, Democrat of Michigan.

Doug Mills/The New York TimesSenators John McCain, left, and Carl Levin, at a hearing on high-speed trading.

Senator John McCain, Republican of Arizona, and the ranking member of the panel, asked Mr. Katsuyama whether it was accurate to describe the market as "rigged."

Mr. Katsuyama said that term was "a word that can be used to describe" the disadvantages that certain investors suffer in the market, but he stopped short of endorsing it.

"What it did was it gave our critics and people who are part of the problem a reason to talk about something else," Mr. Katsuyama said. "It was a distraction which was unfortunate."

A major focus of the hearing is the payments that brokerage firms receive for routing customer orders to particular exchanges or trading firms. The Senate panel contends that these payment systems can compromise brokerage firms' obligation to execute customer orders on the best possible terms.

Doug Mills/The New York TimesFrom left, Thomas W. Farley of the N.Y.S.E., Joseph Ratterman of BATS Global Markets, Joseph P. Brennan of the Global Equity Index Group and Steven Quirk of TD Ameritrade at a Senate hearing on Tuesday.

But not all the witnesses see it that way. Joseph P. Ratterman, the chief executive of BATS, acknowledged in his prepared remarks for the panel that payments for stock orders "create the potential for conflicts of interest," but he added: "I believe these potential conflicts of interest can be and generally are managed by vigorous oversight within broker-dealers."

He addressed a payment system known as the "maker-taker" model, in which brokerage firms accept rebates from exchanges in return for routing orders there. The Senate panel has singled out such rebates for scrutiny, warning of possible conflicts. But Mr. Ratterman said the rebates could improve liquidity and prices for investors.

"I believe restricting incentives to provide liquidity could be counterproductive," he said in his prepared remarks. "Whether it is banning the current maker-taker fee structure, limiting payment for order flow generally, or other attempts to alter the economics of trading, price controls are a blunt instrument likely to cause disruptions and consequences that are unforeseeable and potentially detrimental to all types of investors."

The maker-taker issue has divided the exchange industry. One prominent exchange executive, Jeffrey C. Sprecher, chairman and chief executive of IntercontinentalExchange, the company that owns the New York Stock Exchange, has been a vocal critic of the rebates and has called on regulators to curb their use.

Mr. Katsuyama, who is speaking on the first of two panels on Tuesday, seemed in his prepared remarks to avoid taking a strong position either way. Far from the provocative stances for which he is known, Mr. Katsuyama discussed the maker-taker issue in technical language and took a rather clinical tone.

Even on a topic that IEX has come out against – co-location, a practice where exchanges sell trading firms the right to place their servers within the exchanges' data centers – Mr. Katsuyama proposed only a narrow critique. And even then, he stopped short of actually criticizing the practice.

"Discussions about co-location as advantaging one party over another, namely, the non-co-located party, are understandable, but practically off the mark," he said. "It is our belief that concerns around co-location should focus on whether it enables a market's participants to be able to process and act on information more timely than the market center itself."

In his assessment of the stock market as a whole, Mr. Katsuyama was temperate.

Advancements in technology have "presented the industry with the greatest potential for democratization of market access, fairness and objectivity in order handling, and the ability to supervise and surveil markets," he said. "But we use the word potential very specifically – as we believe that this potential has not been fully realized."

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