Flash Boys' Katsuyama Blasts Back At Ex-CFTC Chilton's "Incorrect Claims"

Tyler Durden's picture

On July 7, Bart Chilton, a former commissioner of the Commodity Futures Trading Commission, wrote an article about high-frequency trading for the New York Times's DealBook. He argued, in effect, that because high-frequency trading has become so central to the stock market, it must be serving some necessary purpose. This is false...

Authored by Brad Katsuyama via Bloomberg View,

In the last few months, I have had a strange and interesting experience. In early April, I found myself the main character in Michael Lewis's book "Flash Boys." It told the story of a quest I've been on, with my colleagues, to expose and to prevent a lot of outrageous behavior in the U.S. stock market.

Many of us had worked at big Wall Street firms or inside stock exchanges, and many of us believed something was amiss in the market. But it took the better part of five years to discover exactly how the market had been organized to benefit financial intermediaries, rather than the investors, the companies or the economy it was meant to serve. Only after looking at a flurry of market innovations -- 40-gigabit cross-connects, esoteric order types, microwave towers -- did we understand that the market’s focus was less about capital formation and more about giving certain market participants an advantage over others. In the end, we felt that the best way to solve these problems was to build a stock market of our own, which we did.

After the book, our stock market, IEX Group Inc., became a topic of discussion -- some positive, some negative, some true and some false. Fair enough. If you're in the spotlight and doing something different, you should take the heat along with the light.

It's for this reason that we have done our best to resist responding publicly to misinformation about our company -- even when we read memos circulated inside banks that "Michael Lewis has an undisclosed stake in IEX" (he does not); that “brokers own stakes in IEX” (they don't); or articles in the Wall Street Journal that said we let "broker-dealers jump to the front of the trading queue,” putting retail investors and mutual funds at a disadvantage (in reality, all orders arrive at IEX via brokers, including those from traditional investors). Our hope in staying quiet was that the truth would win out in the end. But in recent weeks, the misinformation campaign has hit a new high (or low), and on one particularly critical matter, we feel compelled to set the record straight.

On July 7, Bart Chilton, a former commissioner of the Commodity Futures Trading Commission, wrote an article about high-frequency trading for the New York Times's DealBook. He argued, in effect, that because high-frequency trading has become so central to the stock market, it must be serving some necessary purpose. “At any one time, it is likely that 50 percent of all trades are made by high-frequency traders in United States equity markets," he wrote. "Even trading volume on the IEX exchange, which is trumpeted as creating 'institutional fairness' in the Michael Lewis book 'Flash Boys' about the topic, is now made up of roughly 50 percent high-frequency traders.”

This is false: While high-frequency trading firms are estimated to generate 50 percent or more of the volume on other stock markets, on IEX, high-frequency trading firms currently make up less than 20 percent of our volume. (Note: It’s difficult to predict the optimal proportion of HFT activity in any market, but it should definitely not be half the volume.)

There is a reason for this vast difference on IEX: We have sought to eliminate the unfair advantages HFT has over genuine investors (such as the combination of high-speed data and the ability to place their computers feet away from exchange-matching engines). By using technology to eliminate what we see as systematic unfairness -- and the opportunity for certain traders (who purchase premium access at other markets) to prey on ordinary investors -- we have discouraged a great deal of predatory high-frequency trading on IEX. Those high-frequency traders who do trade on our market (we like to call them electronic market makers) are the ones who do not require some unfair advantage to succeed. By creating a market without distinct advantages, IEX has allowed the HFT crowd to define itself.

Chilton’s claim has the effect of making us look no different than any other market. More generally, all these false rumors about IEX attack the foundation of what our team is trying to build -- a fair marketplace, free of the conflicts of interest that have long plagued our financial markets. I am not sure what Chilton’s motives were in using that statistic, but his sources were suspect at best: He claims they were “industry folks."

One thing we have witnessed in the Internet age is that a fiction can spread, eventually appearing to become fact. A few days after the article, the brokerage firm Raymond James & Associates Inc. published a report about exchanges and dark pools. We read in disbelief as a licensed securities analyst claimed that “IEX isn’t quite the sparkling pillar of righteousness that it is often portrayed in media reports. For example, much-vilified high frequency trading firms are a major source of liquidity on IEX.” His validation for writing this was Chilton’s incorrect claims.

With so many billions of dollars at stake, it is not surprising that some people will spin rich fictions about IEX -- to deter others from believing in a fairer stock market. This is a battle being fought with words and numbers. So before you accept them as fact, make sure you consider the sources and their motivations.

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cpnscarlet's picture

Bad haircuts are forever.

Duffy's picture

did you know that if you beat Timmy "I'm actually Lebanese" Massad in a fight, you become him?



BurningFuld's picture

Please don't be naive. Those fuckers will kill you over this.

strannick's picture

"It must be serving some essential purpose".

-CFTC Commisioner Bart Chilton

The depth of market insight, savvy and expertise  we've come to expect from our regulators.

He says the same about his $150/bottle hair conditioner.



BC6's picture

Fucking ThunderLips is the epitomy of douchebag.

What the fuck happened to that imminent report on PM manipulation? Now, that would have been provided some necessary usefulness.

eatthebanksters's picture

Right on Brad!  Chilton is a bought and paid for whore. His worry is probably what happens when Janet starts tightening if the HFT's can't pump up the volume.  Boom!  You're fighting and entrenched corrupt system...Good Luck and I hope you destroy the bastards who twist the truth and steal from the ignorant to line their pockets.  Being smart is one thing, using your smarts to do something immoral or unethical is wrong and the only reason it isn't illegal is the bastards who couldmake this type of behavior illegal are also bought and paid for.

Roanman's picture

If I could Duffy, I'd up you 10 for this one. This has to be the single funniest resume' in all of government, as this pathetic individual has been chronically useless for the entirety of his adult life.


Timothy George "Tim" Massad (born July 30, 1956) is an American lawyer and government official who is Chairman of the Commodity Futures Trading Commission (CFTC). Formerly he was Assistant Secretary for Financial Stability at the United States Department of the Treasury, where he oversaw theTroubled Asset Relief Program (TARP) created by the U.S. government in response to the financial crisis of 2007–08.

Massad earned his undergraduate degree at Harvard University in 1978. After stints working for Ralph Nader and the AFL–CIO, he returned to Harvard to earn a law degree in 1981. He then began a 25-year career as a corporate lawyer at the firm Cravath, Swaine & Moore, where he became an expert on corporate finance and derivatives.

Massad briefly joined the staff of TARP's Congressional Oversight Panel before moving to the Office of Financial Stability as chief counsel. In September 2010 he was named acting Assistant Secretary for Financial Stability. The U.S. Senate confirmed him to the position in June 2011. In November 2013,President Barack Obama nominated him to be CFTC chairman. The Senate confirmed him in June 2014.

Antifaschistische's picture

"because high-frequency trading has become so central to the stock market, it must be serving some necessary purpose. This is false"


no...THIS statement is false!!...it is serving SOME purpose.  You know, like those places in the world where people are taking unauthorized extracts from the local pipeline.  Since the volume of extracted oil doesn't end up in an oil spill, this proves that what is being taken is serving some purpose!!

all Parasites have a purpose!!

The question isn't do they have a purpose....the question how much damage are they doing to the host?  (host = every saving individual in the country).  

Everytime I hear an "investing" related advertisement I realize they're still doing very well at keeping the host alive so the sucking can continue.

Quinvarius's picture

Considering those ex-CFTC guys are considered "loose ends", and now they are useless and out of power, I'd say their time for talking is about over.  I would not worry about what they say.  

Duffy's picture

I like how Batman decided to hold Bart Chilton up as a hero after Chilton went criminally insane, but I still kinda feel like Chilton was always primarily out for himself and his hair.


pauhana's picture

While I applaud Mr. Katsuyama's attempt to level the playing field, the game is rigged on so many levels that HFT is only the latest, greatest, perhaps most eggregious, example.  Inside information, pump & dump, rumor mongering, - oh, where does one begin?  It will never end as long as human greed is part of our nature - so never.  Fix this, something else will rear its ugly head.

NoDebt's picture

I also applaud his attempt.  But I leave it at that.  He knows how to build an exchange and fix, basically, one broken cog in the overall apparatus.  So that's what he fixed.  I don't think anyone should be required to do more than that.

I think his decision to come out again and start pushing back against the anti-IEX stuff (which I've also read and all of it boils down to an attempt to marginalize the exchange) is a good one.  If he sticks to the FACTS, he'll keep winning.  He knows, like we know, the BS and FUD the other side is going to try to use against him.

No, he's not going to save the world, but I'll always support somebody who's doing what they can to make things right in their sphere of influence, no matter how large or small.

thamnosma's picture

Well said (er, written)

buzzsaw99's picture

chilton is as useless as tits on a bull

gdpetti's picture

Interesting that you should say that as Chilton always reminded me of J Edgar Hoover at the FBI, who shared his life, love, house and work with his gay companion, his number 2 at the FBI, and it was known that as long as everyone had the dirt on him, that they wouldn't have to worry about being prosecuted... thus the pictures kept being passed around... and the Kennedy's got blackmailed it seems into giving that Texan assassin Mr. J the job as VP, from which all that followed occurred... and continues to.

MidwestJester's picture

on IEX, high-frequency trading firms currently make up less than 20 percent of our volume. (Note: It’s difficult to predict the optimal proportion of HFT activity in any market, but it should definitely not be half the volume.)


Why not 0%? Why should anything that could be considered as 'front running' customer orders be allowed, and whom would be able to dictate who and how much? Given the choice, would you take a market with 50% HFT volume, 20% HFT volume, or 0% HFT volume?

Alpha Monkey's picture

IEX supposedly has delay lines to make HFT orders arrive the same time as regular orders, which is supposed to stop this activity.  Trading with computers is not such a bad thing, but using them as you described is why IEX came into existence.

Joebloinvestor's picture

Bart also didn't find any silver manipulation after a 5 year investigation, yet the UK had no problem (after being caught with its' pants down over everything else).

NoWayJose's picture

Ebola is so central to West Africa, it must serve some purpose...  Let's send Bart to investigate...

Duffy's picture

There may be no financial oversight agency more toothless and useless than the cftc and that includes the SEC...

I remember that people were pissed at the lack of prosecutions for a while, but then it turned out that the "right wing" Tea Party also thought some of them fuckers should hang, and so good, decent, coastal cryptofascist liberal folk could not be seen worrying about it.... The One has his reasons, and they are often mysterious to we lesser mortals...




Winston Churchill's picture

Like money.

Beyond all our understanding.

ebworthen's picture

The folks at Raymond James & Associates Inc. are inveterate shills and market pumpers.

HFT exists to skim money from retirees and savers - every second of every day - and to grab large chunks of it when the bubbles pop.

The entire market is not a market, it is a PONZI SCHEME.

Roanman's picture

Remember when we used to think that Chilton was straight, but handcuffed while fighting the good fight for properly regulated markets?

We're a bunch of fucking chumps.

SillySalesmanQuestion's picture


phantom blot's picture

ZH should auto-repace the word "folks" with "fuckwits" - articles would read more honestly

Tachyon5321's picture
Yes we have a major problem. For example,  I placed several CBOE options trades that were front run this past week. Placed a sell for 100 contracts then wham... 3 trades jump in front of mine. Cancel my order, the HFT cancel their order. Placed a new order,,, wham 5 HFT front run my order again. What is interesting is the HFT all were trying to sell only 7 contracts. Very small volume, but fast. Amazingly fast.
blindman's picture

it is all contractual bullshit where
you lose your investment at just the
worst time in your life.

miker's picture

Even though they know it's unethical they have to keep it in place. Consider what volume would look like if HFT was banned?  Don't you think it would be then be incredibly obvious how few trades are actually taking place in the markets.  People might start to wonder whether it's smart to buy stocks.

teslaberry's picture

i saw bart chilton on the street and said hello to him , he had no idea who i was but was very flattered someone on the street in new york city of all places would recognize him. 

he was in from out of town just after leaving the ftc. 

he said he was going to write a book about the corruption at the cftc and dontate the money to charity. '