Stepping into the Fast-Paced World of High-Frequency Trading

Asha Tanwar, Entrepreneurship Editor

Asha Tanwar (MBA ’21) talks to Ronan Ryan, President of the start-up exchange, The Investors Exchange (IEX), about creating a fairer stock market, starring in Michael Lewis’ book Flash Boys, and why he does not recommend starting a business straight after school.

I am delighted when Ronan Ryan confirms that he has managed to fit me into his packed schedule. As President of IEX he is responsible for overseeing IEX’s operations, innovations, and go-to-market strategy, and despite the demands on his time he remains zealously focused on raising awareness of the mission that led him to quit his successful, high-flying job at the Royal Bank of Canada (RBC) in 2012 to launch his fintech startup.

IEX’s aim is to create a fairer stock market, and while some of us may assume that likely refers to retail, “Mom & Pop” investors, Ryan is quick to correct the misconception. He explains that they have not historically targeted retail investors, but rather the institutional investors, such as Capital Group and T. Rowe Price, into which many of us have invested our pensions and future wealth.

“There are considerable protections in place for retail investors, but the mutual funds and other value funds are not protected to the same extent, and about 40% of U.S. ownership of stocks is actually held by retail investors and households,” he says, indicating that indirectly, IEX’s mission is in our best interests after all.

Ryan is open and affable, keen to affirm that we are all indeed capitalists by nature, but at IEX the team is trying to make a difference in the world of capital markets beyond just maximizing profit. For those new to the scene, high-frequency trading is a method of trading that uses powerful computer programs and complex algorithms to transact a large number of orders placed by traders around the country in fractions of a second. To visualize the speed of a typical trade, it helps to put it in context: it takes between 300 and 400 milliseconds for you to blink your eye, but high-frequency trading is often measured in milliseconds (thousandths of a second), microseconds (millionths of a second), or even nanoseconds (billionths of a second). Blink, and you would have missed it … several thousand times.

The problem that Ryan and his team are trying to solve is with regards to the speed at which large orders are able to transact at the price shown on the screen. In an interview recorded in 2014, soon after the release of Flash Boys: A Wall Street Revolt, Ryan explains that the four largest stock exchanges in the United States occupy offices in the same small radius in New Jersey. These exchanges then offer expensive real estate to selected traders, and the exact position at which a trader places their trading system in a particular room within that building can determine how much faster they are able to send your trade down the cables to the relevant exchange. In theory, it may seem immaterial, but these computers can “arbitrage away the most infinitesimal price discrepancies that only exist over the most infinitesimal time horizons,” notes the Atlantic.

Ryan’s story in the lead-up to the launch of IEX seems eerily familiar to a number of other successful entrepreneurs: Ryan and his co-founder, Brad Katsuyama, are both immigrants, and Ryan admits that he had not planned to become an entrepreneur but had stumbled into the role while trying to solve a bigger problem he staunchly believed could not be overlooked. In hindsight, he admits he would have probably not launched the business if he had known it would be even 25% as hard as it turned out to be. “I recall telling my wife what I had decided to do, and she was very supportive. I had decided that I would give it five years—to try and make something of the idea I had—and then if it did not work out, I knew I could always go back into banking or do something similar.” He pauses and then passionately adds, “We really believed we could add value and it was time to put our money where our mouth is and do right by the institutional investors.”

“A stock exchange is the center of the entire market ecosystem,” he explains, noting that his co-founders and he had highlighted the inefficiencies within existing stock exchanges while at RBC but had been asked to abandon the project given the general lack of motivation amongst the large banks to disrupt the status quo. Despite pitching to 12 of their existing clients at RBC, Ryan and his team only received seed funding from a single client as they prepared to jump ship. “We had to stand up for something that is completely different,” Ryan says of the daunting start.

The team started with the launch of ATS, its mini-exchange, in 2013. There are over 40 such exchanges that coexist alongside the larger players, Ryan tells me, and for the most part they are not a threat. However, when IEX launched its filing to become a fully-fledged stock exchange, the New York Stock Exchange (NYSE) and NASDAQ were less than pleased. The two teamed up to lobby against IEX receiving approval from the SEC.

Ryan recalls the stress and difficulty of the moment they decided to file. “We had a team of 32 people by then and we acutely felt the responsibility that we had to these people and their families. It was our responsibility to consider every decision we took in light of the impact we would have on them. We had already built a profitable business by then, so we did wonder if we were risking something good—it was a calculated risk, but not one we thought lightly on. I don’t know if it was having the guts to do it or just passionate belief that fueled us and clouded our actions, but I believe it clouded them in a very positive way.”

To put the public commotion surrounding the filing into perspective, Ryan points to the 500+ comments submitted to the SEC regarding IEX’s filing during the 90-day period available for anyone to comment and convey their opinion on a filing after the initial SEC submission. In contrast, the previous four stock exchange applications had received a total of three comments altogether. Luckily for Ryan and his team, the comments submitted were overwhelmingly (>96%) positive, but the anxiety of the process was admittedly much harder for him than quitting his job and launching the startup, he concedes.

It is certainly true that to an extent, Ryan and his team would have avoided much of the fanfare had they not become the stars of Michael Lewis’s book Flash Boys, but Ryan is also grateful for the opportunity to become a beacon for the company’s mission as a result of the publicity that came with it. “Had there not been a book we would probably not have had people who had negative connotations of and negative views on the high-frequency trading world, but we probably also would not have had the overwhelmingly positive response that we did. Overall, it has been a very positive thing and most importantly, no one [in our team] grew an ego from it.”

But I note that there are people who had a disproportionately adverse reaction to the book, with some reviews at the time of the publication indicating that Lewis had “a major incentive to over-hype the story.” Ryan is quick to agree; however, he counters with his own experience of such reviewers. “I have gone to people who had a real adverse reaction at the time and recommended that they now reread the book and carefully take into account the context of the time period it is set in. I nudged them to consider the historical frame of the story with a 2002–2014 lens and with more of an open mind, and many of them now appreciate it very much. When The Big Short was published, it seemed that everyone loved it, but people in the fixed income department hated it—it was too close to home for them. It is a similar story for Flash Boys. Everyone thought it was the beginning of the end, but now people take a much more balanced view.”

Today, the company continues to go from strength to strength. CNBC stated that IEX’s machine-learning technology alone has “helped protect clients on 113 billion shares so far” and the company is profitable, something quite unusual in today’s startup world. Ryan maintains that profitability has always been key, with the founding team closely focused on growing responsibly by immediately taking market share. “We are growing strongly, but we want to grow the right way. Each innovation we have integrated into our platform has built-in protections within machine learning and as a result we trade less on Day 1 of the launch. But because we are completely aligned on improving the value-add for our customers, we win more business over the medium- and long-term—it is a positive cycle.”

Continuous change seems to be a guarantee in the near future as the company exits its listings business that they only entered in 2018. The company’s press release notes, “We have concluded that we can have a greater impact by continuing to grow our core exchange trading business and other new businesses.”

But there are other important changes I notice: Ryan, whose character in Flash Boys is widely known to have a particular tendency to curse, has not cursed during our entire conversation! He laughs when I point it out. “I curse a lot less now,” he says, “but I was on a panel last week where the entire audience seemed to be holding their breath in anticipation. And then one curse word slipped out and everyone laughed! Then, of course, I cursed again when I realized!”

I also ask Ryan for any other advice he has for aspiring entrepreneurs. “I think it is a great idea to get hands-on experience in the industry you might want to launch a startup in before you jump into building a company from scratch.” He emphasizes that there is no rush. “A lot of notable successful start-ups are started by people in their 30s or 40s. Street smarts and business common-sense are the things you need to survive and build a successful company. What actually happens is very different to the theory that you were taught at business school.”

It pays to prepare yourself for the fires you would be fighting at all times, and there are certainly drawbacks to the startup environment that the corporate world takes for granted. Ryan confesses, “When you leave a corporate environment, you definitely realize how limited the structural help is in the startup world,” indicating simple things like getting new equipment or scheduling meetings that suddenly all had to be done by the same people running the company. “But it has been an absolutely unbelievable experience. I don’t recall feeling stressed even as we were working ridiculous hours and trying to balance innumerable things at once.”

Asha Tanwar (MBA ’21) is from London. Prior to HBS, she worked in investment banking before switching to a supply-chain logistics startup. She was once training to become a professional ballerina, but she changed her mind on that pointe.