Flash boys

In 2002, the Royal Bank of Canada (RBC), the world's ninth-largest bank, embarked on a mission to become a significant player on Wall Street. They established an office in New York, staffed primarily by Canadians, including a young trader named Brad Katsuyama. Katsuyama, who initially traded U.S. tech and energy stocks, was later promoted to head RBC's equity trading department. The department underwent a significant change when RBC acquired Carlin Financial, an electronic stock market trading firm, in 2006. The merger led to a culture clash and brought Katsuyama's attention to peculiarities in the financial markets. By 2007, Katsuyama noticed that the market seemed to react instantly to new buyers or sellers, a phenomenon that became evident when a large investor wished to sell 5 million shares of Solectron, a company being acquired by Flextronics. Katsuyama bought the shares at a slightly lower price than the public markets, but when he turned to sell them, the share price dropped significantly, leading to substantial losses.

Ronan Ryan, an Irish immigrant, began his career in telecommunications at MCI, learning the intricacies of the field and quickly advancing to the sales team. His expertise led him to work for Qwest Communications, Level 3, and eventually the big Wall Street banks, where he specialized in optimizing routes for laying fiber and connecting machines. In 2005, BT Radianz hired Ryan to convince Wall Street banks to co-locate their computers in Radianz's data center, a move that significantly reduced latency times.

This success sparked a surge in demand for his services, and from 2006 to 2008, Radianz billed Wall Street firms nearly $80 million to relocate their computers closer to the stock exchange matching engines. This trend wasn't unique to Radianz; other telecom firms like Hudson Fiber also profited from this telecommunications arms race, which saw average order execution times drop dramatically.

By the end of 2010, Katsuyama, Park, and Ryan had developed Thor, a tool designed to counteract the advantages of high-frequency traders, with the addition of ex-Bank of America and Merrill Lynch employee John Schwall for his expertise in high-frequency trading. This was in response to the SEC's Regulation National Marketing System (NMS) introduced in 2007, which required brokers to find the best market prices for their investors. To facilitate this, a centralized register of bids and offers for all stocks in all exchanges was consolidated on a central SEC-operated computer called the Securities Information Processor (SIP).

However, high-frequency traders created their own faster versions of the SIP, gaining a market view 25 milliseconds before others, enabling them to trade on this information before the broader marketplace was aware. Thor was designed to eliminate this speed advantage. Despite initial success, sales for Thor plateaued in 2011 due to investors' obligations to maintain relationships with big Wall Street banks by giving them their trades to execute. This limited the amount of business they could do with the Royal Bank of Canada (RBC), the bank promoting Thor. To gain more publicity, RBC's marketing department suggested applying for a Wall Street Journal Technology Innovation Award for Thor.

Sergey Aleynikov, a Russian immigrant and computer programmer, was hired by Goldman Sachs in 2007 to enhance the speed of their computer systems amidst the radical changes in the U.S. stock market. Aleynikov's role was to optimize Goldman's systems, making the software faster and finding quicker routes for market information to travel. Despite receiving lucrative offers from other firms, Aleynikov stayed with Goldman Sachs until 2009 when a new hedge fund offered him over a million dollars to create a new trading platform. After resigning, Aleynikov emailed himself some source code he had been working on, a mix of open-source software and proprietary code he developed at Goldman Sachs. When Goldman Sachs discovered this, they reported him to the FBI, leading to his arrest and charges under the Economic Espionage Act and the National Stolen Property Act.

Brad Katsuyama, a former trader at the Royal Bank of Canada, resigned from his secure job in 2012 to establish a new, fairer stock exchange. Despite facing skepticism from potential investors, Katsuyama managed to raise $15 million in start-up capital by the end of the year, with contributions from four institutional investors and nine big money managers. He also assembled a team of technologists, including Rob Park, Ronan Ryan, Don Bollerman, Dan Aisen, Francis Chung, and Constantine Sikoloff, who shared his vision of creating a level playing field for investors.

IEX, a new trading platform, officially launched on October 25, 2013, with 32 employees. Initial estimates suggested 159,500 shares would be traded on the first day and 2.5 million in the first week. However, IEX traded 568,524 shares on its first day and over 12 million in the first week. To break even, IEX needed to trade 50 million shares a day. The first traders to use IEX were regional brokerage firms and Wall Street brokers without dark pools, such as the Royal Bank of Canada and Sanford Bernstein. The first major Wall Street player to use IEX was Goldman Sachs, who sent their orders to IEX for execution on December 19, 2013. Within 15 minutes, IEX traded over 25 million shares, surpassing the American Stock Exchange's market share. This move by Goldman Sachs signaled a need for change in the U.S. stock market, with IEX being the platform to initiate this change. The more orders IEX received, the better the experience for investors, making it harder for banks to avoid this new, fair market.