Sfwloosh we love having you here. We like fireworks. Im not promising were going to have any today. You have just written a new afterward. As i read that which is really a history of where weve come since the book came out about a year ago, i sense that you seem a little more agitated a little more disturbed, a little more angry. Is that fair . No i dont think i feel more angry. I feel you know i feel like ive seen this movie before. The response to the book was very similar to the response to money ball, i had this main character who was a disrupter in his industry who was holding up a mirror in the industry and the picture that he revealed wasnt flattering. There was a lot of anger in response to the book. Thats naturally agitating. You cant really thats true. It is agitating to me in the middle of a firestorm, but i basically have been pleased with how the book has been received. I mean i like to the extent its been read as opposed to been just a totem for controversy, people have seen it for what it is. Its a story about a group of people who are inside the stock market who discover something is really wrong and set about trying to fix it which is not that unusual a story in other sectors of our economy, but its an unusual story on wall street. The book certainly sparked controversy you didnt write it to be controversial, did you . I didnt. If you had told me nothing more than the bare facts of the case you had told me that the predatory activity was going on in the stock market or High Frequency traders enjoy this advantage over eared investors and were exploiting it i wouldnt have any interest at all. It would have been one more nepharius wall street story. Whats interesting is these guys that were trying to fix the problem. Why they jumped that way rather than the other way . Why when they saw a hole in the market rather than seeing it as an opportunity to exploit for profit, lets instead plug the hole and fix the system. That interested me. It was i thought it was kind of an inspiring story. Your books are also about characters and developing those characters. Do you think High Frequency trading is unfair inherently . I think the way the market is structured, it is unfair. Wronk, for example certain individuals take advantage of those holes that you describe. I dont think i think that put it this way. This is maybe a better way to put it. So there is half the market is High Frequency trading. Half the trades are High Frequency trading and are involved. When i read the exchange that which is structured to create a level Playing Field between High Frequency traders and everyone else, they still are 18 to 20 of the market. It looks to me like in a fair marketplace High Frequency trading still exists, and it would be onefifth rather than to distinguish it between good hft and bad, no reporter could get to the bottom of that to figure out who the good guys are and who is benign and who is toxic . Right. Lets go back and look at some of the part of which you played in and brad katsiama and the head of bats a man named bill obrien who was sitting there tangled. Lets take a look. 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. Do you think the markets are rigged . I think its really hard to put a word on it. You said it in the book. Thats when i knew the markets were rigged. Its disgusting that you are trying to parse your words now. You cant say that. You are quoted that way in the book. Lets walk through. Do you believe it or not because you said it. Let me walk you through an example. Its a yes or no question. Do you believe it or not . I believe the markets are rigged. There you go. I also think youre a part of the rigging. If you want to do this lets do this. I think he is outrageous. I think he is part of the problem. We reached out to bats for a comment one year later. Their only comment was we have no comment. Does that surprise you at all, michael, that they would have no comment and more to the point do you still believe that the markets are rigged . Do you in any sense regret using those kinds of terms in the past . I do believe the markets are rigged. I think its not a bad description. The only reason i regret the word is that its used in a way that overshadows everything else. It distracts. My biggest complaint about the response to the book and this is going to this is going to sound disingenuous, but its absolutely true is the book generated this instant controversy, so once it became this object of controversy, it didnt get read for what it was. It got seen as this provocation. I stumbled across what i thought was a fantastic story, a narrative that carved out of wall street, and i wanted to tell that story as best as possible about these characters and it was a side show that it generated the controversy it did. I can see why it did, but it wasnt central to my motivation for writing the book. Is the complexity of the marketplace with all of the different exchanges and the dark pools and the various places people can trade, is it something that ate to be fairly simple . Is it the very complexity that creates the opportunity for exploitation on behalf of the people who have High Frequency trade . You said very clearly a moment ago, High Frequency trading in and of itself is not the problem here. Its how it is used. You got no problem with people who got fast computers. Its just how theyre used and what they pay some of those transaction sites to be able to do. I think its generally true that complexity is the new owe paft in the financial markets. Its the way bad behavior gets disguise and it gets made very complicated. Complexity was at the root of the financial crisis. It was like nobody understood. Thats why that was allowed happen. Its not a healthy thing for the society that it does not understand how its stock market works. Do regulators understand it . You have to ask them. Its not clear to me from what they say publically that they do, but have i to believe theyre informed, and it does seem that regulators are conflicted, conflicted partly because they are i mean i think its fair to say captured by the industry. A lot of regulators go to work for the industry. Right. Including mr. Chilton who is at the cftc. True. Im going to decline i may just hit the overhead. I think the subject of the stock market right now is so complicated i think i would were t would not surprise me to learn that within the s. E. C. Theyre arguing with each other about how it actually works. Right. I dont think theres a clear picture. I think this man has drawn the clearest picture ive seen of how it works, which is why it interested me. Were going to come back and pick up with you in just a minute. Youve been nodding, but first i want to bring in bob pos ani. How has High Frequency changed over where you sit from the past year and how well has iex done the exchange that michael talked about had in his book and that brad helped found . Bob pasani been looking into it . Mr. Lewiss book has generated a lot of debate over High Frequency chairman although chairwoman Mary Jo White said theyre not rigged and she said High Frequency trading is not unlawful insider trading. Another former regulator has strongly disagreed with the characterization that High Frequency traders engage in legalized front running. This book is not based upon fact, and when they start throwing around things like front running, you know im a former regulator. We looked at these guys all the time. Not just hfts but all traders in the market and the Investment Advisors act section 206 describes what front running is, and it cannot be done by hft traders. Its just a big lie. I dont mind debating issues but it has to be based on the facts, guys. In january his wife created ab Equity Market Structure Advisory Committee to advise the s. E. C. On what if any, changes need to be made in market structure. Its scheduled meet for the first time in may. On the enforcement front, theres been several investigations announced in the last year including from the fbi, the u. S. Tel attorney generals office, the new York Attorney generals office, and the s. E. C. There have been several fines against exchanges as well. The Exchange Direct edge now part of baps was fined in december 2014 for failing to follow rules regarding disclosure of how it handles order types. Perhaps the most high profile case, the new York Attorney general, is currently embroiled in a dispute with barclays over the way it has managed its dark pool alleging that bank did not tell traders about the presence of High Frequency traders in their pool. There have been very few active movement against High Frequency firms or individuals themselves. This may be because of the difficulty of proving intent art data isnt sufficiently robust to demonstrate abuse. Now, the sec is trying to remedy that. There are proposals out now for a consolidated audit trail that would allow regulators to track not only the trades that get executed, but also all of the bids and asks that traders eventually cancel. That database eventually would be huge. It may be several years before we see that one. One rule that will likely be adopted very soon, the sec is trying to require High Frequency traders to register with the s. E. C. This seems like a no brainer. If High Frequency traders are such a big part of the trading process, why doesnt the s. E. C. Know much about them . This could be implemented later this year. As for iex, its been a very busy year for brad and his company. The Company Raised 75 million in financing from investors last year and its seeking to become an official stock exchange. Now, it is roughly 1 of the trading volume. That may seem small, but that makes them the fourth largest dark pool after chris suisse ubs and deutsche bank. Quite an achievement. Finally, its been unfortunate in my opinion that most of this debate has been about High Frequency traders and whether the market is rigged or not. I think the real focus should be on the very strange relationships that have developed between brokers and dark pools and exchanges at High Frequency traders that has led to the markets being excessively complex and potentially errorprone. Back to you. Bob, thank you very much. Michael is still with us and also to react iex is cofounder and ceo brad. Brad, wblg. Good to have you with us. Thanks for having me. Do you bristle at all when he characterizes your business as a dark pool . That sounds dark and poolish. I think its one of the biproducts of being a startup. We started this with our own money. We ran out of that money pretty quickly. It took ace long time to get funding, and when we raised our first amount of capital, the only thing we could afford to be was an alternative trade system or a dark pool. I think everyone has to start somewhere. Thats where we started. You know we did raise a big round of funds last year and are in the process of looking to become a fullfledged stock market. Are you seeing more and more volume and business from companies, business houses small houses come to you because they want to avoid we have a simple market. Our rules are transparent. We use technology to protect borders that are sent to our market. As a result, we have a large following on the buy side. You know, retail brokers Interactive Brokers are connected, but most of our support has come from the brokers. Advantages shouldnt be able to be purchased. Fast technology and fast data. It should really be about investing, understanding companies, and building a very diverse market. Thats what were looking to do. Most of all its about fairness and i think thats kind of our key tenant. As you look back over the past year what has surprised you the most about the reaction on wall street among regulators you testified yep. Among regulators congress, and so forth . What has surprised you the most and have you received a lot of hate mail, a lot of nasty tweets, what . Any time you say things, there will be people that arent happy. I agree with what bob said prior. There was this real kind of intrinsic laserlike focus on High Frequency trading when in reality it was the system overall. It was about dark pools and hft and brokers and exchanges, and, you know, really at iex, i feel too like i got way too much credit in a way. Iex is a team of people. We have people from across the industry, parts of the system. People that worked at exchanges and big banks and hft regulators, and when we came together, we kind of painted a picture of the market that we believe was not set up in the best interests of traditional investors. Ultimately, fast and slow traders were not meeting on fair terms. So what we were talking about a moment ago, complexity is one of the things you say your place is simple and complexity is one of the things. There have been. But relatively few. I think, you know when you look at the cases that are being enforced a lot of them come from this position of fiduciary. You have a higher level of responsibility than when you dont have any, and i think in the case of High Frequency trading firms, they dont have clients. Theyre proprietary traders. If you look at how to attack this problem, you start at the inside and look for people that have more fiduciary responsibilities and then you work your way out. Its not surprising the way that these cases are being investigated. I think its actually the sensible way to do it. Whey found shocking was what was legal. Not what was illegal. It never occurred to me that law breaking was going on. What was shocking was the system was structured in this legalized front running going on. If thats the case then its quite possible no one will be prosecuted, but the system needs to be fixed. One of the things in the afterward that you wrote and in the vanity fair piece, which brought it home in a way, who gets hurt by this . Who i know who is benefitting. Who gets hurt . Its a tax on investment dollars. How big a tax . This is a great question. So this is one of the things that iex enabled. Once you eliminate the scalp, its to see the size. I talked to one of the countrys biggest Mutual Fund Managers and because they had been trying to estimate the size of the scalp was. How much they how much it cost them to trade off iex as opposed to on iex, how much the market moved against them because it anticipated their orders and it was a firm that did 80 billion in stocks last year, and their estimate was it cost them 240 million. Its a little less than onethird of 1 . Stla that was the big. The big. So its the number is not trivial. I mean and this is not thats one firm. Its one firm managing the savings of ordinary people. Firefighters teachers unions. Pensions. Endowments. Its a tax on those savings. Its i wouldnt be comfortable saying from one firms analysis that thats the number. Clearly its a number theres a number and its not trivial. Weesh going to take a pause. Michael is going to stick around, and were going to continue our conversation and broaden it out. Well be back with more after this. 50ir7g9sz d, had a passion. My whole life i wanted to teach myself to build computers. I wanted to build these things for free. I just wanted to do it for the world and you know when you want something, thats what you do the best. Hello. I am technology that is changing investing forever. I am a fully automated Investment Advisory service. I can help you choose the right portfolio. Monitor it. And even rebalance it. Ive been called innovative. Revolutionary. And just plain smart. Id blush at the compliment if i could. But i cant. So. I wont. Say hello at intelligent. Schwab. Com the value of a mortgages backed security. Flash point is the value of a millie second. You have looked at bubbles and pricing. Are we where you sit anywhere close to a bubble in the stock market particularly in nasdaq particularly in biotech stocks . So the last time im on this show, i got in trouble for saying the stock market is rigged. Now you want me to say if its a bubble. How much trouble as much as youre willing to step into. I am really reluctant to prognosticate to predict what the stock market is going to do . If i thought it was a bubble would i have sold my shares. I dont feel what do you invest in . Im really boring. If things really go bad, is he going to be sitting there with a pile of cash buying up on really good terms. He is my hedge. Then, you know how much is in the stock market . Thats it. I dont think about it. I try not to think about it at all. I try to focus on making it and not losing it rather than making it in the market. Youve been writing about wall street. You work there. Youve been writing in large part almost 25 years ago. Yes. How has the world of wall street changed . Whats different . The geek advisory taken over is the big thing. The story of flash boys is but the thats one big change. There was still a it was a kind of sense a bit of a sense of loyalty. Is it better that way . Totally better that way. Publicly owned companies i think this free agent model is a disaster. I think the people that the best possible way to structure risk taking enterprises is partnerships where the people who are there are on the line and on the hook because otherwise they dont otherwise the risk is born by the shareholders. Right. Who are not they are investing. It creates the wrong incentive. I mourn the loss of the partnership, and i wonder how you get it back. You get it back in a way, but hedge funds hedge funds are partnerships. Thats a smart structure. If you lose you really lose. People got rich making really stupid bets. The wig change is a byproduct of the geeks taking over is it is so much more complicated than it was. You cannot explain the stock market to my mother and thats a problem. I could have explained it 25 years ago. Your next project i hear is in television, but i just want to take note, big short starts filming today. Today in new orleans. In new orleans with a guy named brad pitt. Steve carrel and ryan gosling