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Former RBC banker is hero of new Michael Lewis book

Friday, March 28, 2014

JOANNA SLATER

NEW YORK -- A much-anticipated new book by one of America's most famous authors promises to blow open an obscure area of financial markets and turn a Canadian into a celebrity.

The book, entitled Flash Boys, is by Michael Lewis, the man behind numerous bestsellers including Liar's Poker, Moneyball, The Blind Side and The Big Short.

According to excerpts that were available on Amazon.com on Thursday, the hero of the latest narrative from Mr. Lewis is none other than Brad Katsuyama, formerly an executive with Royal Bank of Canada.

The book, whose official release date is March 31, focuses on the brave new world of high-speed trading and how it has transformed financial markets in ways that are profound but little understood.

Mr. Lewis brings an enormous readership to his subjects, thanks to his uncanny ability to transform complex financial topics into page-turners. Market participants are awaiting the book's release with a mixture of hope and trepidation. Its publication comes at a delicate time, as U.S. authorities intensify their scrutiny of practices used in high-speed trading.

In the introduction to his book, Mr. Lewis singles out Mr. Katsuyama for his courage in digging into such practices. Mr. Katsuyama's "willingness to throw open a window on the American financial world, and to show people what it has become, still takes my breath away," he writes.

While at RBC in New York, Mr. Katsuyama developed a tool that protected investors from the deleterious effects of transacting with predatory high-frequency traders. He left the bank in 2012 and now heads IEX Group Inc., a new stock trading platform with the same objective.

Mr. Katsuyama and IEX did not respond to requests for comment.

Greg Mills, head of global equities at RBC Dominion Securities, said he hoped the book would become "a catalyst in the debate for market structure reform, one of the most complicated subjects Wall Street faces."

Mr. Mills said that RBC has been a consistent opponent of predatory trading practices and he was proud of the role the firm had played in incubating Mr. Katsuyama's current business.

The small selection of pages from Mr. Lewis's book briefly made public by Amazon contained both praise and brickbats for Canada's largest bank. RBC is described as "stable and relatively virtuous" but somewhat clueless as it attempted to push into the big leagues in New York a little over a decade ago.

"It was as if the Canadians had summoned up the nerve to audition for the school play, then showed up in a carrot costume," Mr. Lewis writes.

The book portrays RBC's 2006 acquisition of Carlin Financial, a U.S. electronic trading firm, as a hasty decision that set off an internal culture clash. "The bank's run by these Canadian guys from Canada," the book quotes an anonymous former RBC director as saying. "They don't have the slightest idea of the ins and outs of Wall Street."

Unlike Carlin, RBC had a "no-asshole" rule in its hiring and instead looked for people who were "RBC nice," the book says. Carlin, by contrast, was headed by a man who walked around the trading floor brandishing a baseball bat.

RBC's Mr. Mills acknowledged missteps in the bank's early days in the U.S. but portrayed them as part of the process of entering a tough new market. "We made some mistakes along the way, absolutely," he said. Major U.S. investment banks "don't just welcome a Canadian bank to Wall Street."

The second chapter of Flash Boys is devoted to Mr. Katsuyama, and parts of it read like a mystery story, as he and his RBC colleague Rob Park attempt to unravel the inner workings of the U.S. stock market.

The journey began when Mr. Katsuyama noticed strange things occurring in the execution of trades, the book says: Prices would shift against him after he entered orders but before the orders were completed. Increasingly, he realized that he was "running a stock-trading department unable to trade properly in the U.S. stock market," Mr. Lewis writes. He suspected that high-frequency traders were somehow getting a jump on his orders, the book says.

The book goes on to describe how Mr. Katsuyama and his colleagues developed a tool called "Thor" to eliminate the advantages enjoyed by high-frequency traders.

In an internal memo sent to some of its employees on Thursday, RBC trumpeted its role in that process. "Our clients rely on us, as their broker, to create solutions and strategies that mitigate the impact of predatory strategies," the memo said. "Thor represents our operating philosophy."

With files from reporter Boyd Erman