Like many people on Wall Street and beyond, Sara Furber devoured Michael Lewis’s Flash Boys, the best-selling book that argued high-speed traders had rigged the world’s biggest stock markets. Now, Furber has been tasked with proving that executives and investors really want an alternative.
Lewis’s book told the tale of Brad Katsuyama, who, while working at Royal Bank of Canada, spotted what he saw as a gigantic ripoff in the financial markets and set up a company, IEX, he hoped would end it.
Last year, he hired Furber, a 20-year Wall Street veteran and managing director at Morgan Stanley, to head up the new stock exchanges listing business – poaching business from the New York Stock Exchange and Nasdaq, arguably the two most powerful stock markets in the world.
Next month, Furber hopes IEX will be up and running with its first listing as the exchange takes on a market that has been dominated by the two giants. Giants, she and Katsuyama argue, that have allowed the financial markets to be controlled by the interests of a subset of traders more interested in making a very quick buck than in long term investors.
“From the outside looking in it was hard to really understand the level of conflicts that existed and the behaviour that existed. Reading Flash Boys was a window into that,” says Furber, sitting in an office 44 floors above downtown Manhattan.
Having spent a year here, she says “the levels of complexity and the level of conflicts that exist in the system still exist and in fact there may be other ones that we are seeing as we get further into it”.
As the fledgling exchange tries to make inroads, Furber will become one of Wall Street’s most high profile women.
After two decades in finance she is a little saddened that that is the case. “Women on Wall Street are an important constituency and I would love to see more of them,” she says. But there has not been as much improvement as she would like to see.
“There are still very few women at the senior ranks and it is still very difficult,” she says. She wonders if part of it is the perceived demands of the job.
The biggest lesson she learned was that more responsibility didn’t mean less freedom. “I assumed the higher profile, more senior position I would have, the less control I would have to manage the life I wanted outside of work. Having children, family balance.
“Looking back one of the biggest things I wish someone had told me is it’s inversely correlated. The higher profile, more responsibility roles, the more flexibility you have to structure your life the way you want. You have better people working for you, you have more authority, you are setting when the meetings are, what the agenda is. That control is really empowering.
“Nobody looks at me for going to a parent teacher conference,” she says. “I don’t think that level of autonomy exists at lower levels. Whether you are a man or a woman.”
IEX has rent Wall Street. In 2014, an argument between Katsuyama and Bill O’Brien, then president of the Bats exchange, on CNBC brought trading to a standstill as the IEX founder and Lewis argued investors were being scammed. “I believe the markets are rigged and I also think you’re part of the rigging,” Katsuyama told O’Brien. Katsuyama (and Lewis) were guilty of “falsely accusing literally thousands of people and possibly scaring millions of investors in an effort to promote a business model”, said O’Brien.
Much of the disagreement centers on the need – or not – for the new exchange’s most famous claim to fame: a 38-mile coiled cable designed as a “speed bump” to slow down the high-speed transactions that now dominate trading. The cable is designed to stop high-frequency traders (HFTs) using their algorithms to trade in and out of shares at speeds that allow them to take advantage of slower investors – often those looking to make a long term bet on a company’s fundamental worth.
If you are IEX or its supporters this is tantamount to scalping. IEX’s critics charge its just how efficient markets operate in the digital age. Either way, it’s all very complicated. And that’s the problem, says Furber. Financial complexity is not only too much for ordinary investors, it’s also too much for those on Wall Street.
Furber ran investor relations at Merrill Lynch during the credit crisis. “One of the things that shaped my view incredibly was that there were a lot of people at that time saying: ‘You just don’t understand the risk, it’s very complex.’ As a smart, educated person, when people create a lot of complexity and opaqueness, we have to trust our gut. If you can’t explain it, there is something fair about our sense of unease. What we are tying to do is create more transparency and simplicity because that creates better trust.”
Whoever you agree with, Wall Street does have a problem. Over the last decade the number of listed companies in the US has halved and the number of companies doing initial public offerings (IPOs) is also in free-fall, down from about 300 a year in the 1990s to about 100 a year. Big companies like Albertsons, Bloomberg, Koch Industries are staying private. A new generation of tech giants, Airbnb, Pinterest, Lyft and Uber, are staying private for longer.
Part of the reluctance to join the stock markets is because the existing exchanges seem geared more interested in making money for traders than helping long term investors maximise their returns or companies raise money, says Furber.
“The market structure we have today has evolved over the last 10 to 15 years and it’s being optimized for different participants than companies and investors,” she says. “It doesn’t mean everything doesn’t work for them,” she says, but there are “pain points”.
NYSE and Nasdaq sell tiers of data and higher speed services to traders who can use that advantage to make quick returns that are unavailable to those that don’t pay up. IEX won’t do that.
“Everyone says they are great in clients service but if your business model operates in a way that doesn’t advantage them, I would question that,” she says. On top of that there are a bunch of fees and rebates that IEX will do away with that she argues create “financial incentives that aren’t allying the broker all the time with their client”.
But taking on the incumbent powers will not be easy. Nasdaq and NYSE dominate the listings market – IEX has about a 2% market share. The two exchanges have fought hard against allowing IEX to become an exchange and its speed bump, arguing it added unnecessary complexity. But the Securities and Exchange Commission gave IEX the go-ahead last June. One of NYSE’s exchanges, NYSE American, is now offering a speed bump too.
“It validates the problems that exist,” she says. The current big exchanges still drive a significant portion of their revenues from selling tiers of data and tiers of speed. “The people who can pay the most for that are still the people who can optimise those differences as competitive advantages,” she says.
“Imitation is the sincerest form of flattery,” Furber says with a smile. It can also be the most deadly.