Before the collapse of the U.S. financial system in 2008, Brad Katsuyama could tell himself that he bore no responsibility for that system. He worked for the Royal Bank of Canada, for a start. RBC might have been the fifth-biggest bank in North America, by some measures, but it was on nobody’s mental map of Wall Street. It was stable and relatively virtuous and soon to be known for having resisted the temptation to make bad subprime loans to Americans or peddle them to ignorant investors. But its management didn’t understand just what an afterthought the bank was — on the rare occasions American financiers thought about it at all. Katsuyama’s bosses sent him to New York from Toronto in 2002, when he was 23, as part of a “big push” for the bank to become a player on Wall Street. The sad truth was that hardly anyone noticed it. “The people in Canada are always saying, ‘We’re paying too much for people in the United States,’ ” Katsuyama says. “What they don’t realize is that the reason you have to pay them too much is that no one wants to work for RBC. RBC is a nobody.”
Before arriving there as part of the big push, Katsuyama had never laid eyes on Wall Street or New York City. It was his first immersive course in the American way of life, and he was instantly struck by how different it was from the Canadian version. “Everything was to excess,” he says. “I met more offensive people in a year than I had in my entire life. People lived beyond their means, and the way they did it was by going into debt. That’s what shocked me the most. Debt was a foreign concept in Canada. Debt was evil.”
For his first few years on Wall Street, Katsuyama traded U.S. energy stocks and then tech stocks. Eventually he was promoted to run one of RBC’s equity-trading groups, consisting of 20 or so traders. The RBC trading floor had a no-jerk rule (though the staff had a more colorful term for it): If someone came in the door looking for a job and sounding like a typical Wall Street jerk, he wouldn’t be hired, no matter how much money he said he could make the firm. There was even an expression used to describe the culture: “RBC nice.” Although Katsuyama found the expression embarrassingly Canadian, he, too, was RBC nice. The best way to manage people, he thought, was to persuade them that you were good for their careers. He further believed that the only way to get people to believe that you were good for their careers was actually to be good for their careers.
His troubles began at the end of 2006, after RBC paid $100 million for a U.S. electronic-trading firm called Carlin Financial. In what appeared to Katsuyama to be undue haste, his bosses back in Canada bought Carlin without knowing much about the company or even electronic trading. Now they would receive a crash course. Katsuyama found himself working side by side with a group of American traders who could not have been less suited to RBC’s culture. The first day after the merger, Katsuyama got a call from a worried female employee, who whispered, “There is a guy in here with suspenders walking around with a baseball bat in his hands.” That turned out to be Carlin’s chief executive, Jeremy Frommer, who was, whatever else he was, not RBC nice. Returning to his alma mater, the University at Albany, years later to speak about the secret of his success, Frommer told a group of business students: “It’s not just enough to fly in first class; I have to know my friends are flying in coach.”
Installed in Carlin’s offices, RBC’s people in New York were soon gathered to hear a state-of-the-financial-markets address given by Frommer. He stood in front of a flat-panel computer monitor that hung on his wall. “He gets up and says the markets are now all about speed,” Katsuyama says. “And then he says, ‘I’m going to show you how fast our system is.’ He had this guy next to him with a computer keyboard. He said to him, ‘Enter an order!’ And the guy hit Enter. And the order appeared on the screen so everyone could see it. And Frommer goes: ‘See! See how fast that was!!!’ ” All the guy did was type the name of a stock on a keyboard, and the name was displayed on the screen, the way a letter, once typed, appears on a computer screen. “Then he goes, ‘Do it again!’ And the guy hits the Enter button on the keyboard again. And everyone nods. It was 5 in the afternoon. The market wasn’t open; nothing was happening. But he was like, ‘Oh, my God, it’s happening in real time!’ ”
Katsuyama couldn’t believe it. He thought: The guy who just sold us our new electronic-trading platform either does not know that his display of technical virtuosity is absurd or, worse, he thinks we don’t know.
As it happened, at almost exactly the moment Carlin Financial entered Brad Katsuyama’s life, the U.S. stock market began to behave oddly. Before RBC acquired this supposed state-of-the-art electronic-trading firm, Katsuyama’s computers worked as he expected them to. Suddenly they didn’t. It used to be that when his trading screens showed 10,000 shares of Intel offered at $22 a share, it meant that he could buy 10,000 shares of Intel for $22 a share. He had only to push a button. By the spring of 2007, however, when he pushed the button to complete a trade, the offers would vanish. In his seven years as a trader, he had always been able to look at the screens on his desk and see the stock market. Now the market as it appeared on his screens was an illusion.
This made it impossible for Katsuyama to do his job properly. His main role as a trader was to play the middleman between investors who wanted to buy and sell big amounts of stock and the public markets, where the volumes were smaller. Say some investor wanted to sell a block of three million Intel shares, but the markets showed demand for only one million shares: Katsuyama would buy the entire block from the investor, sell off a million shares instantly and then work artfully over the next few hours to unload the other two million. If he didn’t know the actual demand in the markets, he couldn’t price the larger block. He had been supplying liquidity to the market; now whatever was happening on his screens was reducing his willingness to do that.
By June 2007 the problem had grown too big to ignore. At that point, he did what most people do when they don’t understand why their computers aren’t working the way they’re supposed to: He called tech support. Like tech-support personnel everywhere, their first assumption was that Katsuyama didn’t know what he was doing. “User error was the thing they’d throw at you,” he says. “They just thought of us traders as a bunch of dumb jocks.”
Finally he complained so loudly that they sent the developers, the guys who came to RBC in the Carlin acquisition. “They told me it was because I was in New York and the markets were in New Jersey and my market data was slow,” Katsuyama says. “Then they said that it was all caused by the fact that there are thousands of people trading in the market. They’d say: ‘You aren’t the only one trying to do what you’re trying to do. There’s other events. There’s news.’ney was made from its incomprehensibility.