John Schwall is the co-founder and chief operating officer of a disruptive company that’s looking to shut the technological loopholes that have given electronic trading a bad name — and is doing such a good job of it that it’s won support from Wall Street’s most major players, such as Goldman Sachs, and was the subject of a bestselling book.
But through it all, Schwall — who graduated from Stevens with an engineering degree in 1995 and an M.S. in Technology Management in 1998 — remains the humble son of a Staten Island firefighter who values hard work and fair play in pursuing success.
“You probably know that there’s this book called ‘Flash Boys’ that came out,” Schwall said in a guest lecture at his alma mater last week; most of the 100-plus students and faculty in attendance indicated they had read it. “I get depicted as a bit of a lunatic in the book,” he said, pausing, then adding, “which is true” to some laughter.
He’s hardly a lunatic, but Schwall is clearly obsessed with his goal of cleaning the public image of high-frequency trading, which is often vilified by a public that doesn’t truly understand the practice, or how widespread it is.
The problem, which is spelled out in “Flash Boys,” is that a small group of insiders has been able to exploit weaknesses in computerized trading regulations, a problem Schwall’s company, IEX, has worked to thwart. “When you realize that some participants were somehow anticipating and responding and recognizing trades, and in some way profiting from that — or at least costing an investor money as a result of that — personally, I became hell-bent on trying to solve that problem,” he said.
His appearance in the book is what brought him to the attention of Billy McFarland, a member of the Stevens chapter of business society Phi Beta Lambda.
“While reading ‘Flash Boys,’ I was able to personally connect to John Schwall,” said McFarland, a sophomore Quantitative Finance major. “As a student trying to find my place in the job market, I drew inspiration from seeing a Stevens alumnus find success as a chief operating officer.”
An avenue into finance
Before his story was included in the book — which traces the brief history of IEX from the viewpoint of its president and CEO, Brad Katsuyama — Schwall was a Stevens engineering student who wasn’t sure he wanted a career in engineering. Fortunately, he saw many of his classmates finding other avenues out there.
“So many of them found their way into financial services,” said Schwall, who served as president of the Sigma Phi Epsilon fraternity, and also of the Gear & Triangle and Khoda honor societies. “Through hard work and putting your mind to it, you can accomplish anything.”
“I’m a very, very proud alumnus, and I’m happy to be back,” he said. “I’ve had a brief opportunity to talk to some of the professors in the Quantitative Finance program, and it’s phenomenal that this program has been created.”
It’s the sort of academic path he might have chosen 20 years ago. Schwall’s first job was in business analysis at Pershing, in Jersey City, and he rose to leadership roles and Bank of America and RBC before striking off into entrepreneurial waters with IEX.
One of his most memorable assignments was with Bank of America, where he managed the project to ensure the bank would be fully compliant with regulation that fully ushered in the digital era of trading. That gave him a front row seat on the technological, regulatory and business aspects of the bank. It was there, and at RBC, that he got a firsthand look at some of the vulnerabilities in the regulation.
“The connotation high-frequency trading has is, obviously, in many cases very negative, when in fact the vast majority of trading that happens today uses some form of high-frequency trading,” Schwall said. “The reality is, everyone’s using some type of technology to effect their executions today.”
IEX, he said, “differentiates between high-frequency trading that we feel takes advantage of certain structural inefficiencies that exist in the market, and certain high-frequency trading strategies that are there actually serving a purpose, perhaps unnecessarily, because of fragmentation.”
Pursuing entrepreneurial vision
In a question-and-answer session after his lecture, students asked about the implementation and development of specific technologies behind IEX, as well as the decision to leave established banks to help start IEX. It wasn’t an easy decision, he told the audience.
“You basically get two opportunities to do this,” he said. The first is when “you’re young and have nothing to lose, and are accustomed to living on ramen noodles and willing to work 20 hours a day.” The second is when you have a cash cushion allowing you to take some risk, but as a man with a young family, it was still a tough call.
But it was the right one for Schwall, and he’s wearing a number of hats as he continues to help the company grow and succeed.
“A lot of what puts me in a position to do all these things — which is really just problem solving — is having been exposed to different situations,” he said. “And for me, getting the degree at Stevens that I did helped me learn how to think though a problem and solve it and propose a solution. I attribute a lot of it to Stevens, I attribute a lot of it to hard work.”
Students engaged in a lively conversation with Schwall, which is exactly what McFarland hoped to see.
“I wanted him to speak at Stevens to share not only the success in his career, but also to share how he made the transition from an undergraduate to a thriving businessman,” McFarland said. “During his talk, one of the most valuable things he said was that hard work is the root of his success. This idea definitely resonated with our undergraduate community.”
If IEX continues to succeed, Schwall hopes his hard work translates not only into more trading activity and revenue, but also to greater transparency around the financial industry and increased fairness for its participants. At one point during the Q&A session, Schwall asked for a show of hands as to who in the audience trusted Wall Street. No hands went up.
“We, at IEX, hope to change that,” Schwall said after his lecture. “I sincerely want Stevens graduates to want to do that and to be a part of that. We have to change that. And a problem facing Wall Street in the wake of the financial crisis is that it’s increasingly difficult to attract talent from college, because nobody trusts Wall Street.”
At Stevens, business studies aim to put a focus on the importance of ethical leadership, a concept that is stressed in the MSTM program through a shared experience at West Point. Stevens also puts strong emphasis on an honor code, and business programs have a strong ethics thread that’s emphasized in each class.
“Everybody wants an ethical leader,” said Dr. Gary Lynn, who teaches courses in the MSTM program. “In today’s age, it’s easy to take the shortcut for the quick buck. And we’re trying to train leaders that will take the longer way, but the surer way, from point A to point B.”
That’s the hope of IEX, also, according to Schwall.
“Wall Street is obviously not going away,” he said, “but we’re going to see a Wall Street with a conscience in the next couple of years, I think it’s going to be forced to have a bit of a conscience.”
John Schwall '95 MSTM '98, right, talks with Billy McFarland before his lecture. McFarland, a QF student, says Schwall's insistence on the importance of hard work 'definitely resonated with our undergraduate community.' (Photo: Lisa Torbic)