ES BEST-SELLING
#
AUTHOR
MICHAEL
LEWIS
A
WALL STREET REVOLT
FLASH
I
BOYS
USA $27.95
ISBN 978-O-393-24466-3
CAN. $32.95
Four years after
#1
his
bestseller
The Big
Short Michael Lewis returns to Wall Stree
c
,
report on a high-tech predator stalking the
equity markets.
Flash Boys
Street guys
is
about a small group of Wall
who figure
out that the U.S. stock
market has been rigged for the benefit of
insiders
and
that, post-financial crisis, the
markets have become not more free but
less,
and more controlled by the big Wall
Street
banks. Working at different firms, they
come
to this realization separately; but after they
band
discover one another, the flash boys
together and set out to reform the financial
markets. This they do by creating an exchange
in
which high-frequency trading
—source of
—
have no
the most intractable problems
will
advantage whatsoever.
The characters in Flash Boys
are fabulous,
each completely different from what you
think of
when you
think “Wall Street guy.”
away from jobs
Several have walked
financial sector that paid
dollars a year.
From
their
them
in the
millions of
new vantage
point
they investigate the big banks, the world’s
stock exchanges,
and high-frequency trading
firms as they have never been investigated,
and expose the many strange new ways
Wall Street generates
that
profits.
The light that Lewis
shines into the darkes’
corners of the financial world
may
not be
(continued on back flap)
APR
2014
FLASH
BOYS
ALSO BY MICHAEL LEWIS
Boomerang
The Big Short
Home Game
The Blind Side
Coach
Moneyball
Next
The Neu>
New Thing
Losers
Pacific Rift
The Money Culture
Liar’s
Poker
EDITED BY MICHAEL LEWIS
Panic
MICHAEL LEWIS
FLASH
BOYS
A WALL STREET REVOLT
W. W.
NORTON & COMPANY
New York
|
London
Copyright
© 2014 by Michael Lewis
All rights reserved
Printed in the United States of America
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Edition
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1234567890
W
1
T 3QT
A man got
to
have a code.
— Omar
Little
CONTENTS
INTRODUCTION
WINDOWS ON THE WORLD
CHAPTER
1
HIDDEN
CHAPTER
2
BRAD’S PROBLEM
CHAPTER
3
RONAN’S PROBLEM
CHAPTER
4
TRACKING THE PREDATOR
CHAPTER
5
PUTTING A FACE ON HFT
CHAPTER
6
CHAPTER
7
AN ARMY OF ONE
CHAPTER
8
THE SPIDER AND THE FLY
EPILOGUE
IN PLAIN SIGHT
1
7
23
56
89
128
HOW TO TAKE BILLIONS FROM
151
WALL STREET
193
244
RIDING THE WALL STREET TRAIL
Acknowledgments
273
FLASH
BOYS
INTRODUCTION
WINDOWS
ON THE WORLD
suppose
this
book
when
started
I first
heard the story ot Ser-
gey Aleynikov, the Russian computer programmer
I
worked
for
Goldman
after he’d quit his job,
the United States
computer code.
in
Sachs and then, in the
thought
stealing
Goldman
sort
Goldman
role, that the
who had been charged with any
employee who had taken something from
Sachs employee
of crime was the
Goldman
Sachs’s
strange, after the financial crisis,
it
which Goldman had played such an important
only
had
was arrested by the FBI and charged by
government with
I’d
who
summer of 2009,
Sachs. I’d thought
it
even stranger that government
prosecutors had argued that the Russian shouldn’t be freed on
bail
because the
Goldman
Sachs computer code, in the
wrong
hands, could be used to “manipulate markets in unfair ways.”
(Goldman’s were the right hands? If Goldman Sachs was able to
manipulate markets, could other banks do
the strangest aspect of the case
be
—
for the
few
who
was how
attempted
—
it,
too?)
difficult
to explain
it
But maybe
appeared to
what the Russian
FLASH BOYS
2
had done.
I
don’t
mean only what he had done wrong:
what he had done. His job. He was usually described
mean
I
“high-
as a
frequency trading programmer,” but that wasn’t an explanation.
That was
term of art
a
even on Wall
Why
frequency trading?
Sachs to do
it
summer of 2009, most
that, in the
had never before heard.
Street,
was the code
when
so important that,
it
people,
What was
that enabled
was discovered
to
been copied by some employee, Goldman Sachs needed
FBL
the
It
code was
this
on
for
Goldman
have
to call
once so incredibly valuable and so
at
dangerous to financial markets,
worked
high-
Goldman
how
did
Russian
a
who had
Sachs for a mere two years get his hands
it?
At some point
I
went looking
My
those questions.
for
someone who might answer
search ended in a
room looking
out
at
the
World Trade Center
site,
were gathered
army of shockingly well-informed people
a small
from every corner
ot
at
One
Wall Street
Liberty Plaza. In this
—
big banks, the major stock
exchanges, and high-frequency trading firms.
left
high-payingjobs to declare war on Wall
among
room
Many
Street,
of them had
which meant,
other things, attacking the very problem that the Russian
computer programmer had been hired by Goldman Sachs
create. In the bargain they’d
I
sought answers
thought to
than
I
I
ask.
to,
along with
These,
it
a lot
experts
of other questions
turned out, were
tar
to
on the questions
more
I
hadn’t
interesting
expected them to be.
didn t
start
it
much
out with
though, like most people,
When
become
I
crashed on October
around the
fortieth floor
interest in the stock
enjoy watching
19, 1987,
of One
I
it
go
market
boom and
happened
to
crash.
be hovering
New York Plaza, the stock market
my then employer, Salomon
trading and sales department of
Brothers. That was interesting. If you ever needed proof that even
WINDOWS ON THE WORLD
3
Wall Street insiders have no idea what’s going to happen next on
Wall
Street, there
it
One moment
was.
all is
well; the next, the
value of the entire U.S. stock market has fallen 22.61 percent, and
no one knows why. During the
some Wall
crash,
to avoid the orders their customers
wanted
simply declined to pick up their phones.
that
It
wasn’t the
time
first
Wall Street people had discredited themselves, but
the authorities responded by changing the rules
for
Street brokers,
to place to sell stocks,
time
this
—making
it
easier
computers to do the jobs done by those imperfect people. The
1987 stock market crash
stronger over the years
—weak
at first,
ended with computers
entirely
motion
set in
—
that has
a process
replacing the people.
Over
the past decade, the financial markets have
changed too
rapidly for our mental picture of them to remain true to
picture
I’ll
bet most people have of the markets
human being might
bottom of some
have taken. In
cable
TV screen,
it,
a ticker
is still
dated; the world
it
depicts
is
The
tape runs across the
and alpha males in color-coded
jackets stand in trading pits, hollering at each other.
is
lite.
a picture a
That picture
dead. Since about 2007, there
have been no thick-necked guys in color-coded jackets standing
in trading
pits;
or, if
they
are, they’re pointless.
some human beings working on the
floor of the
There
are
New York
still
Stock
Exchange and the various Chicago exchanges, but they no longer
preside over any financial market or have a privileged
those markets.
The
U.S. stock market
boxes, in heavily guarded buildings in
What
goes on inside those black boxes
tape that runs across the
only the
tiniest fraction
public reports of
and unreliable
bottom of
now
New Jersey
is
inside
and Chicago.
hard to say
cable
view
trades inside black
TV
—
the ticker
screens captures
of what occurs in the stock markets.
what happens
The
inside the black boxes are fuzzy
— even an expert cannot
say
what exactly happens
FLASH BOYS
4
inside them, or
when
happens, or why.
it
The
no hope of knowing, of course, even the
He
logs onto his
he needs to know.
TD Ameritrade or E*Trade or Schwab account,
symbol of some
enters a ticker
average investor has
little
He may
“Buy”: Then what?
stock,
and
clicks
an icon that says
think he knows what happens after
he presses the key on his computer keyboard, but, trust me, he
does not. If he did, he’d think twice before he pressed
The world
because
it’s
clings to
comforting; because
what has replaced
for
you have no
draw
— of
The
coming
at
a
so.
built
is
Wall
draw
Street;
This book
up from
of
programmed
to
One
to
a
new
is
become,
still
—
financial world,
takes
draw
of
it
an attempt to
bunch of smaller
behave impersonally in
personally; of
a
than they had
Canadian, of all things
many
my breath
and
to
—
stands
smaller pictures into
coherent whole. His willingness to throw open a
American
to
kinds of financial
ticks rather differently
it
of these people
the picture’s center, organizing the
the
a picture
Wall Street with one idea of what makes the
place tick only to find that
supposed.
so hard to
programmer himself would never do
that the
people,
doing
picture
post-crisis
cleverness; of computers,
ways
it’s
and because the few people able
interest in
that picture.
pictures
it;
it.
old mental picture of the stock market
its
window on
show people what
it
has
away.
As does the Goldman high-frequency trading programmer
arrested for stealing
for
Goldman
Goldman’s computer code.
Sachs, Sergey
second floor of One
Aleynikov had
New York
a
When
he worked
desk on the forty-
Plaza, the site of the old
Salomon
Brothers trading floor, two floors above the place I’d once watched
the stock market crash.
He
hadn’t been any
staying in that building than
2009, had
was on
left
1
had been and,
from Chicago
to
Newark,
interested in
in the
summer of
On July 3,
New Jersey,
to seek his fortune elsewhere.
a flight
more
2009, he
blissfully
WINDOWS ON THE WORLD
unaware of
his place in the world.
happen
what was about
to
he had no idea
how
to
landed.
of knowing
Then
again,
high the stakes had become in the financial
magnitude of those
window of his
He had no way
him when he
game he’d been helping Goldman
to see the
5
airplane,
Sachs to play.
stakes,
down on
the
Oddly enough,
he had only to look out the
American landscape below.
CHAPTER ONE
HIDDEN IN PLAIN SIGHT
B
men
y the summer of 2009 the line had a life of its own, and two
thousand men were digging and boring the strange home
it
Two hundred
needed to survive.
and
five
each, plus assorted advisors and inspectors,
early to figure out
how
crews of eight
were
now
rising
through some innocent
to blast a hole
mountain, or tunnel under some riverbed, or dig a trench beside
a
country road that lacked
inch-wide hard black
—
a roadside-
Why? The
the obvious question:
plastic
it
its
burrow
straight path ever
center
ern
peculiar needs and wants.
maybe
into the earth.
It
Above
principal data center
its
to be straight,
on the South Side of Chicago*
New Jersey.
The
dug
just a one-and-a-half-
already had the feeling of a living
creature, a subterranean reptile, with
needed
without ever answering
tube designed to shelter four hundred
hair-thin strands of glass, but
It
all
was
line
was
all,
later
to a stock
apparently,
moved
the most insistently
needed
it
to connect a data
exchange in north-
needed
to
be
to Aurora, Illinois, outside
a secret.
Chicago.
FLASH BOYS
8
The workers were
what they needed
told only
to
know. They
tunneled in small groups apart from each other, with only
local sense ot
going
to
They were
to.
make
where the
specifically not told
Yeah,
just said,
I
of the
it
a
was
purpose
line’s
sure they didn’t reveal that purpose to others. “All the
time, people are asking us,
ment?
was coming from or where
line
not have
known what
enemies:
They
all
’
the govern-
for,
but they
knew
that
it
had
to be alert to potential threats. If they
line, for instance,
of questions about
a lot
Is it
one worker. The workers might
the line was
knew
saw anyone digging near the
one asking
this top secret?
‘Is
said
or noticed any-
they were to report what
it,
they’d seen immediately to the head office. Otherwise they were
to say as
little as
say, “Just
laying fiber.” That usually ended
the conversation, but if it didn’t,
struction crews
them what they were
possible. If people asked
doing, they were to
were
as
it
The con-
didn’t really matter.
bewildered
as
anyone.
They were used
to digging tunnels that connected cities to other cities,
ple to other people. This line didn’t connect
else. Its sole
purpose,
as possible,
even
mountain
if that
meant they had
flirting
rocksaw through
way around
it.
a
Why?
with another depression and
they were just happy for the work. As
knew why.
anyone
as straight
most workers didn’t even ask the
until the end,
The country was
to
and peo-
to
they could see, was to be
rather than take the obvious
Right up
question.
as far as
anyone
make
People began to
Dan
Spivey
said,
“No one
their reasons up.”
Spivey was the closest thing the workers had to an explanation
bed they were digging for it. And Spivey was
by nature tight-lipped, one of those circumspect southerners with
for the line, or the
more thoughts than he cared
to share.
He’d been born and
in Jackson, Mississippi, and,
on those
sounded
He’d just turned
as if he
d never
left.
rare occasions
raised
he spoke, he
forty but
was
still as
HIDDEN
IN PLAIN SIGHT
lean as a teenager, with the face of a
After
some
unsatisfying years
son he’d quit,
he put
as
working
turned out to be renting
more
own
for his
made
how much money
trading futures contracts in Chicago against the
present prices of the individual stocks trading in
New Jersey.
at
it.
To capture
once.
In the old days
floors
—
before, say,
human
2007
—
limits.
if you
for instance
you had
the profits,
of the exchanges, and
“fast”
constraint was
the data center in
in Carteret,
What
both
rapidly.
which
a trader
the speed with
beings worked on the
wanted
to
buy or
sell
anything
The speed with which
how fast an electronic signal could travel
New
Chicago
York
that
—
or,
more
precisely,
between
housed the Chicago Mercantile
a data center beside the
Nasdaq’s stock exchange
New Jersey.
Spivey had realized, by 2008, was that there was
difference
between the trading speed
was
that
these exchanges and the trading speed that
sible.
to be fast to
was changing
on them was no longer constrained by people.
between Chicago and
Exchange and
sell
through them. The exchanges, by 2007, were
to pass
trades occurred
you could
Human
simply stacks of computers in data centers.
The only
York and
the price of the stocks that
What was meant by
could execute had
you had
—when,
more than
the futures contract for
markets
New
Every day there were thousands of moments when
the prices were out of whack
comprised
That
account. Like every
other trader on the Chicago exchanges, he saw
could be
sporting.”
on the Chicago Board Options
a seat
Exchange and making markets
stockbroker in Jack-
as a
“to do something
it,
9
Walker Evans tenant farmer.
Given the speed of light in
sible for a trader
who needed
fiber,
it
to trade in
send his order from Chicago to
New
available
a
big
between
was theoretically pos-
should have been pos-
both places
York and back
12 milliseconds, or roughly a tenth of the time
it
at
once to
in roughly
takes
you
to
FLASH BOYS
10
blink your eyes, if you blink as
is
one thousandth of
ous telecom carriers
slower than
that,
fast as
The
a second.)
you
can. (A millisecond
routes offered by the vari-
—Verizon, AT&T, Level
and inconsistent.
One
day
3,
it
and so on
—were
took them 17 mil-
liseconds to send an order to both data centers; the next,
them
By
16 milliseconds.
across a route controlled
“The Gold Route,”
you happened
by Verizon
between
on
traders
it
it,
because on the occasions
it
you were the
first
prices in
Chicago and
prices in
to exploit
York. Incredibly to Spivey, the telecom carriers were not
to understand the
fail
to see that
it
new demand
could
sell its
for speed.
“You would have
you got
late as
cial
it,”
says Spivey.
Not only
New
set
up
did Verizon
special route to traders for a fortune;
Verizon didn’t even seem aware
value.
took
had stumbled
that took 14.65 milliseconds.
the traders called
to find yourself
the discrepancies
some
accident,
it
“They
owned anything of
up
to order
didn’t
special
several lines
and hope that
know what
they had.” As
2008, major telecom carriers were unaware that the finan-
markets had changed,
radically, the value
of a millisecond.
Upon closer investigation, Spivey saw why. He went to Washington, DC, and got his hands on the maps of the existing fiber
cable routes
running from Chicago to
New York. They
mostly
followed the railroads and traveled from big city to big
Leaving
New York and
each other, but
when
Chicago, they ran
line
main problem:
highway.
as
a
map of Pennsylvania and saw
The only straight
the Allegheny Mountains.
running through the Alleghenies was the
way, and there was
The
city.
toward
they reached Pennsylvania they began to
wiggle and bend. Spivey studied
the
fairly straight
a
interstate high-
law against laying fiber along the
interstate
other roads and railroads zigzagged across the state
the landscape permitted. Spivey found a
Pennsylvania and drew his
own
more
line across
it.
detailed
“The
map of
straightest
HIDDEN
IN PLAIN SIGHT
path allowed by law,” he liked to
call
it.
11
By
using small paved
roads and dirt roads and bridges and railroads, along with the
occasional private parking lot or front yard or cornfield, he
could cut more than a hundred miles
the telecom carriers.
obsession,
much
What was
to
oft the distance traveled
become
began with an innocent thought:
faster
someone would be
if
they did
by
Spivey’s plan, then his
I’d like to see
how
this.
In late 2008, with the global financial system in turmoil,
Spivey traveled to Pennsylvania and found a construction guy
to drive
him
the length of his idealized route. For
rose together at five in the
“What you
night.
morning and drove
when you do
see
this,” says Spivey, “is
small towns, and very tiny roads with
sheer rock wall
on the
other.”
The
two days they
until seven at
cliffs
on one
side
very
and
a
railroads traveling east to
west tended to tack north and south to avoid the mountains:
They were of limited
use.
“Anything
west that had any kind of curve in
that wasn’t absolutely east-
it I
didn’t like,” Spivey said.
Small country roads were better for his purposes, but so tightly
squeezed into the rough terrain that there was no place to lay the
under the road. “You’d have
fiber but
to close the road to dig
up
the road,” he said.
The
construction guy with
out of his mind. Yet
come up with
a
possible. That’s
“I
was
done
it,”
it.
reason
him
clearly suspected
he
why
the plan wasn’t
what Spivey had been
says. “I
he might be
Spivey pressed him, even he couldn’t
just trying to find the reason
block.” Aside
one
when
at least
after: a
theoretically
reason not to do
no [telecom]
was thinking: Surely
I’ll
see
carrier
from the construction engineer’s opinion
in his right
mind wanted
to cut
had
some roadthat
no
through the hard Allegheny
rock, he couldn’t find one.
That’s
when,
as
he puts
it,
“I
decided to cross the line.”
The
FLASH BOYS
12
line separated
who traded options on Chicago
who worked in the county agencies and
Wall Street guys
exchanges from people
Department of Transportation
controlled public
that
offices
rights-of-way through which a private citizen might dig a secret
tunnel.
He
sought answers to questions:
about laying fiber-optic cable?
The
What might
a
lay fiber.
it
recalls, “It
What kind
was from
whose cousin
a friend
is
ing questions about case
how would you
few months
later
ing in Cleveland.
mer
who
take?
to.’
sizes,
said,
‘I
who
As Williams
have an old
and he has some construc”
Spivey himself then called.
Williams, “and
recalls
and what kind of
Spivey called
“I didn’t
to
call.
fiber
is
ask-
you
use,
dig in this ground and under this river.”
Williams. Spivey told
what he needed
He
of mine.
would supervise the laying of a
cable. In
it
Steve Williams,
unexpected
in trouble,
“This guy gets on the phone,”
A
long would
of equipment was required?
named
construction engineer
tion questions he needs answers
and
How
cost?
lived in Austin, Texas, received an
friend
the rules
yards a day might a crew with the right equipment
tunnel through rock?
Soon
and
to dig holes
How many
What were
permission did you need?
Wall Street people from people
line also separated
knew how
Whose
him
again
—
to ask
know what
I
was getting
him nothing more about
know
him
if
he
fifty-mile stretch of fiber, startinto,” said
the project than
to lay a single fifty-mile stretch
of
between, Spivey had persuaded Jim Barskdale, the for-
CEO
of Netscape Communications and a fellow native of
Jackson, to fund what Spivey estimated to be a $300 million
tunnel.
They named
the
company Spread Networks, though
they disguised the construction behind shell companies with
dull
names
like
Northeastern ITS and Job
David Barksdale, came on board
—
8.
Jim
Barksdale’s son,
to cut, as quietly as possible,
HIDDEN
hundred or
the four
IN PLAIN SIGHT
needed
so deals they
and counties in order
to
13
to cut
with townships
be able to tunnel through them. Wil-
liams then proved so adept at getting the line into the ground
that Spivey
and Barksdale called and asked him to take over the
entire project. “That’s
way
New Jersey,’ ”
to
when
they
Williams
‘Hey, this
said,
is
going
the
all
said.
Leaving Chicago, the crews had raced across Indiana and
On a good day they were able to lay two to three miles of
When they arrived in western Pennsyl-
Ohio.
the line in the ground.
vania they hit the rock and the pace slowed, sometimes to a few
hundred
feet a day.
hard limestone.
“They
And
it’s
call
it
blue rock,” says Williams.
a challenge to get
through.”
“It’s
He found
himself having the same conversation, over and over again, with
Pennsylvania construction crews. “I’d explain to them that
need to go through some mountain, and one
would
but
say, ‘That’s crazy.’
that’s
I’d say,
how
‘It’s
And
we’re doing
it.’
would
I
And
more of a customized
To which they
really didn’t
‘I
we
another they
know
that’s crazy,
they would ask, ‘Why?’
And
route to the owner’s wishes.’
much
have
His other problem was Spivey,
slightest detours.
say,
after
who was
to say except,
all
him about
over
”
“Oh.”
the
For instance, every so often the right-of-way
crossed over from one side of the road to the other, and the line
needed
to cross the road
within
road crossings irritated Spivey
right
and
left turns.
seconds,” he’d
ond.)
say.
“Steve, you’re costing
(A nanosecond
And: “Can you
at least cross
Spivey was a worrier.
risks,
the thing that
boundaries. These constant
its
—Williams
He
is
it
a
hundred nano-
one billionth of one sec-
diagonally ?”
thought that
went wrong was
was making sharp
me
when
a person
took
usually a thing the person
hadn’t thought about, and so he tried to think about the things he
wouldn’t naturally think about.
The Chicago
Mercantile Exchange
FLASH BOYS
14
to New Jersey. The Calumet River might
Some company with deep pockets a big Wall
might dose and move
—
prove impassable.
—might
Street bank, a telecom carrier
doing and do
it
themselves. That
last fear
own
already out there, digging Ins
what he was
discover
—
someone
that
straight tunnel
else
was
— consumed
him. Every construction person he talked to thought he was out
of his
mind, and yet he was sure the Alleghenies were crawl-
ing with people
who
becomes obvious
surely
someone
What
ished,
else
he
doing
that the line
to
What
it
that,
once
would be
the
came
it
to
What
worth
line’s
twenty-five different players
the rest of the market?
to
in the U.S. stock market,
this
a single
to share the
the degree
market value.
How
market to
How much
else?
to
same advantage over
it
helps
can make purely from speed
and how,
exactly, they
make
a
Dutch auction
it
—
until the line
that
it.
“No
many
that
start at
a
monopoly.
any one bank or hedge fund would
billions of dollars they
was worth, and they
is,
was bought by
Wall Street firm, which would then enjoy
fork over the
about
valuable to the
these sorts of questions,
traders
reserve price and lower
They weren’t confident
oly
was compli-
It
it.
market,” says Spivey. “It was opaque.”
They considered holding
some high
—
To answer
know how much money
one knew
do
to a single player in the U.S. stock
have an advantage in speed over everyone
Maybe
much
know was
they did not
fin-
thought
— speed—was only
scarce.
was
of a gold rush.
his backers hadn’t
of scarcity that would maximize the
much was
site
his line
line. Just the reverse:
they were selling
was
something
this.”
mind was
the line until the time
sell
extent that
and
“When
“you immediately think
said,
Wall Street would not want to buy the
He assumed
cated.
is
never crossed his
for that reason, he
how
shared his obsession.
to you,”
didn’t like the
assumed the monop-
sound of the inevitable
HIDDEN
IN PLAIN SIGHT
headlines in the newspapers: Barksdale
ing
Out Ordinary American
consultant
15
Makes
Billions Sell-
They hired an
Investor.
named Larry Tabb, who had caught Jim
attention with a paper he’d written called
industry
Barksdale’s
“The Value of a
Milli-
One way to price access to the line, Tabb thought, was
figure out how much money might be made from it, from the
second.”
to
so-called spread trade
between
New
York and Chicago
—
the
simple arbitrage between cash and futures. Tabb estimated that
if a single
Wall Street bank were to exploit the countless minus-
cule discrepancies in price between
Thing A
He
in
New York,
make
they’d
Thing
profits
further estimated that there were as
A
Chicago and
in
of $20 billion
many
as
a year.
four hundred
firms then vying to capture the $20 billion. All of them
need to be on the
were only places
Both
between the two
fastest line
for
two hundred of them on
cities
would
— and
there
the line.
estimates happily coincided with Spivey’s sense of the
market, and he took to saying, with obvious pleasure,
“We
two hundred
But what
shovels for four
to charge for each shovel? “It
air,” says
was
ditch diggers.”
really a total
Brennan Carley, who had worked
high-speed traders, and
network
hundred
who had been
to them. “All of us
were
they came up with was $300,000
a
price of the existing telecom lines.
market players willing to pay
lease
would
who
leased Spread’s line
their
own
in
wet finger
with
closely
hired by Spivey to
just guessing.”
signal amplifiers,
of
sell his
The number
The
first
two hundred
advance and sign
also
stock
a five-year
The
traders
need to buy and maintain
housed in thirteen amp
sites
Spread’s route. All-in, the up-front cost to each of the
dred traders would come to about $14 million, or
of $2.8 billion.
in the
a lot
month, roughly ten times the
get a deal: $10.6 million for five years.
would
have
a
along
two hun-
grand
total
FLASH BOYS
16
By
2010 Spread Networks
early
hadn’t informed a single
still
A
prospective customer of their existence.
had
ers
To maximize
someone
that
would seek
else
March 2010,
to replicate
three
sell
it.
and powerful
men whose
“The
modus operandi was
these firms
‘You
to
says
line
How to
businesses they
one of us knew,”
come over and
until
it is
NDA
sign an
That’s
how
we
was due
were about
to find
Brennan
to be
approach the rich
to disrupt?
someone
Carley.
at
one of
“We’d
say,
The
“People told
first
me
he carried with
says Spivey.
him
demanded
—
you
we come
in stealth.
to
”
in.’
“There were
they
in the financial
them was
total disbelief.
they thought, Surely not, but
let’s
says Spivey. Anticipating their skepticism,
a
map, four
feet
by eight
his cross-country tunnel.
proof.
line buried three feet
can’t tell
The men with whom
reaction of most of
later that
walked them through
still
We
most highly paid people
the
him anyway,”
talk to
you about.
And, by the way, we want you
they went to Wall Street
CEOs at every meeting,”
markets.
talk to
get there.
[non-disclosure agreement] before
met were among
ple
they decided to wait
know me. You know ofjim Barksdale. We have something
we want
what
a secret.
what they had done,
so,
months before the
completed, before they tried to
general
still
the line’s shock value and minimize the chance
or even announce their intention to do
until
year after the work-
started digging, the line was, incredibly,
You
feet.
He
finger-
Even then peo-
couldn’t actually see a fiber-optic
under the ground, but the amp
sites
were
highly visible thousand-square-foot concrete bunkers. Light
fades as
it
travels; the fainter
it
becomes, the
less
capable
it
is
of transmitting data. The signals transmitted from Chicago to
New Jersey
miles,
these
and
needed to be amplified every
for the amplifiers that did the
fifty to seventy-five
work, Spread had built
maximum-security bunkers along the
route. “I
know you
HIDDEN
IN PLAIN SIGHT
17
guys are straight shooters,” one trader said to them. “But
heard of you before.
I
want
tograph of the most recent
him
that
it
Once
What
amp
was actually being
their disbelief faded,
Of course
just in awe.
glass fibers,
they
my $14
do I get for
one
site
the line
one.)
When
is
sat
and ticked
of a long conference
“SHIT, THIS
IS
as
what
can you supply us with the five
move
to a
we
at
new
him
we do
require before
for fifteen
as
a trader
who
minutes on the other
didn’t get said
was often
as interest-
were changing
fully understand.
Their
in
new
ways
ability
computer, rather than human, speed had given
class
of Wall Street traders, engaged in
trading. People
new
how
rise
kinds of
and firms no one had ever heard of were get-
ting very rich very quickly without having to explain
were or
busi-
they asked
then leapt to his feet and shouted,
financial markets
even professionals did not
to
up
their boxes, they failed to disguise
table,
what
The
did.
it
the backup if your line goes
COOL!”
In these meetings
ing
if the line’s cut
will have
any firm? (Um, in five years.) But even
stone-faced listening to
side
who
wonder. Spivey’s favorite meeting was with
their
show
and expenses? (Two
What happens
years of audited financial statements that
their questions
pho-
to
asked the usual questions.
all still
and running in eight hours.) Where
ness with
a
built.
million in assorted fees
isn’t
man
under construction
for each direction.)
doum? (Sorry, there
this
most of the Wall Street guys were
(We have people on
by a backhoe ?
Every
to see a picture of this place.”
day for the next three months, Spivey emailed
never
I
they were
making
their
who
they
money: These people were
Spread Networks’ target audience. Spivey actually didn’t care
to pry into their
to
come
this,”
he
warring trading
across as if we
said.
He
knew how
strategies.
“We
never wanted
they were making
didn’t ask, they didn’t say.
money on
But the response of
FLASH BOYS
18
many
ot
them suggested
depended on being
commercial existence
that their entire
than the
faster
of the stock market
rest
and that whatever they were doing wasn’t
put
it,
“would
microsecond
felt
grandmothers
one millionth of
was so important
they
their
sell
is
them was not
to
threatened by this faster
clear;
new
We
this line.
ing.
we
strategies
And
“I’ll tell
from
my
you
live in a
when
month.
written to the SEC.
my
For $300,000
my
a
.
.
office.’
my
they came to
And
.Who
month
thing
know who
from reading
us
us.
couldn’t
I
they were going
the cli-
a letter
plus a
we’d
few million more in up-front
making perhaps more
made on Wall
Street
would enjoy
what they were already doing. “At
kind of pissed
off,” says Carley.
meeting, David Barksdale turned to Spivey and
people hate
of my
takes those kinds of business risks?”
people have ever
that point they’d get
The
office
they didn’t even
the right to continue doing
Oddly enough, Spivey loved
After one
said,
Those
these hostile encoun-
was good
to
have twelve guys on the other side of the
and they are
all
mad
ters. “It
table,
to continue
have to be on
office to talk to all
expenses, the people on Wall Street then
sales
we
reaction to them,” says Darren Mulholland,
They only discovered
money than
we want
high-speed trading firm called Hudson River
Trading. “It was, ‘Get out of
go
that
have no choice but to pay whatever you’re ask-
believe was that
ents were!
speed
was
”
a principal at a
to
why
clear
“Somebody would
are currently running,
you’re going to go
competitors.’
microsecond.” (A
Exactly
what was
line.
the age-
as
Brennan Carley
as
for a
a second.)
“
say, ‘Wait a second,’ ” recalls Carley.
‘If
with the
simple
as
Some of them,
old cash to futures arbitrage.
us only four guys
at
would buy
River Trading bought the
you,” he
it,
line.)
said.
and they
“A dozen people
all
bought
Brennan Carley
it.”
said,
told
(Hudson
“We
used
HIDDEN
‘We
to say,
Dan
can’t take
IN PLAIN SIGHT
19
to this meeting, because even if they
have no choice, people do not want to do business with people
they’re angry with.’
When
”
Networks moved from the
the salesmen from Spread
smaller, lesser-known
Wall Street firms
ing. Citigroup, weirdly, insisted that
the building next to the
view
to the big banks, the
world became even more intrigu-
inside the post-crisis financial
Nasdaq
Spread reroute the line from
in Carteret to their offices in
lower Manhattan, the twists and turns of which added several
milliseconds and defeated the
banks
all
them
the contract Spread required
anyone
hibited
it.
its
Any
purpose.
The
other
who
leased the line
to sign. This contract pro-
from allowing others
to use
big bank that leased a place on the line could use
own
with
line’s entire
grasped the point of the line but were given pause by
it
for
proprietary trading but was forbidden from sharing
brokerage customers. To Spread
its
The
restriction:
had access
to
it.
this
was more valuable the fewer people
line
The whole
it
seemed an obvious
that
point of the line was to create inside
the public markets a private space, accessible only to those will-
ing to pay the tens of millions of dollars in entry
Suisse
was outraged,”
says a
Spread employee
with the big Wall Street banks. “They
people to screw their customers.’ ”
that this
was not true
—
that
it
negotiated
said, ‘You’re
The employee
“Credit
fees.
who
enabling
tried to argue
was more complicated than
on the other hand, came back
Stanley,
need you
to
change the language.
the restrictions?’
optics.’
ity.”
it
We
And
they
say,
to Spread
it
so they
had
its
said,
customers;
it
We
about
plausible deniabil-
Stanley wanted to be able to trade for
could not trade for
and
‘But you’re okay with
say, ‘Absolutely, this is totally
had to wordsmith
Morgan
“We
that
Morgan
but in the end Credit Suisse refused to sign the contract.
just didn’t
itself in a
want
to
way
seem
as
FLASH BOYS
20
wanted
if it
was the
it,”
to.
Of all
the big Wall Street banks,
Goldman
“Goldman had no problem
easiest to deal with.
Sachs
signing
the Spread employee said.
was
It
at just this
—
—
moment
were leaping onto the
line
There’d been challenges
Chicago they had
tried
as the biggest
all
and
to give
way around when they stumbled upon
New Jersey. The
knew
it
didn’t
want
little
it
was supposed
in the
to
century-old
a
The
feet
up and find
amp
first
site
to be near a mall in Alpha,
guy who owned the land
was going
120
failed six times to tunnel
tunnel that hadn’t been used in forty years.
after leaving Carteret
tracks.
its
along the route. After leaving
under the Calumet River. They were about
a slower
Wall Street banks
that the line stopped in
be some kind of
said no.
“He
terrorist target
said
he
and he
neighborhood,” said Spivey. “There’s always
gotchas out there that you have to be careful of.”
Pennsylvania had proved even more
imagined.
Coming from
difficult
than Spivey had
the east, the line ran to a small forest in
Sunbury, just off the east bank of the Susquehanna River, where
it
stopped and waited for
its
western twin. The line coming from
the west needed to cross the Susquehanna. That stretch of river
was breathtakingly wide. There was one
would
cost
under the
a
drill
river.
is
it?”
At the
drill in the
last
is
world
— capable of boring
to rent
In June 2010, the drill was in Brazil.
in Brazil ,” says
Obviously someone
ing.
use
that
them $2 million
Spivey.
“That idea
using the
drill.
is
When
—
it
a tunnel
“We
need
quite alarm-
do we get
to
minute they overcame some objections from
Pennsylvania bridge authorities and were permitted to cross the
river
on the bridge
—by boring
holes through
its
concrete pylons
and running the cable on the underside of the bridge.
At which point the technical problems gave way
problems. Leaving the bridge, the road
split;
to social
one branch went
HIDDEN
IN PLAIN SIGHT
21
north; the other, south. If you attempted to travel due east,
dead end. The readjust stopped, near
hit a
that said,
Welcome
two big parking
to Sunbury.
lots.
One
Blocking the
belonged to
tured wire rope, the cable used on ski
by
a
its
twin
century-old grocery store
in the
Sunbury
one of these parking
forest,
a
line’s
company
lifts;
path were
that
manufac-
the other was
owned
named Weis Markets. To
reach
the line needed to pass through
or travel around the entire
lots
you
a sign beside a levee
city.
The
owners of both Weis Markets and the Wirerope Works were
hostile or suspicious, or both; they weren’t returning calls.
whole
state has
liams explained.
“The
been abused by coal companies,” Steve Wil-
“When you
say
you want
to dig, everyone gets
suspicious.”
Going around
lated,
would
rather than through the town, Spivey calcu-
months and
cost several
add four microseconds to
his route.
Networks from delivering the
a lot
It
cable
of money and would
would
also prevent
on time
to the
Spread
Wall Street
banks and traders ready to write checks for $10.6 million for
But the guy
so
who
it.
ran the wire rope factory was for some reason
angry with Spread’s local contractor that he wouldn’t speak
to them.
The guy who
ran the Weis Markets was even harder
to reach. His secretary told Spread that he
was
ment, and unavailable. He’d already decided
ing Spread Networks
low
—
to reject the
six figures plus free
somewhat
him
in
ing
The
line passed too close to his ice
exchange
The chairman had no
ment
that
In July
for a ten-foot
line
it
strange offer of
easement under his park-
cream-making
interest in signing over a
would make
2010 the
golf tourna-
high-speed Internet access they had
offered
lot.
at a
—without inform-
difficult to
expand the
plant.
permanent easeice
cream
plant.
dropped back underground beneath the
bridge in Sunbury and just stopped.
“We
had
all this
fiber out
FLASH BOYS
22
there and
we needed
Then,
said Spivey.
some reason he never
They
the wire rope people softened.
The day
needed.
after
sent out
Chicago
set a
to
its first
Newjersey has been
was 827 miles long.
the industry had
Even
the line
had
at
would be
“It
in
badly
— and
In one of his
used.
had told the
wanted
first
The
it;
They’d
the line
knew
how
for sure
biggest question about the line
explored. All
who wanted
ways
to find
meetings with
firm’s boss the price
a
of his
line:
ments.
The
a single question:
it
knew
creators
wanted
it
very
have
it.
big Wall Street firm, Spivey
he paid up front, $20 million or so
boss said he’d like to go
its
for others not to
costs if
returned with
time from
said Spivey.
creators
line’s
Wall Street people
also
travel
cut to 13 milliseconds.”
some time,”
—remained imperfectly
that the
parking
factory’s
“Round-trip
was the biggest what-the-fuck moment
Why ?
was
couldn’t,”
the easement he
under 840 miles and beaten
none of the
then,
him
under the wire rope
press release:
goal of coming in
sold
it
fully understood,
Spread Networks acquired lifetime rights
to a ten-foot-wide path
lot, it
and
to talk to each other
it
for
if
$10.6 million plus
he paid in
install-
away and think about
“Can you double
it.
He
the price?”
CHAPTER TWO
BRAD’S PROBLEM
p
U
the
till
moment of
no responsibility
Royal Bank of Canada,
biggest
Wall
the collapse of the U.S. financial
system, Brad Katsuyama could
bank
Street.
known
for
for a start.
in the world, but
was
It
having
stable
and
bank was
it
He worked
RBC
was on no one’s mental map of
them
the rare occasions
Brad’s bosses
at all.
New York back in 2002, when
part of a “big push” to
become
for the
might be the ninth
relatively virtuous,
and soon
I
who moved
got there,
it
Brad himselt
was
to
American
‘Holy
its
their
financiers thought
had sent him from Toronto
to
he was twenty-four years old,
a player
on Wall
Street.
RBC from Morgan Stanley put
like,
said,
But
what an afterthought
The
truth about the big push was that hardly anyone noticed
trader
be
to
make bad subprime
to ignorant investors.
didn’t understand just
— on
about them
himself that he bore
resisted the temptation to
loans to Americans or peddle
management
tell
for that system.
shit,
welcome
“7’he people in
it,
it.
as
sad
As
to the small time!’
Canada
a
“When
”
are always saying,
FLASH BOYS
24
‘We’re paying too
much
they don’t realize
is
much
It
that
is
was
as if
for people in the
no one wants
United
you have
that the reason
RBC
work for RBC.
to
summoned
the Canadians had
for a role in the school play, then turned
What
States.’
them too
to pay
a
is
nobody.”
the nerve to audition
up
for
it
wearing
a
car-
rot costume.
him
Before they sent
had never
there to be part of the big push, Brad
on Wall
laid eyes
Street or
New York
City.
It
was
his
immersive course in the American way of life, and he was
first
instantly struck
sion.
people in
their
by
how
different
it
was from the Canadian ver-
“Everything was to excess,” he
a
year than
I
had
in
means, and the way they did
That’s
what shocked
Canada. Debt was
me
it
offensive
People lived beyond
was by going into
Debt was
the most.
evil. I’d
met more
said. “I
my entire life.
a foreign
never been in debt in
my
debt.
concept in
life,
ever.
I
got here and a real estate broker said, ‘Based on what you make,
you can
afford a $2.5 million apartment.’
was
I
like,
What
the
fuck are you talking about?” In America, even the homeless were
profligate.
Back in Toronto,
after a big
bank dinner, Brad would
gather the leftovers into covered tin trays and carry
them out
to a
homeless guy he saw every day on his way to work. The guy was
always appreciative.
When
the
bank moved him
he saw more homeless people in
in a year.
When
me
it
down
like,
doing
it
York,
home
king’s
to the people
‘What the fuck
because
New
no one was watching, he’d pack up the
banquet of untouched leftovers
walk
to
day than he saw back
I
is
after the
on the
this
Brad
New York
streets.
guy doing?’
didn’t feel like
In the United States,
a
”
he
anyone gave
also noticed,
lunches and
“They just looked
said. “I
at
stopped
a shit.”
he was expected to
accept distinctions between himself and others that he’d simply
ignored in Canada. Growing up, he’d been one of the very few
BRAD’S PROBLEM
Asian kids in
his
a
25
white suburb of Toronto. During World
War
II,
Japanese Canadian grandparents had been interned in prison
camps
in western Canada.
Brad never mentioned
this or
any-
thing else having to do with race to his friends, and they ended
up thinking of him almost
identity.
only after he arrived in
issue
to
a
as a
person
do more
to
promote
New York.
diversity,
RBC
bunch of other nonwhite people
Going around
issue.
feel like a
minority
Then he
left.
“To be
said,
is
needed
it
this exact
a
minority
at
honest, the only
moment.
If
you
you shouldn’t make people
to encourage diversity
minority.”
that
meeting to discuss the
to a
turn came he
I’ve ever felt like a
want
Worried
invited Brad along with
the table, people took turns responding to
RBC.” When Brad’s
really
did not have a racial
about your experience of being
a request to “talk
time
who
His genuine lack of interest in the subject became an
The group continued
to
meet
without him.
The
episode said
as
much
home. Ever since he was
scious thought, he
had
him from any group
was seven
student,
He
his
mother
about
him
as
it
more by
a little kid,
did about his
new
instinct than
con-
resisted the forces that sought to separate
to
which he
told
he belonged.
felt
him he’d been
and she offered him the chance to attend
told her he
wanted
to stay
with
When
he
identified as a gifted
his friends
special school.
and attend the
normal school. In high school the track coach thought he could
be a
star (he
ran a 4.5-second forty-yard dash), until he told the
coach that he’d rather play
and
football.
Upon
a
—he stuck with hockey
team sport
leaving high school
at
the top of his class, he
could have gone on scholarship to any university in the world:
He was
not only the best student but a college-caliber tailback
and
a talented pianist. Instead
and
his football
teammates
he chose to follow his girlfriend
to Wilfrid Laurier University,
an
FLASH BOYS
26
hour or so from Toronto. After he graduated from Laurier, tak-
wound
ing the prize for best student in the business program, he
up trading stocks
had any particular
no idea what
forced
to,
Bank of Canada
the Royal
at
interest in the stock
do
else to
up, or that he
might end up
ferent place than the friends he’d
that
it
RBC trading floor,
would reward
him of
till
the
moment he was
he hadn’t really thought about what he wanted to be
when he grew
about the
market but because he had
Up
for a living.
—not because he
a locker
in
grown up
aside
from the
his analytical abilities,
room. Another group,
to
some
with.
radically dif-
What
feeling
was
that
it
it
he liked
him
gave
reminded
which he naturally
belonged.
The
RBC
trading floor
the holes once filled
the firm was
it
was
safe for
forgot about
conducting
still
its
One
at
Liberty Plaza looked out on
by the Twin Towers.
what had happened
his first
and energy
to create
Brad
arrived,
determine
employees to breathe. In time they just
few years on Wall
He had some
stocks.
what he
sort
if
of
in this place; the hole in the
ground became the view you looked
For
When
air quality studies to
at
without ever seeing
Street,
it.
Brad traded U.S. tech
fairly abstruse ideas
called “perfect markets,”
about
how
and they worked so
well that he was promoted to run the equity trading depart-
ment, consisting of twenty or so
had what the
someone came
a typical
traders.
The
staff liked to refer to as a
RBC trading floor
“no-asshole rule”; if
in the door looking for a job and sounding like
Wall Street
how much money
asshole, they
he
said
wouldn’t hire him, no matter
he could
make
the firm. There
even an expression used to describe the culture:
“RBC
was
nice.”
Although Brad found the expression embarrassingly Canadian,
he, too,
was
RBC
nice.
The
best
way
to
manage
people, he
thought, was to convince them that you were good for their
BRAD’S PROBLEM
careers.
He
believe that
good
you were good
They just seemed
was
a
effect
on
his first
a
trader
to get people to
was actually
for their careers
for a living,
on Wall
his habits, tastes,
Street without
who Brad Katsuyama
it. He assumed he
its
having the
worldview, or character.
by being himself he became, on Wall
at
be
he didn’t see
few years on Wall Street he appeared to be
“His identity
to
to him:
obvious.
contradiction between
was and what he did
could be
way
These thoughts came naturally
for their careers.
If there
27
further believed that the only
RBC
in
New
slightest
And
during
correct. Just
Street, a great success.
York was very simple,”
says a
former colleague. “Brad was the golden child. People thought
he was going to end up running the bank.” For more or
entire
life,
less his
Brad Katsuyama had trusted the system; and the
tem, in return, trusted Brad Katsuyama. That
left
him
sys-
especially
unprepared for what the system was to do to him.
TROUBLES BEGAN
HIS
the end of 2006, after
at
RBC
paid $100
million for a U.S. electronic stock market trading firm called
Carlin Financial. In what appeared to Brad to be undue haste,
his bosses
back in Canada bought Carlin without knowing
about either
it
typical
Canadian fashion, they had been slow
change
in the financial markets; but
act,
they’d panicked.
from Canada,”
much
or electronic trading. In what he thought to be
a
once they
“The bank’s run by
former
RBC
to react to a big
felt
these
director put
it.
compelled to
Canadian guys
“They
don’t have
the slightest idea of the ins and outs of Wall Street.”
In buying Carlin they received a crash course. In a stroke Brad
found himself working
traders
who
side
by
side
could not have been
with
less
a
group of American
suited to
RBC’s
culture.
FLASH BOYS
28
The
day
first
merger, Brad got a
after the
female employee,
who
whispered, “There
call
is
a
from
guy
worried
a
in here with
suspenders walking around with a baseball bat in his hands, tak-
ing swings.” That turned out to be Carlin’s founder and
CEO,
Jeremy Frommer, who, whatever
RBC
One of Frommer
nice.
baseball bat
he was, was not
else
signature poses was feet up
’s
swinging wildly over
his
on
his desk,
head while some poor
shoeshine guy tried to polish his shoes. Another was to find
perch on the trading floor and muse in loud tones about
might get
Returning
fired next.
versity of Albany, to tell a
to his
a
who
alma mater, the Uni-
group of business students the secret
of his success, Frommer actually
said, “It’s
not just enough that
I’m flying in
know my
friends are flying in
first class.
I
have to
coach.” “Jeremy was emotional, erratic, and loud
— everything
the Canadians were not,” says one former senior
RBC
“To me, Toronto
tive.
later.
“The people
is
there are not the
same culture
take a very cerebral approach to Wall Street.
It
execu-
Frommer
like a foreign country,” said
as us.
was
They
just such a
It was a hard adjustment for me. If you were
a
you couldn’t swing your dick around the way you could
different world.
hitter,
in the old days.”
With each mighty swing Jeremy Frommer scored
on Canadian
sensibilities.
merged, he took
RBC
it
The
first
Christmas
upon himself to organize
Christmas party had always been
stuff at
was
I
like,
didn’t
“It
Marquee,
‘What the fuck
know
looked like
one former
says
is
two firms
the office party.
a staid affair.
rented out Marquee, the Manhattan nightclub.
do
a direct hit
after the
RBC
going on here?’ ”
“RBC
trader.
“I
The
Frommer
doesn’t
“Everyone
walked
in
and
ninety percent of the people there,” says another.
we were
in a Vegas hotel lobby bar.
There were
these girls walking around half-naked, selling cigars.
I
asked,
BRAD’S PROBLEM
‘Who
are
these people?’” Into this old-fashioned Canadian
all
bank, heretofore
gies,
immune from
Frommer imported
women
at
29
a
the usual Wall Street patholo-
bunch of people who were
former
says another
RBC trader delicately.
room
trader.
It
was
bled
whom
in jail for financial crimes.” “Carlin
imagined
bucket shop was
a
“The
RBC,”
at
the feeling
also
came
of day traders, some of whom had rap sheets
full
with various financial police, others of
wind up
“You got
With Carlin
they were hired because they were hot.”
a boiler
not.
women
Carlin had a different look than the
like,” says
were about
was what
to
always
I
another former
RBC
attire,” said another.
“There was
a lot
as if a tribe
of 1980s Wall Street alpha males had stum-
upon
of the gold chains
time machine and,
a
prank, identified the most
as a
mild-mannered, well-behaved province
ported themselves into
it.
The
RBC
in
Canada and
guys were
at their
tele-
desks at
6:30; the Carlin guys rolled in at 8:30 or so, looking distinctly
unwell.
The
RBC guys were understated and polite;
the Carlin
guys were brash and loud. “They lied or exaggerated a
with accounts,” says
their relationships
“They were
and we’re
like,
tight.’
‘Yeah,
And
I
a current
lot
about
RBC salesman.
cover [hedge fund giant John] Paulson
you’d
call
Paulson up and they’d barely
heard of the guy.”
For reasons Brad did not fully grasp,
move with
offices
his entire U.S. stock trading
near the World Trade Center
Midtown. This bothered him
sion that people in
was the
* In the
site
RBC
insisted that
into Carlin’s building in
a lot. Fie got the distinct
Canada had decided
Goffer,
impres-
that electronic trading
future, even if they didn’t understand
room was, among other people, Zvi
he
department from their
why
or even what
who was later sentenced to ten years
in jail for orchestrating an insider trading ring in his prior job, with the Galleon Group.
FLASH BOYS
30
it
meant. Installed in Carlin’s
lkBC
the
offices,
people were soon
gathered to hear a state-of-the-financial-markets address given
by Frommer.
that
all
hung on
stood in front of a
“He
panel computer monitor
flat
up and
gets
says the
about speed,” says Brad. ‘“Trading
then he
had
to
He
his wall.
says, ‘I’m
this
going to show you
guy next
him with
to
And
him, ‘Enter an order!’
a
the
how
our system
fast
guy
hit Enter.
type the
name
how
fast that was!!!’ ” All the
on
ol a stock
played on the screen, the
way
a letter,
the
guy
It
“Then he
was
this.
’
And was
in real time!’
I
absurd,
As
mer
like,
‘I
Brad thought: The guy who just sold
ing platform either does not
is
it
or,
know
worse, he thinks
happened,
at
it
name was
‘Do
it
we
behave oddly. Before
life,
RBC
my
‘Oh
us our
God,
new
electronic trad-
moment Jeremy From-
the U.S. stock market began to
acquired this supposedly state-of-
technology, he trusted his trading screens.
meant
that he could
He had
buy 10,000
showed 10,000
pushed the button, the
When
his trading
$22
shares of Intel for
By
a share,
$22
it
a share.
the spring of 2007,
shares of Intel offered at
offers vanished. In his
Now,
some of Carlin’s
shares of Intel offered at
only to push a button.
his screens
it’s
don’t know.
suddenly, they didn’t. Until he was forced to use
showed 10,000
And
wasn’t
don’t fucking believe
the-art electronic trading firm, his computers worked.
screens
again!’
that his display of technical virtuosity
almost exactly the
fully entered Brad’s
The market
like,
dis-
has been typed,
goes,
five in the afternoon.
open; nothing was happening. But he was
happening
the order
And Frommer
Enter button on the keyboard again.
hits the
everyone nods.
once
And
He
said
guy had done was
keyboard, and the
a
appears on a computer screen.
And
it.
now
And
is.’
He
computer keyboard.
appeared on the screen so everyone could see
goes, ‘See! See
markets are
about speed.’
is all
when
$22 and he
seven years
as a
BRAD'S PROBLEM
trader he
and
had always been able to look
was an
screens
Now
stock market.
see the
31
the screens
at
the market as
investors
who wanted
stock and the public markets,
Some
IBM;
might want
investor
the markets
to
desk
his
buy and
his
was
for
to
sit
big amounts of
sell
a 3-million-share
sell
would only show demand
and then work
as a trader
where the volumes were
to
Brad would buy the entire block,
instantly,
on
appeared on
illusion.
This was a big problem. Brad’s main role
between
it
smaller.
block of
million shares;
1
off a million shares of
sell
few hours
artfully over the next
it
to
know what
the
markets actually were, he couldn’t price the larger block.
He
unload the other 2 million shares.
he didn’t
If
had been supplying liquidity to the market; now, whatever was
happening on
Unable
to
his screens
judge market
By June 2007
electronics
intention to
$4
a share.
A
he was
the problem had
company
its
was reducing
risks,
buy
was
grown too
was 3.70—3.75, which
Solectron for $3.70 a share or buy
that, at those prices,
offered.
The
announced
big investor
only
a
wanted
it
is
than
to
sell
—
the
public stock markets
York Stock Exchange (NYSE) and Nasdaq
it
An
big to ignore.
a smaller rival, Solectron, for a bit less
The
it.
to take them.
big investor called Brad and said he
current market. Say
sell
happy
in Singapore called Flextronics
5 million shares of Solectron.
New
do
his willingness to
less
— showed
to say
for $3.75.
the
you could
The problem
million shares were bid for and
who wished
to sell 5 million shares of
Solectron called Brad because he wanted Brad to take the risk
on the other 4 million
$3.65, slightly
when he turned
ing screens
—
shares.
And
Brad bought the shares
so
below the price quoted
to the public markets
in the public markets.
—
the share price instantly
market had read
his
at
But
on
his trad-
moved. Almost
as if the
the markets
mind. Instead of selling
a
million shares
at
FLASH BOYS
32
$3.70, as he’d
assumed he could do, he sold
sand and trigged
as if
a
someone knew what he was trying
to his desire to sell before he
he was done selling
he had
had
to
It
fully expressed
By
it.
the time
below
$3.70,
lost a small fortune.
He
understood
how
he might
the price of an infrequently traded stock simply by sat-
isfying the
demand
for the highest bidder.
But
Solectron, the stock of a
company about
known
company was trading
price by another
should be plenty of supply and
range;
it
just shouldn’t
demand
narrow price
buyers in the mar-
sought to
he did
they don’t understand
computer
isn’t
working the way
it’s
of
There
heavily.
in a very
move very much. The
moment he
what most people do when
in the case
to be taken over at a
ket shouldn’t vanish the
their
was
do and was reacting
5 million shares, at prices far
all
This made no sense to him.
move
few hundred thou-
a
minicollapse in the price of Solectron.
At
sell.
supposed
to:
that point
He
why
called
tech support. “If your keyboard didn’t work, these were the guys
who would come up and
where, their
first
replace
it.”
Like tech support every-
assumption was that Brad didn’t
know what
he was doing. “‘User error’ was the thing they’d throw
They just thought of us
explained to them that
key on his keyboard:
Once
it
was
It
traders as a
all
“They
clear that the
started to send
who had bought and installed
to
screw that up.
problem was more complicated
me
on
his screens used to
mainly blank
stares.
be a
bumped
He
at least sort
explained that the market
fair representation
now it was
It wound up
to a higher
product people, the people
the systems, and they
of sounded like technologists.”
stock market but that
you.
he was doing was hitting the Enter
was hard
than user error, the troubleshooting was
level.
at
bunch of dumb jocks.” He
of the actual
not. In return he received
being
me
talking to some-
BRAD’S PROBLEM
one and them looking,
like,
come
to
RBC
befuddled.” Finally he complained
him
so loudly that they sent
33
the developers, the guys
in the Carlin acquisition.
“We would
who had
how
hear
they had this roomful of Indians and Chinese guys. Rarely
would you
them on
see
the trading floor.
They were
called “the
Golden Goose.” The bank did not want the Golden Goose
when
tracted, and,
on
from some
leave
Brad
told
me
were in
his
was because
it
New Jersey
said that
critical mission.
and not
that he,
was
it
dis-
the geese arrived, they had the air of people
was
I
and
They, too, explained to
machine, was the problem. “They
my
in
New
York and the markets
market data was slow. Then they
caused by the fact that there are thousands
all
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.’
If that
was the
”
case,
he asked them,
why
did the market in
any given stock dry up only when he was trying to trade in
To make
his point,
him and watch while he
am
am
it?
he asked the developers to stand behind
‘Watch
closely.
I
about to buy one hundred thousand shares of Amgen.
I
traded. “I’d say,
willing to pay forty-eight dollars
rently
a share.
There
are cur-
one hundred thousand shares of Amgen being offered
forty-eight dollars a share
New
thousand on the
— ten thousand on BATS,
York Stock Exchange,
at
thirty-five
thirty thousand
on Nasdaq, and twenty-five thousand on Direct Edge.’ You
could see
all
it
on
the screens.
my
screen and I’d have
out loud to five
“
“
“
‘One
‘Two.
.
.
.
‘Three.
.
.
We’d
all sit
there and stare at the
finger over the Enter button. I’d count
.
.
.
See, nothing’s happened.
.
.
.
.
Offers are
still
there at forty-eight
.
.
.
FLASH BOYS
34
“
‘Four.
“‘Five.’
.
.
would break
stock
Still
.
no movement.
Then Fd
hit the
The
loose.
would pop
Enter button and
said,
To
“You
see,
Fm
pear and never
come
I
—boom! —
all hell
and the
disappear,
guys standing behind him
am
the news.”
had no response. “They were kind of
me
look into
that.’
back.” Fie called
realized they really had
them
to the
the event.
that the developers
‘Ohhh, yeah. Let
like,
all
higher.”
At which point he turned
and
would
offerings
no shot
at
a
Then
they’d disap-
few times, but “when
solving the problem,
I
I
just left
alone.”
Brad suspected
lin that
RBC
that the culprit
had more or
less
was the technology from Car-
bolted onto the side of his trad-
ing machines. “As the market problem got worse,” he said, “I
started to just
assume
technology was.”
A
my
real
problem was with
pattern was established:
how bad
their
The moment he
attempted to react to the market on his screens, the market
moved. And
pening to
all
it
wasn’t just him:
of the
The
exact same thing was hap-
RBC stock market traders who worked for
him. In addition, for reasons he couldn’t fathom, the fees that
RBC was paying to stock exchanges were suddenly skyrocketing.
At the end of 2007 Brad conducted
what had happened on
his trading
books
happened, or what used to happen,
stated
“The
on
his trading screens
difference to us
plus fees, he said.
in
a
study to compare
to
what should have
when
the stock market as
was the market he experienced.
was tens of millions of dollars”
“We were hemorrhaging
Toronto called him in and told him
reduce his rising trading
in losses
money.” His bosses
to figure out
how
to
costs.
Up till then, Brad had taken the stock exchanges for granted.
When he’d arrived in New York, in 2002, 85 percent of all stock
BRAD’S PROBLEM
market trading happened on the
New
35
York Stock Exchange,
and some human being processed every order. The stocks that
didn’t trade
No
daq.
on the
New
stocks traded
York Stock Exchange traded on Nas-
on both exchanges. At
the behest of the
in turn responding to public protests about cronyism, the
SEC,
exchanges themselves, in 2005, went from being
by
members
their
to public corporations
run
utilities
competition was introduced, the exchanges multiplied.
different public exchanges,
2008 there were thirteen
them
on
in
all
northern
New
the
New Jersey.
of these exchanges:
Virtually every stock
You could
still
owned
buy and
York Stock Exchange, but you could
By
now
sell
also
early
most of
traded
IBM on
buy and
on BATS, Direct Edge, Nasdaq, Nasdaq BX, and
sell it
Once
for profit.
so on.
human being needed to stand between investors
and the market was dead. The “exchange” at Nasdaq or at the
New York Stock Exchange, or at their new competitors, such
The
as
idea that a
BATS
and Direct Edge, was
a stack
of computer servers that
contained the program called the “matching engine.” There was
no one
to the
inside the
exchange to
exchange by typing
it
talk to.
into a
the exchange’s matching engine.
the guys
who
You submitted an
computer and sending
At the big Wall
order
into
it
Street banks,
once peddled stocks to big investors had been
reprogrammed. They now sold algorithms, or encoded trading
rules designed
by the banks, that investors used to submit
stock market orders.
The departments
their
that created these trading
algorithms were dubbed “electronic trading.”
That was why the Royal Bank of Canada had panicked and
bought Carlin. There was
Brad
—
to
sit
still a
between buyers and
role for
sellers
Brad and traders
like
of giant blocks of stock
and the market. But the space was shrinking.
At the same time, the exchanges were changing the way they
36
FLASH BOYS
made money.
2002 they charged every Wall
In
Street broker who
submitted a stock market order the same simple fixed commission per share traded.
the markets to
Replacing people with machines enabled
become not just
faster
but
more complicated. The
exchanges rolled out an incredibly complicated system of
fees
and kickbacks. The system was called the “maker-taker model”
and, like a lot of Wall Street creations, was understood
by almost
no one. Even
professional investors’ eyes glazed over
tried to explain
a lot
it
to
them.
It
was the one thing
because
of people just didn’t get
shares in Apple,
it,” he said. Say you wanted to buy
and the market in Apple was 400-400.05. If you
simply went in and bought the shares
at
$400.05, you were said
to be “crossing the spread.”
The
was
If you instead rested
classified as the
buy Apple
to
when Brad
I'd skip,
you
at
at
taker.
trader
who
crossed the spread
your order
to
$400, and someone came along and sold the shares
$400, you were designated a “maker.” In general, the
exchanges charged takers
somewhat
less,
a
few pennies
a share, paid
and pocketed the difference
makers
—
on the dubious
theory that whoever resisted the urge to cross the spread
was
performing some kind of
For instance, the
BATS
service.
But there were exceptions.
exchange, in Weehawken,
New Jersey,
perversely paid takers and charged makers.
In early
thought
like,
all
2008
all
of this came
‘Holy shit, you
bank
s
moment, happened
total disaster,
seize the
to
all
he
said.
trade?’ ”
“I
“I’m
Think-
of RBC’s trading algorithms
for
what they wanted
to be the
BATS
to
do
exchange.
—which,
“It
was
a
When he tried to buy or sell stock and
from the BATS exchange, the market for that
said Brad.
payment
Brad Katsuyama.
flat fee,”
stock market orders to whatever exchange
would pay them the most
at that
news
mean someone will pay us to
ing he was being clever, he had
direct the
as
the exchanges just charged us a
BRAD’S PROBLEM
37
moved away
stock simply vanished, and the price of the stock
from him. Instead of being
wound up hemorrhaging
paid, he
even more money.
It
be
was not obvious
a taker
you
be
to
to
Brad
why some
and charged you to be
and paid you to be
a taker
could explain
it,
exchanges paid you to
maker, while others charged
a
a
No
maker.
either. “It wasn’t like there
‘Hey, you should really be paying attention to
one was paying attention
to this.”
one he asked
was anyone saying,
this.’
Because no
further bewilder the Wall
To
Street brokers
who sent stock market orders to the exchanges, the
amounts
were charged varied from exchange
that
and the exchanges often changed
all
seemed bizarre and unnecessarily complicated
just
raised
of questions.
all sorts
a taker?
I
mean,
who
would anyone do
anything to
did.
worked on the
Canadians. “I
is
retail
end in Toronto
said, ‘I’m
screwing me.’
that’s
more players ?’
now
a
market?
Why
who might know
He
but there wasn’t really
talking to a
he
says,
I
can’t figure out
‘You know, there are more
market now.’
says,
guy who
selling stocks to individual
getting screwed, but
And
players out there in the
mean
it
pay anyone to be
make
willing to pay to
this
— and
that?”
He tried Googling,
Google. One day he was
more than he
who
is
“Why would you
took to asking people around the bank
He
to exchange,
To Brad
their pricing.
And
‘You know,
I
say,
‘What do you
there’s this
ten percent of the U.S. market.’ ”
new
firm
The guy mentioned
the firm’s name, but Brad didn’t fully catch
it.
It
sounded
like
Gekko. (The name was Getco.) “I’d never even heard of Getco.
I
didn’t even
know
the name. I’m like,
ten percent of the market.
that
How
‘WHAT??’ They were
can that be true?
It’s
insane
someone could be ten percent of the U.S. stock market and
I’m running a Wall Street trading desk and I’ve never heard of
38
FLASH BOYS
And why, he wondered, would a guy from retail in
Canada know about them first?
He was now running a stock market trading department
the place.
unable to trade properly in the U.S. stock market.
watch people he cared
to
He was
and upset by
for harassed
1980s Wall Street throwbacks.
And
he
might go wrong, the
and wondered what
sat
financial system
created
went
money had
dled their
life
chaos:
had just got
He
into a freefall.
The jobs and
hit
wasn’t naive.
then, in the
line.
by
forced
bunch of
of 2008,
fall
as
entire U.S.
The way Americans han-
led to market chaos,
were suddenly on the
it I
else
a
and the market chaos
careers of everyone
“Every day
I’d
around him
walk home and
feel as
a car.”
He knew
that there
were good guys and bad
guys, and that sometimes the bad guys win; but he also believed
that usually they did not.
That view was
he began to grasp, along with the
American firms had
seem
loans
fail,
so
sold
on
more
them
his
career,
like
he
good
felt
hit
now
someone
else
credit ratings to
make bad
subprime bonds designed to
and then bet against them, and
win
first
someone
if
could only win
time in his
else lost, or,
if he lost.
He was
a
His body had always tended to register
was
even
When
zero-sum person, but he had somehow wound
the middle of a zero-sum business.
up in
It
challenged.
of the world, what big
some kind of wall. For the
that he could only
likely, that
not by nature
done— rigged
loans, created
to their customers
mind
rest
as if his
stress
before his mind.
refused to accept the possibility of conflict
body was engaged
as his
from one
mind
illness to another.
in that conflict.
Now
he bounced
His sinuses became infected and
required surgery. His blood pressure, chronically high, skyrocketed.
By
His doctors had him seeing
early
2009 he’d decided
a
kidney
to quit
specialist.
Wall
Street.
He’d
just
BRAD’S PROBLEM
39
become engaged. After work every day he’d
—
Ashley Hooper
fiancee,
grown up
in Jacksonville, Florida
They’d whittled the
down
list
Orlando, and San Francisco.
he just wanted out.
to do;
was never
or the stock market
ment was not
him almost $2 million
that
it
him.
for
what he was going
sell
pharmaceuStreet.
money
think about
was growing up. So the attachoddly, he hadn’t
RBC
What he
had never pressured him
to
become
now
was
His heart had been in
really liked the people
who worked
people
a year.
his
to live.
need to be on Wall
money, even though
to
mainly because he
felt a
idea
said. “1 didn’t
I
where
to decide
could just
I
Maybe more
strong.”
wedded
that
all
when
—
He had no
he
a calling,”
with
San Diego, Atlanta, Toronto,
thought
or whatever.” He’d never
ticals
“It
“I
to
down
sit
Ole Miss graduate who’d
a recent
paying
his job,
but
he worked for and the
liked about
RBC
was
be anyone but himself. The
— or the markets, or perhaps both—was now pushing him
bank
be someone
to
Then
2009
else.
the bank,
RBC
on
its
own, changed
parted ways with Jeremy
to help find
someone
to replace
its
mind. In February
Frommer and
him. Even
as
asked Brad
he had one foot
out the door, Brad found himself interviewing candidates from
over Wall Street
all
ple
who
— and he saw
that basically
trading understood
it.
“The problem was
that the electronic
people facing clients were just front men,” he
no
clue
none of the peo-
held themselves out as knowledgeable about electronic
how
said.
“They had
the technology worked.”
He withdrew
his foot
from the doorway and thought about
Every day, the markets were driven
less directly
it.
by human beings
and more directly by machines. The machines were overseen
by people, of course, but few of them knew
worked.
He knew
that
RBC’s machines
how
—not
the machines
the computers
40
FLASH BOYS
themselves, but the instructions to run
but he had assumed
it
them
—were
third-rate,
was because the company’s new electronic
trading unit was bumbling and inept. As he interviewed people
from the major banks on Wall
common
they had more in
he came to realize that
Street,
with
RBC
than he had supposed.
“I’d always
been
of inside
bubble. You’re just watching your screens
Now
I
a
traders.”
one
He had
in
said.
a
good
friend
“And
first
who
as a trader
you’re kind
all
day.
time started to watch other
traded stocks
Greenwich, Connecticut, called
at a
big-time
SAC
Capital.
Capital was famous (and soon to be infamous) for being
step
ahead of the U.S. stock market.
know something
to
he
stepped back and for the
hedge fund
SAC
a trader,”
he figured,
up
train
trade.
it
If
anyone was going
about the market that Brad didn’t know,
would be them. One spring morning he took the
Greenwich and spent the day watching
to
Right away he saw
technology given to
that,
his friend
even though his friend was using
him by Goldman
Sachs and
Morgan
Stan-
and the other big firms, he was experiencing exactly the
same problem as RBC: The market on his screens was no longer
ley
the market. His friend
would
hit a
button to buy or
sell a
stock
and the market would move away from him.
“When I see this
now see that it isn’t
frustration. And I was
—
guy trading and he was getting screwed
me.
just
like,
My
Whoa,
frustration
is
the market’s
I
this is serious.”
Brad’s problem wasn’t just Brad’s problem.
when
they looked
at
—
the U.S. stock market
What
the
people saw
numbers on the
screens of the professional traders, the ticker tape running across
the
I
bottom of the
CNBC screen—was an illusion.
realized the markets are rigged.
And
I
knew
it
“That’s
when
had to do with
the technology. That the answer lay beneath the surface of the
technology.
I
had absolutely no idea where. But
that’s
when
the
BRAD’S PROBLEM
lightbulb
went
going on
is
if
41
way I’m going
off that the only
to find out what’s
go beneath the surface.”
I
THERE WAS NO way he, Brad Katsuyama, was going to go below
the surface of the technology. People always assumed, because
he was an Asian male, that he must be
program
couldn’t (or wouldn’t)
his
a
computer wizard. He
own VCR. What
he had was
who didn’t
actually know what they were talking about and those who did.
The very best example of the latter, he thought, was Rob Park.
Park, a fellow Canadian, was a legend at RBC. In college in
an
the late 1990s he’d
become entranced by what was then
machine
idea: to teach a
and replicating
RBC
own
the
only
it,”
to
behave
me was
thing that interested
at
between computer people
ability to distinguish
Park
briefly,
said.
taking a trader’s thought process
He and Brad had worked
back in 2004, before he
business, but they
had
hit
way Brad thought when he
thoughts into code.
The
ing algorithm. Here’s
buy 100,000
market;
it
saw
result
how
it
it
was RBC’s most popular trad-
worked: Say the trader wanted
would
mere 100
The market was too
shares.
which the
rithm
Rob
built
amount on
offer
amount
offered.
he makes
ible
make
shares
trader should
had
a trigger point:
is,
sense,”
amount of thought
if the
Brad
thin.
GM
buy
It
was greater than the
That
The
were only 100 shares
buy 100,000
at
together
to start his
Rob took an interest in
Rob then turned those
off.
trader seeking to
point
left
traded.
shares in General Motors.
that there
a novel
very smart trader. “The
like a
said of
into them.
offered.
No
smart
tip his desire for a
But what was the
stock?
The
only bought stock
historical average
market was
to
algo scanned the
thick.
“The
algoif the
of the
decisions
Rob. “He puts an incred-
And
since he puts so
much
42
FLASH BOYS
thought into
his decisions, he’s capable
of explaining those deci-
sions to others.”
Rob
After Brad persuaded
fect
RBC,
to return to
he had the per-
person to figure out what had happened to the U.S. stock
market.
And
in Brad,
Rob saw
the perfect person to grasp and
explain to others whatever he discovered. “All Brad needs
translator
Park.
from computer language
“Once he
to
human
has a translator, he completely understands
Brad wasn’t exactly shocked when
ing for someone to run
its
a
it.”
RBC finally gave up look-
mess of an electronic trading opera-
tion
and asked him
else
was shocked when he agreed
if he
is
language,” said
would
take
over and fix
it
to
do
it,
as
it.
Everyone
he had a safe
(a)
and cushy $2-million-a-year job running the human traders
and (b) RBC had nothing to add to electronic trading. The market
was
had only so much space on
cluttered; big investors
desks for trading algorithms sold by brokers; and
Goldman
their
Sachs
and Morgan Stanley and Credit Suisse had long since overrun
that space
and colonized
it.
All that was
left
of RBC’s purchase
of Carlin was the Golden Goose. Thus Brad’s
the
Golden Goose:
How
do
an answer: They planned to
as
it
we
first
question to
make money? They had
open RBC’s first “dark pool.” That,
plan to
turned out, was what the Golden Goose had been up to
all
along, writing the software for the dark pool.
Dark pools were another rogue spawn of the new
financial
marketplace. Private stock exchanges, run by the big brokers,
they were not required to reveal to the public what happened
inside them.
They reported any
so with sufficient delay that
what was happening
it
trade they executed, but they did
was impossible
trade occurred. Their internal rules
the broker
who
ran
a
to
know
in the broader market at the
dark pool
knew
were
a
for sure
exactly
moment
the
mystery, and only
whose buy and
sell
BRAD’S PROBLEM
orders were allowed inside.
43
The amazing idea the big Wall
Street
banks had sold to big investors was that transparency was
enemy.
Corp.
say, Fidelity
If,
—
so the
wanted
their
to sell a million shares of Microsoft
—they were
argument ran
better off putting
them
into a dark pool run by, say, Credit Suisse than going directly to
On the public
the public exchanges.
exchanges, everyone would
notice a big seller had entered the market, and the market price
of Microsoft would plunge. Inside
broker
The
Brad
who
ran
cost of
now
it
a
dark pool, no one but the
had any idea what was happening.
RBC’s
creating and running
would be
learned,
second question for the Golden Goose:
his
its
own
dark pool,
nearly $4 million a year.
Thus
How will we make
more than $4 million from our own dark pool? The Golden
Goose explained
that they’d save all sorts of
they paid to the public exchanges
and
ers
If
RBC
who came to RBC at the
who wanted to buy a
and another who wanted to sell
had some investor
million shares of Microsoft,
a
in fees
of the same stocks
sellers
same time.
money
—by putting together buy-
million shares of Microsoft, they could simply pair them off
in the dark pool rather than pay
Exchange
to
do
it.
much. “The problem,”
of the market.
and
sis,
I
asked
sellers to cross.
No
often
$200,000
will
all its clients’
a year in
sense; in practice, not so
“was
RBC
we were
one had done the
once finished, showed that
and routed
made
said Brad,
how
RBC,
orders into
exchange
fees.
if
I
have buyers
The
analysis.”
it
opened
it first,
“So
was two percent
likely to
analy-
dark pool
a
would
said,
save about
‘Okay,
how
else
”
we make money?’
The answer
that
came back explained why no one had both-
ered to do any analysis on dark pools in the
was
New York Stock
Nasdaq or the
In theory this
a lot
of free
money
to
first
place.
There
be made, the computer programmers
44
FLASH BOYS
RBC
explained, by selling access to the
They
traders.
said there
were
all
dark pool to outside
be in our dark pool,” recalled Brad. “And
pay to be in our dark pool?
Brad
traders.
any
sort
And
tried to think
RBC
would pay
they
said,
So
had
said. “I
I
said,
RBC’s
traders of
“It just felt
of why and the feeling didn’t
weird,”
feel
good.
”
just pissed off a lot of people
and fueled suspicions
Brad Katsuyama was engaged in some
search for corporate profits.
Now
he was in charge of a business
—with nothing
was
a
that
activity other than the
called electronic trading
instead,
why
customers’ stock
‘Okay, none of this sounds like a good idea. Kill the
dark pool.’
That
a feeling
‘High-frequency
of good reasons
for access to
will pay to
‘Who would
said,
I
market orders, but he came up with none.
he
who
these people
to
What
sell.
he had,
fast-growing pile of unanswered questions.
Why,
between the dark pools and the public exchanges, were there
nearly sixty different places, most of
you could buy any
fiddle
with their
listed stock?
own pricing so
them
Why
often
in
New Jersey,
— and why did you
by one exchange to do exactly the same thing
exchange might charge you?
— Getco—trade
°f
market?
Canada
How
for
volume of the stock
How had this guy in the middle of nowhere —in
Why
Getco’s existence before him?
market displayed on Wall Street trading screens an
In
May
more questions
York senator Charles Schumer wrote
— then
done — condemning
SEC
retail
in
was the
illusion?
2009, what appeared to be a scandal involving the
public stock exchanges added
New
get paid
which another
did a firm he’d never heard
10 percent of the entire
—learned of
where
did the public exchanges
a
to Brad’s
letter
issued a press release telling the world
to
list.
the
what he had
the stock exchanges for allowing “sophisti-
cated high-frequency traders to gain access to trading
mforma-
BRAD’S PROBLEM
tion before
it is
exchange will
just a
few
45
sent out widely to other traders. For a fee, the
‘flash’
information about buy and
sell
orders for
fractions of a second before the information
publicly available.” That
the term “flash orders.”
he added another:
was the
To
Why
first
growing
the
is
made
time that Brad had heard
list
of mental questions,
would stock exchanges have allowed
flash trading in the first place?
HE AND ROB
set
out to build
U.S. stock market. “At
worked
No
in
one
or
who
calls.
was looking
in
Finding people
to investigate the
for
at large
who had
guys
banks,” said Brad.
high-frequency trading would
who worked
for the big
banks
Wall Street firms were shedding people. Guys
easier:
wouldn’t have given
up in
1
had worked
who had worked
return his
was
HFT
team of people
a
first
his office
RBC
a
second thought were
begging for work.
“We
seventy-five people,” he said.
problem with
all
“I
now
who
turning
interviewed more than
didn’t hire
any of them.” The
of these people was that even
when
they said
they had worked in electronic trading, they clearly didn’t understand
how
the electronics did the trading.
Instead of waiting for resumes to find him, Brad
for people
ments. In
Bank
software programmer
ager in
went looking
who worked in or near the banks’ technology departthe end his new team consisted of a former Deutsche
named
Bank of America’s electronic
Billy Zhao, a former
trading division
man-
named John
Schwall, and a twenty-two-year-old recent Stanford computer
science graduate
for Princeton,
named Dan
New Jersey,
figure out if any pieces of the
they found
a
Aisen. Fie then set out with
where the Golden Goose
Rob
resided, to
Goose were worth keeping. There
Chinese programmer named Allen Zhang, who,
FLASH BOYS
46
it
turned out, had written the computer code for the
dark pool.
doomed
who was good and who was not from
Rob could,” said Brad. “And it became
“I couldn’t tell
just talking to
them, but
clear that Allen
was the Goose.” Or,
at
any
rate,
the only part
of the Goose that might be turned to gold. Allen, Brad noticed,
had no
conforming
interest in
work on
preferred to
his
norms of corporate
to the
own,
in the
refused to ever take off his baseball cap,
down low
over his eyes, giving
him
driver badly in need of sleep. Allen
What was
which he wore pulled
the appearance of a getaway
was
also incomprehensible:
came tumbling out of him
just possibly English
quickly and indistinctly that his words tended to freeze the
As Brad put
tener in his tracks.
Rob
thing, I’d turn to
Once he had
at
team in
say,
“Whenever Allen
it,
Brad persuaded
so
lis-
said any-
‘What the fuck did he just
place,
Royal Bank of Canada
the
series
a
and
He
life.
middle of the night, and
say?’
conduct what amounted to
to
”
his superiors
a
of science experiments in the U.S. stock markets. For the
next several months he and his team would trade stocks not to
make money
but to
question:
Why was
displayed
on
test theories
—
his trading screens
when he went
to
buy 20,000
an answer,
money
answer
his original
between the stock market
and the actual market? Why,
shares of
ing screens, did the market only
Brad asked
to try to
there a difference
sell
IBM
offered
on
him 2,000? To
his trad-
search for
RBC agreed to let his team lose up to $10,000 a day.
Rob
to
come up with some
theories to spend the
on.
The obvious
place to start
was the public markets
teen stock exchanges scattered in four different
sites
—
the thir-
run by the
New
York Stock Exchange, Nasdaq, BATS, and Direct Edge.
Rob
invited the exchanges to send representatives to
answer
a
few questions.
“We were
RBC
to
asking really basic questions:
BRAD’S PROBLEM
does
47
“
does your matching engine work?’ ” recalls Park.
‘How
it
handle a
lot
of different orders
—but they
about the technology
They
the machines.
kept push-
who knew a
know much.
who actually
really didn’t
They were
finally sent developers.”
programmed
But
price?’
When we
managers, business people
ing, they sent product
little
same
the
at
they sent salespeople and they had no idea.
‘How
the guys
“The question we wanted
answer
to
you push the button
was,
‘What happens between
the time
trade
and the time your order
gets to the exchange?’ ” says Park.
“People think pushing
It’s
button
is
as
simple
pushing
as
a button.
not. All these things have to happen. There’s a ton of stuff'
The
happening.
ing
a
to
at first just
there.
It
Rob’s
dling
all
data
was just
first
we
got from
them about what was happen-
seemed random. But we knew the answer was out
question of how to find
a
it.”
theory was that the exchanges weren’t simply bun-
the orders at a given price but arranging
kind of sequence. You and
buy 1,000
shares of
IBM
at
$30
obtain the right to cancel your order if
“We
started getting the idea that people
“That they were
kets, together,
just
showed 10,000
orders
lumped
phantom
way
lined up in such a
had the
ability to
ple in the front
jump
They
that
ther
we
problem was
is filled.
a
mar-
$400
a
who wanted
bunch of smaller
sell
suspected that the orders were
some people
at
the back of the line
of the line sold their shares.
didn’t even
order
orders.” Say the
out of the queue the
the exchanges and asking
Park. “But
my
one person
of Apple but rather
together.
some
were canceling orders,”
shares of Apple offered at
share. Typically, that didn’t represent
to sell 10,000 shares
in
but you might some-
a share,
how
says Park.
them
might both submit an order to
I
them
if that’s
moment
“We
what they
know what words
the peo-
tried calling
to use.”
did,” said
The
fur-
that the trading reports did not separate out
FLASH BOYS
48
the exchanges: If
you
seemed
offer
be on
to
buy 10,000
tried to
shares of
Apple that
and succeeded in buying only 2,000 of
them, you weren’t informed which exchanges the 8,000 missing
had vanished from.
shares
Allen wrote
new program
a
to a single exchange.
that allowed
Brad was
prove that some, or maybe even
all,
allowing these phantom orders. But no:
to a single exchange,
The market
as
it
Brad to send orders
fairly certain that this
would
of the exchanges were
When
he sent an order
he was able to buy everything on
offer.
appeared on his screens was, once again, the
market. “I thought, Crap, there goes that theory,” said Brad.
“And
It
that’s
our only theory.”
made no
sory
Why
sense:
real if you sent
when you
would the market on the
your order only
sent
to
screens be
one exchange but prove
your order to
all
the exchanges
at
illu-
once?
Lacking an actual theory, Brad’s team began to send orders into
various combinations of exchanges. First
Then
NYSE
and Nasdaq and BATS. Then
Nasdaq, and BATS.
mystery.
And
the
centage of the order that was
What came
back was
a further
the per-
filled decreased; the
they tried to buy stock from, the
“There was one exception,”
exchanges
we
cent of what was offered
said, “I
a great
had no idea
why
less
we
more
“No
matter
how many
always got one hundred per-
on BATS.” Rob Park studied
this
places
stock they actually bought.
said Brad.
sent an order to,
and Nasdaq.
NYSE, Nasdaq BX,
number of exchanges,
so on.
As they increased
NYSE
would
be.
I
just thought,
this
and
BATS
is
exchange!”
One morning, while taking a shower, Rob had another theHe was picturing a bar chart Allen had created. It showed
ory.
the time
it
took orders to travel from Brad’s trading desk in the
World Financial Center
to the various exchanges. (To
wide-
BRAD'S PROBLEM
spread
they’d
relief,
downtown.)
“I
occurred to
me
was
and moved back
he
just visualizing that chart,”
that the bars are different heights.
me
were the same height? That got
work and went
to
49
Carlin’s old offices
left
at
same
the
and
time.’
The increments of time involved were
theory, the shortest travel time,
if
up immediately.
fired
right to Brad’s office
because we’re not arriving
said. “It just
What
said,
‘I
I
they
went
think
it’s
”
absurdly small: In
from Brad’s desk
BATS
to the
exchange in Weehawken, was about 2 milliseconds, and the
from Brad’s desk
slowest,
was around 4 millisec-
to Carteret,
much more than
onds. In practice, the times could vary
depending on network
traffic, static,
and
of equipment between any two points.
to blink
your
eyes;
it
that,
glitches in the pieces
took 100 milliseconds
It
to believe that a fraction of the
was hard
blink of an eye could have such vast market consequences. Allen
wrote
a
program
—
this
one took him
built delays into the orders
faster to get to, so that
they did
as
at
couple of days
a
they arrived
the exchanges that
exactly the
at
were slower
it
all
about
faster.
We
had to go
down.” One morning they
program. Ordinarily,
sat
when you
faster.
down
up
the screens
you got everything you asked
for,
hadn’t taken his Series 7 exam,
to press the Enter button
was
telling us
And we were
it
slowing
the screen to test the
at
when you
lit
of the stock you were
red;
was
button to buy and failed
hit the
to get the stock, the screens
after,
that
same time
to get to. “It
counterintuitive,” says Park. “Because everyone
was
—
Brad sent to exchanges that were
got only
some
up brown; and when
lit
the screens
lit
up green. Allen
which meant he wasn’t allowed
and make
a trade, so
Rob
actually hit
the button. Allen watched the screens light up green, and, as
he
later said, “I
had the thought: This
agree. “As soon as
I
is
pushed the button,
too easy.”
I
Rob
did not
ran to Brad’s desk,”
FLASH BOYS
50
Rob.
recalled
was
a
“
‘It
worked!
pause and then Brad
It
fucking worked.’
I
remember
‘Now what do we
said,
there
”
do?’
That question implied an understanding: Someone out there
was using the
market orders arrived
at differ-
ent times at different exchanges to front-run orders
from one
market
fact that stock
to another.
Knowing
question suggested another:
whatever game
is
other purpose?
It
took Brad roughly
‘We have
paign,’ ” recalls Park. “It
THEY
off this.
He just
NOW HAD an answer
been happening to
first
guy
to
me
to
to
their questions
this out.
a tool
make
—which,
The
as
no way
So what happened to
they could
to investors:
sell
to build delays into the stock
that,
they wanted to
remember being
“and you hear people going,
stock!’ ”
to
for almost three years. There’s
exchange orders. Before they did
you can buy
seconds to answer the
six
2009,” said Brad. “This had
“It’s
have figured
traders. “I
to join
Or for some
go on an educational cam-
one of
program Allen had written
RBC’s own
knowledge
would have been very easy
everyone else?” They also had
the
this
chose not to.”
always, raised another question.
I’m the
what do you do next? That
you use
being played in the stock market?
question. “Brad said,
money
that,
Do
at
my
test
it
on
desk,” said Park,
‘OOOOOOO!’
and ‘Holy
tool enabled the traders to
shit,
do the job
they were meant to do: take risk on behalf of the big investors
who wanted to
trust the
and
his
trade big chunks of stock.
market on
their screens.
team stewed over
his desk
The
this until
They could once again
tool
needed
one day
and hollered, “Dude, you should just
hammer!” Someone was assigned
be an acronym
for,
a
a trader
to figure out
call
it
name. Brad
stood up
at
Thor! The
what Thor might
and they found some words that worked, but
BRAD’S PROBLEM
no one remembered them. The
51
was always
tool
just Thor. “I
knew we were onto something when Thor became
“When
Brad.
The
other
I
heard guys shouting, ‘Thor
way he knew they were on
to
a verb,” said
it!’”
something was from
money
conversations he had with a few of the world’s biggest
The
managers.
Gitlin,
who
ments
for T.
Brad and
first visit
Rowe
The
Price.
just changed,” said Gitlin.
was going
was
a far
more
considered
up.
made was
to
to
Mike
“You could
see that
come
when you were
knew what you were going
against you.”
to
something had
see that
to do,
But what Brad described
detailed picture of the market than Gitlin had ever
— and,
The Wall
move
story they told didn’t
“You could
trading a stock, the market
it
Park
oversaw $700 billion in U.S. stock market invest-
Gitlin as a complete shock.
and
Rob
in that market, all the incentives
Street brokerage firm deciding
were screwed
where
to send
Rowe Price’s buy and sell orders had a great deal of power
over how and where those orders got submitted. The firms were
now paid for sending orders to some exchanges and billed for
T.
sending orders to others. Did the broker
when
meant
was
resist
these incentives
they didn’t align with the interests of the investors he was
No
to represent?
called
“payment
can stockbroker and
one could
say.
all
their customers’ stock
Another wacky incentive
As of 2010, every Ameri-
for order flow.”
the online brokers effectively auctioned
market orders. The online broker
TD
Ameritrade, for example, was paid hundreds of millions of dollars
each year to send their orders to
a
high-frequency trading
firm called Citadel, which executed the orders on their behalf.
Why
was Citadel willing
one could say with
It
ture.
had been hard
But
now
to pay so
much
to see the flow?
No
certainty.
to
there
measure the cost of the
was
a tool for
new market
gauging not just
how
struc-
orders
FLASH BOYS
52
reached their destination but also
how much money
this
new
Wall Street intermediation machine was removing from the
pockets of investors large and small: Thor. Brad explained to
Mike
Gitlin
much more
ability
how
team had placed big
his
cheaply they bought stock
trades to
when
measure
of the machine to front-run them. For instance, they
bought 10 million shares of Citigroup, then trading
$4 per share, and saved $29,000
— or
than
less
a
sounded small
until
in the U.S. stock
applied to that
you realized
so insidious because
pens on such
and figure
it
a
to
billion.
you couldn’t
see
you
out you wouldn’t be able to do
can’t
imagine
a
It
tax rate
a day. “It
tried to line
hapit
up
People are getting
it.
microsecond.”
Thor showed you what happened when
Wall Street firm
a
helped an investor to avoid paying the tax.
indirect but, to Gitlin’s
per-
volume
said Brad. “It
it,”
if
1
Park.
The same
more than $160 million
granular level that even
screwed because they
Rob
that the average daily
market was $225
sum came
roughly
at
tenth of
cent of the total price. “That was the tax,” said
was
how
they removed the
The evidence was
mind, damning. The mere existence
RBC
have
the foremost electronic trading expert in the world was a
little
of Brad Katsuyama was totally shocking. “To have
strange,” said Gitlin.
“You would not think
world’s foremost electronic expert
The
discovery of
closer to a beginning.
would
Thor was not
Brad and
his
a
pure abstraction.
to replace the old
heads.
The same
sion screens
one
It
crisis.
the actual trading.
it
a
still
it
was
mental
The market was
mind no obvious
picture
carried around in their
old ticker tape ran across the
— even though
where the
the end of a story;
called to
that people
is
team were building
picture of the financial markets after the
now
that
reside.”
bottom of televi-
represented only a tiny fraction of
Market experts
still
reported from the floor
BRAD’S PROBLEM
New York
of the
53
Stock Exchange, even though trading no lon-
ger happened there. For a market expert truly to get inside
the
New
tall
black stack of computer servers locked inside a cage locked
York Stock Exchange, he’d need
inside a fortress
guarded by
to climb inside a
army of heavily armed men
a small
New Jersey.
and touchy German shepherds in Mahwah,
wanted an overview of the
entire stock
company
trading in a single
like
IBM
market
—
If
he
or even the
—he’d need
to inspect
the computer printouts from twelve other public exchanges
New Jersey,
scattered across northern
dealings that occurred inside the
If
he tried to do
no
least
new financial
ing photograph of
a
pools.
he’d soon learn that there actually was no
this,
computer printout. At
existed of the
plus records of the private
growing number of dark
reliable one.
No
mental picture
market. There was only this yellow-
market
now
dead that served
as a
stand-in
for the living.
Brad had no idea
how dark and difficult the picture he’d create
knew
would become.
All he
was no longer
market.
tered across
a
New Jersey
It
for sure
was
was
a collection
that the stock
market
of small markets scat-
and lower Manhattan.
When
bids
moment,
even
off.
a
the markets acted as markets should. If they arrived
millisecond apart, the market vanished, and
Brad knew
that he
was being front-run
trader was, in effect, noticing his
exchange and buying
him
at a
it
on
demand
—
all
that
were
bets
some other
for stock
on one
others in anticipation of selling
it
to
higher price. Ele’d identified a suspect: high-frequency
traders. “I
had
a sense that the
problems are being caused by
new
participant in the market,” said Brad. “I just didn’t
how
they were doing
By
and
same
offers for shares sent to these places arrived at precisely the
late
this
know
it.”
2009 U.S. high-frequency trading firms were
flying
FLASH BOYS
54
to
Toronto with
offers to
pay Canadian banks to expose their
customers to high-frequency traders. Earlier that year, one of
competitors, the Canadian Imperial
RBC’s
(CIBC), had sublet
license
its
Bank of Commerce
on the Toronto Stock Exchange
several high-frequency trading firms and, within a
had seen
its
6-7 percent share of Canadian
historically stable
stock market trading
triple.*
to
few months,
Senior managers
the Royal
at
Bank
now arguing that the bank should create a Cana-
of Canada were
dian dark pool, route their Canadian customers’ stock market
orders into
and then
it,
sell
to high-frequency traders the right
Brad thought that
to operate inside the dark pool.
more
RBC
sense for
simply to expose the
it
new game
made
for
a lot
what
it
was, and perhaps establish themselves as the only broker on Wall
Street not conspiring to screw investors.
was honesty,”
play
Rob
as
Brad argued to
Park put
“The only card
left
he should be permitted to
his bosses that
launch what amounted to a public information campaign.
wanted
in the
The
to tell
rules of the
The
One
idea
is
them about
Canada
to enable
are different
that does not exist in the
CIBC
(representing
a share,
but that
CIBC
some
it is
sellers.
is
“broker priority.”
investor) has a standing order to
For example, imagine that
buy
shares in
Company
is
the
sell
first
shares in
Company
X
HFT
firms.
$20, the
at
to have his order filled.
CIBC
customers and the
X at
not alone, and several other banks also have standing orders for
operate with CIBC’s license,
own
rules of the U.S. stock
States
shares at $20. If CIBC then enters the market with an order
customer to
the trade and
from the
United
brokerage firms that have both sides of a trade to pair off buyers and
without the interference of other buyers and
Company X’s
prey.
they might use
from the predator. But the market was
Canadian stock market
rule in
new weapon
this
sellers
$20
were now the
States stock markets, that they
United
to defend themselves
market.
He
go out and explain, to anyone with money to invest
to
He wanted
*
to
it.
CIBC
from another
buyer has priority on
By allowing high-frequency
traders to
was, in effect, creating lots of collisions between
its
BRAD’S PROBLEM
already pressuring
to
win
to say
for
nothing
at all.
him was
his
weird discovery, which proved
exactly?
That the stock market now behaved
when
didn’t?
it
The
trading as he did. “I needed
what
cally,
knew
as little
real,” said
someone from deep
inside the
trading.
how
.
.
.
what,
strangely, except
about high-frequency
someone from the industry
was saying was
I
in a race
RBC executives who wanted to join forces
with high-frequency traders
that
He was
of RBC’s top management about
newly automated stock markets. All he had
to respond to the
going
him
a debate in front
55
He’d spent the better
Brad.
He
to verify
needed, specifi-
world of high-frequency
part of a year cold-calling strang-
HFT strategist willing to
defect. He now suswho knew how high-frequency
traders made money was making too much money doing it to
stop and explain what was going on. He needed to find another
ers in search
of an
pected that every
way
in.
human
being
CHAPTER THREE
RONAN’S PROBLEM
art
P
of Ronan’s problem was that he didn’t look like
He had pale skin
Street trader.
ders,
and the uneasy caution of a
one potato famine and
Wall Street
is
trader’s ability to
he caught his
first
early twenties,
— and
Street
like a
Wall
man who has survived
He also lacked the
expecting another.
bury
his self-doubt,
more important and knowledgeable than he
was wiry and wary,
a
and narrow, stooped shoul-
and to seem
actually was.
He
mongoose. And yet from the moment
glimpse of a Wall Street trading
Ronan Ryan
floor, in his
badly wanted to work on Wall
couldn’t understand
why he
“It’s
hard
not to get enamored of being one of these Wall Street guys
who
people are scared of and
make
all this
didn’t belong.
money,” he
said.
But
it
was
hard to imagine anyone being scared of Ronan.
The
other part of Ronan’s problem was his inability or
unwillingness to disguise his modest origins. Born and raised in
Dublin, he’d
The
Irish
moved
to
America
government had
in 1990,
when he was
sent his father to
New
sixteen.
York
to talk
RONAN’S PROBLEM
American companies
into
moving
but few imagined that they would do
dreary (“kind of like
57
to Ireland for the tax benefits,
a shithole, to
so.
was poor and
Ireland
be honest”). His
was not made of money, had spent every
what
life
was
the “right side of the tracks.” “I couldn’t believe
it,”
says
attend the
on
Greenwich public high school and
Ronan. “The kids had
own
their
complain they had to ride on
a
three miles.’
It’s
twenty-two,
school bus. I’d
And
behind.
He
was recalled
to Ireland;
didn’t think of Ireland as a place
The
American Dream
I
used to walk
When Ronan
ever go back to if given the choice, and he’d
idea of the
Kids would
‘This fucking
say,
free!
it’s
hard not to love America.”
his father
see
cars at sixteen!
thing actually takes you to school!
sion.
to
Ronan might
rent a house in Greenwich, Connecticut, so that
like
who
father,
penny he had
last
— Greenwich,
Ronan
was
stayed
anyone would
now embraced
his
Connecticut, ver-
year before, through an Irish guy his father had met,
summer
he’d landed a
internship in the back office at Chemical
Bank and had been promised
a place in the
management
train-
ing program.
canceled the training program; the Irish guy van-
Then they
ished.
Graduating from Fairfield University in 1996, he sent
Wall Street banks but received just one
ters to all the
let-
false flicker
of interest, from what, even to his untrained eyes, was a vaguely
criminal,
not
pump-and-dump penny
you think
as easy as
didn’t
know
knew no
anyone.
to get a job
to
work
cations, the big
because
I
on Wall
Street,”
he
“It’s
said. “I
My family had no contacts whatsoever. We
one.”
Eventually he gave up trying.
happened
stock brokerage firm.
was
in the
New
He met
York
telecom company.
Irish,” said
Ronan.
who
Communi-
another Irish guy
office
of MCI
“He gave me
“I guess
a
job
strictly
he had a few charity
FLASH BOYS
58
cases a year.
was one of them.” For no particular reason other
I
than that no one
would
else
hire him, he
went
work
to
in the
telecom industry.
The
big job they gave
first
eight thousand
new
pagers
him was
MCI
make
to
had sold
sure that the
to a big
Wall Street
firm were well received. As he was told, “People are really sensitive
about their pagers.”
truck in the
summer
new
He
pagers.
unpacked the
come and
up
set
traveled in the back of a repair
some
office
new
pagers.
for the
An
and
a
back of the truck and
Wall Street people to
hour into
ing and huffing inside the truck while
for their pagers,
building to deliver the
his little table at the
and waited
crates
get their
Ronan
heat to
a line
he was sweat-
it
of people waited
crowd had formed, of guys
to
already given the pagers: pager protestors. “These
suckl ”
and
“I hate this
fucking pager!” they screamed,
even more pagers. As he dealt with the
to pass out
of the Wall Street firms’ secretaries called
new
whom
new
pager. She
was
as
he’d
pagers
he tried
one
revolt,
him about
her boss’s
so despondent about the thing that
Ronan
thought he could hear her crying. “She keeps saying over and
over,
How
too big!
‘It’s
going to
It’s
going to
really hurt him!’ ”
could
a
pager
inflict
harm on
box, an inch by an inch and
midget, and
would dig
it
Ronan. “And
a really
don’t
At
want her
that
And
“Then
into his side
too big!
It’s
she
when he
to think I’m a dick,
Why
I
It’s
totally confused:
grown man?
a
a half.
I’m thinking, but
It
was
a tiny
me
he’s a
tells
bent over,” said
don’t say
it
He was
because
don’t you just strap
it
I
onto
backpack?”
moment, and
Ronan s mind
Street people,
him!
that he wasn’t like a normal-sized midget.
small dude.
his back, like a
really hurt
Ronan was now
others like
it,
many
things crossed
that he did not say. Sizing pagers to
and being hollered
at
little
Wall
by big Wall Street people
RONAN’S PROBLEM
who
didn’t like their
doing with
Wall
his
decided to
upset he hadn’t found a path onto
make
the best of it.
That turned out to be the view
MCI
that
Ronan had
entire U.S. telecom system.
59
was not what he’d imagined
gadgets,
He was
life.
He
Street.
new
he’d never actually studied anything practical.
nothing about technology.
pretty captivating,
“It’s
how
this shit
Now
works,” he
information, compared to a glass
Cisco compared to a switch
companies made the
buildings in
which
line
by
run by
how
also learned
from one place
a single
a
switch
information actually traveled
usually not in a straight
telecom carrier but in
pieces of
for that call to happen.
a
convoluted path run
New
a call to
York from
connected
You probably just
zon on the
MCI
New
New York City to
Florida
it’s
think
not.”
A
to
it’s
cir-
would have Veri-
York end, BellSouth on the Florida end, and
in the middle;
it
would zigzag from population center
population center; once
it
got there
it
would wind
of crazy ways through skyscrapers and city
knowing, telecom people liked
through “the
Florida,
equipment you have
fucking like two cans and a piece of string. But
cuit that
made by
old manufacturing buildings
—which was
“When you make
no idea how many
go through
How
fiber.
to another
several.
you have
it,
copper circuit conveyed
a
computer equipment, and which
—
He
best.
it.
contained floors that could withstand
the weight of that equipment
were
next to
take the nerdiness out of
all
made by Juniper. Which hardware
fastest
cities
of the
about
How
said.
He knew
he started to learn
when you
him
offered
always been handy, but
NFL
streets.
in
all
to
sorts
To sound
to say that the fiber routes ran
cities.”
That was another thing Ronan learned:
A
lot
of people in
and around the telecom industry were more knowing than
knowledgeable.
The people
at
MCI who
sold the technology
FLASH BOYS
60
often didn’t actually understand
who
than people, like him,
it,
it
and yet were paid
simply fixed problems. Or,
“I’m making thirty-five and they’re making
and they’re fucking
became
a
He
idiots.”
leading salesperson.
lured from
MCI
A
got himself
as
he put
buck twenty
a
moved
to sales
by Qwest Communications; three years
He was now making good money
By 2005, he
—
a couple
carrier,
later,
Level
likely than ever to
entire
weeks
be big Wall Street banks.
Goldman
inside
Sachs and
3.
of hundred grand a
also couldn’t help but notice, his clients
more
and
few years into the job, he was
he was lured from Qwest by another big telecom
year.
far better
Lehman
He
were
spent
Brothers and
Deutsche Bank, figuring out the best routes to run fiber and the
best
machines to hook that
nal ambition.
he’d nose around for
so
many
fiber
up
He
to.
hadn’t lost his origi-
At some point on every Wall
people.
Street job he had,
job opening. “I’m thinking: I’m meeting
a
Why
can’t
I
Actually, the big banks offered
get a job at
one of these places?”
him jobs
the time, but the jobs
all
were never finance jobs. They offered him tech jobs
in
some remote
cable.
There was
site
—working
with computer hardware and fiber-optic
a vividly clear class distinction
between tech
guys and finance guys. The finance guys saw the tech guys
faceless help
and were unable to think of them
“They always
said the
lines guy,’ ”
said.
Then,
in
he
2006,
BT
9/11, after the attacks
same thing
Radianz
to
as
me: ‘You’re
called.
sell
boxes and
Radianz was born of
to build for big
Wall Street banks
a
the financial world
The company
system
able to outside attack than the existing system.
to
a
as
else.
on the World Trade Center knocked out
big pieces of Wall Street’s communication system.
promised
anything
less
vulner-
Ronan’s job was
on the idea of subcontracting
their
information networks to Radianz. In particular, he was meant
RONAN’S PROBLEM
on “co-locating”
to sell the banks
data center in Nutley,
his
a
job
at
Radianz,
Ronan had
hedge fund based in Kansas
at a
their
New Jersey.
61
computers in Radianz’s
But not long
a different sort
The
City.
after
he started
of inquiry, from
caller said
he worked
stock market trading firm called Bountiful Trust, and that
he had heard
one place
Ronan was
expert
between Kansas City and
trades
moving
at
to another. Bountiful Trust
had
New
a
financial data
York,
it
took them too
long to determine what happened to their orders
stocks they
ingly,
when
on them,
‘My
had bought and
I
said,
They
—
that
is,
what
also noticed that, increas-
they placed their orders, the market was vanishing
just as
it
latency time
“And
sold.
from
problem: In making
was vanishing on Brad Katsuyama. “He
is
‘What
forty-three milliseconds,’ ” recalls
the hell
a millisecond?’
is
”
Latency was simply the time between the
and when
says,
Ronan.
moment
was received. There were
a signal
several factors
was
sent
that
determined the latency of a stock market trading system: the
it
boxes, the logic, and the lines.
the signals passed through
on
The boxes were
the machinery
way from Point
their
A
to Point
The
B: the computer servers and signal amplifiers and switches.
logic
was the software, the code instructions
boxes.
Ronan
didn’t
more and more,
it
know much
seemed
barely spoke English.
The
gle biggest
about software, except
that,
be written by Russian guys
who
to
lines
that carried the information
that operated the
were the
glass fiber-optic cables
from one box
to another.
determinant of speed was the length of the
The
or
A
to
the distance the signal needed to travel to get from Point
Point B.
Ronan
didn’t
know what
understood the problem with
was
in Kansas City. Light in a
per second,
or,
this
sin-
fiber,
a millisecond was,
but he
Kansas City hedge fund:
vacuum
It
traveled at 186,000 miles
put another way, 186 miles
a millisecond.
Light
FLASH BOYS
62
bounced
inside of fiber
oft' the
walls and so traveled at only about
two-thirds of its theoretical speed. But
gest
enemy of the speed of a
needed to
“Physics
travel.
didn’t understand,” said
The whole
is
longer a place.
sey.
was
The
still fast.
physics
—
this
what the
is
big-
signal
traders
Ronan.
its
founders believed that
where they were physically
It
it
was the distance the
reason Bountiful Trust had set up shop in Kansas
City was that
place.
signal
located.
no longer mattered
it
That Wall Street was no
They were wrong. Wall
Ronan moved
the computers
once again,
Street was,
wasn’t actually on Wall Street now.
It
was
from Kansas City
data center in Nutley and reduced the time
it
in
a
New Jer-
to Radianz’s
took them to find
out what they had bought and sold from 43 milliseconds to 3.8
milliseconds.
From
that
moment
services intensified.
demand on Wall
the
Street for
Ronan’s
Not just from banks and well-known high-
frequency trading firms but also from prop shops (proprietary
trading firms) no one had ever heard
them. All wanted to be able to trade
be
to
be
its
faster
a
few guys
in
than the others. To
they needed the newest hardware, stripped
essentials; to
physical distance
be
between
faster
they also needed to reduce the
their
computers and the computers
inside the various stock exchanges.
all
faster
they needed to find shorter routes for their signals to
faster
travel; to
down
with just
of,
of these problems. But
as all his
Ronan knew how
new
computers inside the Radianz data center in Nutley,
tricky business.
Ronan
Where am
I
you mean
the room’?
the room."
‘in
in the
He was
says,
“One day
the
guy meant,
willing to pay to
this
a trader calls
room?’ I’m thinking, In
What
to solve
customers housed their
move
it
his
and
was
a
asks,
What
do
turned out, was
in
the
room?
computer
that sent
orders into the stock market as close as possible to the pipe that
RONAN’S PROBLEM
exited the building in Nutley
jump on
called
Ronan
few yards longer than
it
to say that he
wind around
cable
had noticed
it
would have
a slight
his cable to
that his fiber-optic cable
needed to
the outside of the
—which helped
wanted
so that he
the other computers in the room. Another trader then
was
a
—
63
be. Instead
to reduce the heat in the
hew
of having
room with everyone
room
—
else’s
the trader
middle
a straight line right across the
of the room.
was only
It
out that,
if
a
matter of time before the stock exchanges figured
people were willing to spend hundreds of thousands
move
of dollars to
machines around inside some remote
their
data center just so they
might be
a tiny bit closer to the stock
exchange, they’d pay millions to be inside the stock exchange
Ronan
itself.
sell
vices.”
it’s
followed them there.
proximity to Wall Street
a
“We
tried to
word,” he
became known
authority
on
He came up
as a service. Call
trademark proximity, but you
as
When
end of the
cable.
fast
on the devices on
for instance.
data switches and slow ones
“One guy
critical.
a second),
says to
me,
The switching
place.’”
times
to 1.2 microseconds per trade.
started to ask,
cal fibers
‘What kind of
differ-
but microseconds were
doesn’t matter if I’m one
‘It
fell
“And
The
was measured in
second slower or one microsecond; either way
ond
can’t because
they ran out of ways to reduce
Data switches,
microseconds (millionths of
now
idea:
What he wanted to call proximity soon
“co-location,” and Ronan became the world’s
the subject.
ence between
with an
“proximity ser-
said.
the length of their cable, they began to focus
either
it
I
then,” says
glass are
come
in sec-
from 150 microseconds
you
Ronan, “they
using?’ ” All opti-
were not created equal; some kinds of glass conveyed
light signals
more
Never before
in
efficiently
human
than others.
And Ronan
thought:
history have people gone to so
much
FLASH BOYS
64
much money
trouble and spent so
to gain so little speed. “People
were measuring the length of their
cables to the foot inside the
exchanges. People were buying these servers and chucking them
out six months
He
didn’t
For microseconds.”
later.
know how much money
high-frequency traders
were making, but he could guess from
spending.
From
the end of
2005
how much
anz alone billed them nearly $80 million
—
-just
for setting
computers near the stock exchange matching engines.
their
Radianz was hardly the only one
fiber routes
than
they were
end of 2008, Radi-
to the
ideal,
between the
finding straighter ones.
billing them. Seeing that the
New Jersey
Ronan prodded
a
exchanges were often
company
Hudson
up
And
Hudson
called
now
Fiber was
less
Fiber into
doing
land-
a
digging trenches in places that would give Tony
office business
Soprano pause. Ronan could
also guess
how much money
high-
frequency traders were making by the trouble they took to conceal
how they made it. One HFT firm he set up
stock exchanges insisted that he
ers in
—
wire gauze
to prevent
wrap
their
inside
one of the
new computer
serv-
anyone from seeing their blink-
ing lights or improvements in their hardware. Another
HFT
firm secured the computer cage nearest the exchange’s matching
engine
—
the
computer code
market. Formerly
that, in effect,
owned by Toys “R” Us
ably ran the toy store’s website), the cage
store logos.
The
HFT
right to be. If
all
was emblazoned with
you know how
find a
new
“R” Us
matching engine, by
paranoid,” said
several
Ronan. “But they were
to pickpocket
someone and you
were the pickpocketer, you would do the same
someone
the stock
would know they had improved
their position, in relation to the
“They were
now
computers prob-
firm insisted on leaving the Toys
logos in place so that no one
feet.
was
(the
thing.
You’d
switch that was three microseconds
see
faster,
RONAN’S PROBLEM
and
two weeks everyone
in
65
in the data center
would have
the
same switch.”
By
the end of 2007
of dollars
He was
faster.
anything.’
And
milliseconds
He was
I
saw
it
—
—
they’re like,
fifty
it’s
how
the
little
saw
‘I
And
fast!’
there’s
it!’
‘Look, I’m
I’d say,
no fucking way you saw
And
I’m
like,
three
‘It’s
times faster than the blink of an
”
eye.’
keenly aware that he had only the faintest idea of
also
new
the reason for this incredible
lot
so
-it’s
our product. But
like
of thousands
stock market trades
understood of the technology they were using.
‘Aha!
say,
happy you
make
and over again, by
struck, over
traders he helped
“They’d
Ronan was making hundreds
year building systems to
a
He
lust for speed.
heard a
of loose talk about “arbitrage,” but what, exactly, was being
arbitraged,
and
why
getaway driver,” he
Drive
faster!’
Then
did
it
said.
it
was
need to be done so
“Each time,
like,
was, ‘Get rid of the fucking
‘Excuse me,
a sense
sirs,
it
was
fast? “I felt like
like,
‘Get rid of the airbags!’
Then
Towards the end I’m
seats!’
the
faster!
but what are you doing in the bank?’ ”
it
like,
He had
of the technological aptitude of the various players. The
biggest high-frequency trading firms, Citadel and Getco,
two
were
easily the smartest.
The
too.
big banks,
Beyond
ents.
The
had heard
scale.
He
that,
Some of
at least for
he didn’t even
of.
the prop shops were smart,
now, were
really
all
slow.
know much
about his
cli-
— everyone
Credit
— Goldman
Getco —were famous on
Others —
big banks
Suisse
Sachs,
Citadel,
a
small
learned that some of these firms were hedge funds,
which meant
that they took
money from
outside investors. But
most of them were prop shops, trading only
ers’
‘Drive
money.
their
own
found-
A huge number of the firms he dealt with— Hudson
River Trading, Eagle Seven, Simplex Investments, Evolution
Financial Technologies, Cooperfund,
DRW—no
one had ever
66
FLASH BOYS
heard
of,
and the firms obviously intended
The prop shops were
to
especially strange,
keep
that way.
it
because they were
both transient and prosperous. “They’d be just
five guys in a
room. All of them geeks. The leader of each five-man pack is
just an arrogant version of that geek. A fucking arrogant
ver-
sion of that.”
closed,
and
One
all
day
prop shop was trading; the next,
a
the people in
Wall Street bank.
it
One group
four Russian, one Chinese.
clearly their leader
had moved to work
Ronan saw
of guys
The
to big
had
over and over:
who was
arrogant Russian guy
was named Vladimir. Vladimir and
ping-ponged from prop shop
it
some big
for
bank and back
his
boys
to prop shop,
writing the computer code that
trading decisions.
most senior guys
them
—and
made the actual stock market
Ronan watched them meet with one of the
at a
big Wall Street bank that hoped to employ
the Wall Street big shot sucked up to them.
walks into the meeting and
man
in the
room, but in
that these roving
says, ‘I’m
Vladimir
this case
bands of geeks
I
was listening
to
them
is.’
’
Ronan knew
nothing but condescen-
felt
sion toward the less technical guys
firms.
“He
always the most important
who
ran the big Wall Street
talk about
some
calculation they
had been asked to make, and Vladimir goes, ‘Ho, ho, ho. That’s
what Americans call math.’ He said it like moth. That’s what
Americans
call moth.
I
thought, I’m fucking
guys. This country gave
By
early
you
Irish,
but fuck you
a shot.”
2008 Ronan was spending
a lot
of his time abroad,
helping high-frequency traders exploit the Americanization
of
foreign stock markets.
A
Canada, Australia, the
A
pattern emerged:
the stock market had always traded
on
country in which
a single
exchange
UK—would, in the name of free-market
competition, permit the creation of a
exchange was always located
at
some
new
exchange.
surprising distance
The new
from the
RONAN’S PROBLEM
original exchange. In Toronto
store building across the city
67
was inside an old department
it
from the Toronto Stock Exchange.
was mysteriously located not
Sydney finan-
in the
In Australia
it
cial district
but across Sydney Harbor, in the middle of
dential district.
London.
BATS
The
old
London Stock Exchange was
created a British rival in the Docklands,
created another, outside of London, in Basildon, and
new exchange
ated a third in Slough. Each
for
gave
would fragment,”
He
said
cre-
the need
was almost
that the
market
Ronan.
didn’t have a job
still
“It
up exchanges so
NYSE
Chi-X
rise to
high-speed routes between the exchanges.
like they picked places to set
a resi-
in central
on Wall
Street, but
Ronan had
every
reason to be pleased with himself and with his career. In 2007,
the
first
twice
much
as
he’d ever made. Yet he did not
with himself or with
his career.
he did, but he had no idea
to.
boom, he’d made $486,000,
year of the speed
as
why
At the end of 2007, on
sitting in a
pub
she’d
bought him
about doing, and
ever had in
than
my
it’s
ing Willy
called
him
a plane ticket to
favorite football team. “I’m
In the
Year’s Eve, he
with “Let
It
what
found himself
Be” playing dully on
the trip as this lovely
England and
doing something
I
gift.
note that said
a
a ticket to see his
always dreamed
Ronan. “I’m thirty-four
I’ve
years old. I’m
never going to get any better. I’m going to be fuckfor the rest
of my
life.”
He
felt
ordinary.
of 2009, out of the blue, the Royal Bank of Canada
him and
a little
at
was about the most depressing moment
life,” said
Loman
fall
it
nearly
pleased
and he wanted
it,
miniature soccer ball she’d wrapped
a
thinking
obviously good
he was doing
New
in Liverpool
the radio. His wife had given
Around
He was
feel
invited
him
to interview for a job.
wary. He’d barely heard of
checked out their website
it
told
RBC,
him next
He was more
and when he
to nothing.
He’d
FLASH BOYS
68
grown weary of self-important Wall Street traders who wanted
him to do their manual labor for them. “I said, ‘I mean no
disrespect, but if you’re calling to offer
have no fucking
Brad Katsuyama
finance,
on
interest.’ ”
—
insisted that
was
a
it
at
meet
to
him
bunch of questions and
a
what seemed
his bosses. In
like “the quickest hiring in the history
offered
him
a
job on the trading
floor.
paid $125,000,
It
to high-frequency traders.
It
came with
High-Frequency Trading
Strategies.
Ronan was
floor,
cut.
“To be
title
disturbed him, because,
honest,
I
high-frequency trading
landed
a
he
less,”
says to
realized
I
He was
so excited to have
me, ‘What are you going to do
didn’t really fucking
IN
He
know any
job on a Wall Street trading floor that he didn’t
have no idea what the job
discussed.
a
But the
said.
“I didn’t
it,
bother to ask the obvious question. His wife asked
“She
speed
Head of
title:
willing to take a big pay
he put
strategies.”
a fancy
For a chance to work on
would have taken
as
to
of Wall Street,”
Ronan was making peddling
Wall Street trading
if
for interviews at
or roughly a third of what
finally
I
him
seven the next morning and wondered
him back
then invited
RBC
tech job,
called
wasn’t a tech job but a job in
Wall Street thing, hauling people in
seven in the morning. Brad asked
Ronan
me some
guy who
trading floor.
a
Ronan met Brad
that
RBC
The
never told
THE FALL of 2009, an
is.
know.
I
it
for
for them?’
really,
him.
And
I
honest to God,
There was no job description ever
me what
he wanted
article in a trade
me
for.”
magazine caught Brad
Katsuyama’s eye. He’d spent the better part of a year trying and
failing to find
anyone
who
actually
worked
in
regularly referred to as high-frequency trading
what was now
who was
willing
RONAN’S PROBLEM
to explain to
HFT
that
him how he made
technologists were
his
money. The
article
their firms,
whom
some of
were rumored
hundreds of millions of dollars
a year.
who
Deutsche Bank
names. Ronan’s was the
dealt often
of
strategists
be taking
home
looking for one
he made, to a
first call
with HFT, gave him two
first.
Ronan
In his interview,
to
He went
of these unhappy technologists. The very
at
claimed
unhappy with the widening gulf
between themselves and the senior trading
in pay
guy
69
described to Brad what he’d wit-
nessed inside the exchanges: the frantic competition for nanoseconds, the Toys
“R” Us
war
cage, the wire gauze, the
for space
within the exchanges, the tens of millions being spent by highfrequency traders for tiny increments of speed. As he spoke, he
huge empty
filled
markets.
tracts
“What he
on Brad’s mental map of the
said told
me
that
we needed
financial
to care about
microseconds and nanoseconds,” said Brad. The U.S. stock market
was
nots.
now
The
that a
a class system,
rooted in speed, of haves and have-
haves paid for nanoseconds; the have-nots had no idea
nanosecond had value. The haves enjoyed
of the market; the have-nots never saw
a perfect
the market at
all.
view
What had
once been the world’s most public, most democratic, financial
market had become, in
something more
spirit,
viewing of a stolen work of art.
him
in an
HFT,”
hour than
said Brad.
He wanted
his bosses or
I
My
a Travesty.
I
met him
him without being
to
I
wanted
to hire him.”
able to fully explain, to
even to Ronan, what he wanted to hire him
couldn’t very well call
ing to
like a private
more from talking
learned from six months of reading about
“The second
to hire
“I learned
him Vice
Clueless Superiors
for.
He
President in Charge of Explain-
Why
High-Frequency Trading
Is
So he called him Head of High-Frequency Trading
Strategies. “I felt
he needed a ‘Head
of’ title,” said
Brad, “to get
FLASH BOYS
70
more
from people.” That was Brad’s main concern:
respect
people on the trading
at
Ronan and
guy
see a
even
floor,
lievably
a
meant
to ‘cross the spread.’
to
‘bid’
the side, without
Ronan
buy
if you
selling,
‘offer’
a big deal
an attempt to
their private deal:
Ronan would
“He
He
was.
A
sell
down and
ing
first
The
Price’s Gitlin
a
That was
it.”
Brad and
his
team
product they could
Thor and use
its
it
for themselves
less tried to
problems.
buy
it
on
the
The experiment of arriv-
same time had worked perfectly
proved hard to repeat, because
coax thirteen
cross the spread,
explained
to teach.
had more or
the exchanges at the
It
To
investors they’d told about their discov-
—but Thor now had
time.
it.
teach Brad about technology.
to investors.
at
of it, Brad started to
“bid” was an attempt
Brad would teach Ronan about trading, and
ery were clearly eager to buy
spot
it
“This fucking guy didn’t laugh
price.
sat
were having trouble turning Thor into
Rowe
know what
to accept the bidder’s price, or, if you
Right away there was something
T.
didn’t
”
making
meant
me,” said Ronan.
sell
know what
questions that were unbe-
the language of trading.
stock, an “offer”
were
and
were buying, the ottering
at
who’d just emerged
rudimentary but that were necessary,” said Brad. “He
know what
On
that
take one look
didn’t even pretend to
“He had
trading floor.
didn’t
teach
RBC, would
in a yellow jumpsuit
from some manhole. Ronan
happened on
at
it
was
—
the
difficult to
light signals to arrive in thirteen different stock
exchanges spread across northern
New Jersey within 350 micro-
— or roughly 100 microseconds
seconds of each other
the time they had calculated
trader to front-run their order.
it
would
take
They’d succeeded the
by estimating the differences in
travel
time
it
less
than
some high-speed
first
time
took to send the
messages to the various exchanges, and by building the equiva-
RONAN’S PROBLEM
lent delays into their software.
the same.
They had no
it
traffic
was on the network.
New York Stock Exchange; other times, took
When the travel time differed from their guesses
it
7 milliseconds.
would
In short,
how much
took 4 milliseconds for their stock market orders
it
to arrive at the
of what
were never
travel times
control over the path the signals took to
get to the exchanges, or
Sometimes
But the
71
be, the market, once again, vanished.
Thor was inconsistent; and it was
inconsistent,
Ronan
explained, because the paths the electronic signals took from
Ronan
Brad’s desk to the various exchanges were inconsistent.
could see that these traders hadn’t thought
which
process by
ical
much
about the phys-
New Jersey
their signals traveled to the
stock exchanges. “I realized very quickly,” he said, “and they’ll
admit
clue
so
this,
mean no
I
arrived at the
New Jersey
some exchanges were
fastest
exchange
have a talent for
it.
with the market
as
to arrive at
trader’s signal
all
That
is,
to build
To make
it
first
takes to blink
on
your
eye, if you
his trading screens, they
his point,
On
station at
he unrolled his
RBC’s network
told his
own
new
fiber
needed
colleagues
in oversized
see just
One
first
at
network.
fiber-optic networks built
maps you could
from Brad’s trading
When
Ronan
Ronan brought
companies.
the
that,
and control your
showing the
in
The
for Brad’s trading orders to interact
displayed
New Jersey
exchanges.
others.
could travel from the
the exchanges within a 465 -microsecond win-
dow. The only way to do
eled
times because
reached to the next one was 465 microseconds, or
it
was
at different
from Brad’s desk than
one two-hundredths of the time
RBC,
from Brad’s desk
signal sent
exchanges
farther
any high-speed
had no fucking
disrespect, that they
what they were doing.” The
how
maps of
by telecom
a signal trav-
Liberty Plaza to the
map,
support team burst out,
guy
who worked
“How
the fuck did
a
FLASH BOYS
72
you get those? They’re telecom property! They’re proprietary!”
Ronan
me
explained,
“When
they said they wouldn’t give them to
because they were proprietary,
etarily fuck
off.’
”
I
said,
The high-frequency
much
telecom carriers too
to
fucking gold,” he
business that they
would
underwear drawer
if
The maps
“But
said.
let
were paying the
be denied whatever they wanted,
and Ronan had been the agent of their
like
Well, then, propri-
traders
me
“These maps are
desires.
had brought them so much
I
see inside their freaking wife’s
asked them to.”
I
told a story:
Any
trading signal that originated in
lower Manhattan traveled up the West Side Highway and out
the Lincoln Tunnel. Perched immediately outside the tunnel, in
New Jersey,
Weehawken,
the routes
was the
BATS
became more complicated,
way through
exchange.
From BATS
they had to find their
as
“New
the clutter of the Jersey suburbs.
Jersey
is
now
carved up like
way
or another, they traveled east to Secaucus, the location of
the Direct
Thanksgiving turkey,”
a
said
Ronan. One
Edge family of exchanges founded by Goldman Sachs
and Citadel, and south to the Nasdaq family of exchanges in
The
Carteret.
New
York Stock Exchange further complicated
the story. In early 2010,
lower Manhattan,
distant
Mahwah,
at
NYSE
still
had
its
computer
55 Water Street. (They
servers in
moved them
to
New Jersey, that August.) As was less than a
NYSE appeared to be the stock market
it
mile from Brad’s desk,
closest to
him; but Ronan’s maps showed the incredible indirec-
tion of optic fiber in Manhattan.
to Fifty-five
Water
Street,
he explained. “You can go
downtown. To
you could
RBC’s
get
from
“To
get
from Liberty Plaza
you might go through Brooklyn,”
fifty
miles to get from
Midtown
to
a building to a building across the street
travel fifteen miles.”
It
was
office at Liberty Plaza to the
a
ten-minute walk from
New York Stock Exchange.
RONAN’S PROBLEM
But from
Exchange was further from RBC’s
To Brad
the
York Stock
than Carteret.
offices
maps explained, among other
BATS
market on
73
New
computer’s point of view, the
a
why
things,
the
had proved so accurate. The reason they were
always able to buy or
100 percent of the shares
sell
listed
on
BATS was that BATS was always the first stock market to receive
News
their orders.
to spread
BATS
Inside
news
is
of their buying and selling hadn’t had time
throughout the marketplace.
just closest to us.’
It’s
“I
was
BATS, high-frequency
on
the other exchanges.
cally for 100 shares, for every listed stock.
was
buyer or
a
of
seller
Company
(The race they needed to win was not
who had no
clue
were typically
order to be
was
at
just the
The
100-share
to
minimum
him, but
on
orders resting
on
BATS
—
orders to
The
BATS
required for an
they actually wanted to buy and
what
to find out
BATS,
sell
investors
HFT firms posted
buy or
basically every stock traded in the U.S.
it.
accordingly.
the front of any price queue, as their only purpose
these tiny orders
they did
sell
that
would
a race against the ordi-
to tease information out of investors.
wanted
Having gleaned
what was happening
against other high-speed traders.)
They
offers, typi-
X’s shares, they
and buy or
race ahead to the other exchanges
nary investor,
shit,
trading firms were waiting for
that they could use to trade
obtained that news by placing very small bids and
there
‘Holy
like,
right outside the freaking tunnel.”
sell
market
100 shares of
—not because
the stocks but because they
wanted
to
buy and
sell
unsurprisingly, had been created
before
by high-
frequency traders.
The funny thing was
heard didn’t
Brad
now
make
helped
noticed the
HFT
that a lot of
sense to him:
him
He
what Ronan had seen and
didn’t
to understand.
know what he knew.
Ronan had
For instance,
guys creating elaborate tables of the time,
74
FLASH BOYS
measured in microseconds,
took for
it
from any given brokerage house
travel
Latency
were
tables,” these
The
called.
ent for every brokerage house
a stock
to each
market order
to
of the exchanges.
times were subtly differ-
—they depended upon where
the
brokerage house physically was located and which fiber networks
it
leased in
New Jersey.
were of obvious value
no
idea
but he
These
why. This was the
knew
exactly
took trouble to create and
tables
to high-frequency traders, but
why
Ronan had
Brad had heard of latency
first
they had been created:
tables,
They enabled
high-frequency traders to identify brokers by the time their
orders took to travel from one exchange to the other. Once you
had figured out which broker was behind any given stock market order,
If
you could discern patterns
you knew which broker had
just
in each broker’s behavior.
come
into the
market with
an order to buy 1,000 shares of IBM, you might further guess
whether those 1,000 shares were the entire order or
much
You might
larger order.
distribute the order
among
tion to
make
The
HFT
riskless profits;
IBM
cally
also
behave
knew
idiotically,
temptation.
ents’ stock
the
that
When
a
how much
shares the broker
might
they only needed to skew the odds
Brad put
large brokers
who
are
with their customers’ orders. That’s the
He
to
is
of
guys didn’t need perfect informa-
systematically in their favor. But, as
looking for ultimately
a part
the broker might
the various exchanges and
above the current market price for
be willing to pay.
how
also guess
“What
you’re
behaving
idioti-
it,
real
Wall Street brokers had
a
gold mine.”
new
incentive
because he had himself succumbed to the
Wall Street decided where to route
market orders, they were
now
new system of kickbacks paid and fees
their cli-
greatly influenced
by
charged to them by the
exchanges: If a big Wall Street broker stood to be paid to send an
order to buy 10,000 shares of IBM to
BATS
but was charged to
RONAN’S PROBLEM
send the same order to the
program
New York
Stock Exchange,
routers to send the customer’s order to
its
router, designed
by human beings, took on
Along with the trading algorithms,
cal piece
and
by people
built
Both do the thinking
intellectual tasks they
thinking
its
first:
more than $25
were
a criti-
who work
a share,
when
for the
Wall Street
that people used to do, but the
perform are
decides
It
shares offered at $25.
how
The algorithm does
different.
up any given
to slice
XYZ
order.
Company
at
no
the market shows a total of 2,000
To simply attempt
to
buy 100,000
shares
once would create havoc in the market and drive the price
higher.
The algorithm
buy them, and the
to
of its own.
the routers
Say you want to buy 100,000 shares of
all at
a life
would
it
BATS. The
of technology in the automated stock markets. Both
are designed
broker.
75
decides
how many
shares
price to pay. For example,
you buy, when
it
may
instruct
the router to carve the 100,000-share order into twenty pieces,
and
is
to
buy 5,000
shares every five minutes, so long as the price
no higher than $25.
The
router determines where the order
router might instruct the order to go
dark pool before going to the exchanges.
order to go
to
To
to
how
—
to
is
to
whom you
buy 100,000
might
instruct the
you have
are paying a
shares of
Company
now, conveniently, there are 100,000 shares
on each of ten
it
a
firm’s
a so-called sequential cost-effective router.)
stupid routing can be, say
Wall Street broker
you wish
Or
For instance,
Wall Street
exchanges on which the broker will be compelled
pay to trade. (This
illustrate
sent.
to a
to any exchange that will pay the broker to trade,
first
and only then
is
first
different exchanges, all
XYZ
at
your
—
that
$25 and
for sale at $25, 10,000
of which will charge the
broker to trade on your behalf (though
mission you have paid to him). There
told
commission
far less
are,
than the com-
however, another 100
FLASH BOYS
76
The
pay the broker for the trade.
go
will
first
to
BATS
BATS
on the
shares for sale, also at $25,
exchange
—which
will
sequential cost-effective router
and buy the 100 shares
— and
cause the other
100,000 shares to vanish into the paws of high-frequency traders (in the
sell
bargain relieving the broker of the obligation to pay
The high-frequency
to trade).
the shares of
traders can then turn
XYZ
Company
at a
around and
higher price, or hold onto
the shares for a few seconds more, while you, the investor, chase
Company XYZ’s
shares even higher. In either case, the result
is
unappealing to the original buyer of Company XYZ’s shares.
That
is
but the most obvious of many examples of routing stu-
is
The customer
pidity.
(you, or
someone investing on your behalf)
typically entirely oblivious to the inner
rithms and routers: Even
was routed, and
was
said
was
shares traded
The
the
a
true, as
tell.
he has no
sufficiently detailed record
The
tell
might be
a glitch in their
guys on the other side of the
Once Brad had
to explain
it
explained
again. “It was,
now make more
With Ronan’s
all
The
shit,
sense,’ ” said
help, the
RBC
sales pitch
a
weapon you can use
about whether
to
RBC
traders ended. Brad’s
it
all
had
con-
a
machines rather
was just
as valuable to
table.
some of the things
over-
I
Ronan.
team designed
their
own
fiber
product that could be sold to
was absurdly simple: There
predator in the financial markets. Here
a
of what
of this to Ronan, he didn’t need
‘Oh
network and turned Thor into
investors.
his order
and when they traded.
twitch of their facial muscles, but
HFT
heard
know how
broker told him, he would never be sure what
brokers’ routers, like bad poker players,
spicuous
than
his
workings of both algo-
he demanded to
if
is
how
is
a
new
he operates, and we have
defend yourself against him.
The argument
should leap into bed with high-frequency
new problem was
spreading the
word of
RONAN’S PROBLEM
what he now knew
Ronan had
shocked people were by what
ested they
were
in
77
to the U.S. investing public. Seeing
to say,
new was
suade his bosses that something strange and
decided to
set
Ronan
“Brad
me
in
calls
on Wall
loose
and
how
and
and no longer needing Ronan
it,
says,
‘What
if
how
inter-
to per-
afoot,
Brad
Street’s biggest customers.
we
you Head of
stop calling
High-Frequency Trading Strategy and make you Head of Electronic Trading Strategy?,’ ” said
either
title
they just promoted me.’
A
few days
you going
role
good
was
What
to say?
idea
said,
I
why Brad had
—
recalls the
wing
just
given
him
a
The man on
—
encounter
is,
is.
As
a year.)
“But
he’s talking,
know what
I
hadn’t pre-
”
you under-
the other end of this
the president of a $9 billion
this
way: “I
market prices
don’t
know
I
have
a
a nine-billion-dollar
know
They’re not
costing
is
exactly
I’m saying to myself,
him $300
what the problem
RBC
doesn’t even
And who are these
salesguys. And they’re
they are doing.
aren’t traders.
I
Wall
‘What
he knows that the cost of not being
able to trade at the stated
million
first
He now had a
new job title. “My
it.’
three-hundred-million-dollar problem on
hedge fund.” (That
what
think
‘I
says,
say to clients, ‘Don’t
extemporaneous presentation
hedge fund
to his
have you prepared?’
‘I’ll
stand you’re being fucked?’ ”
first
idea
said,
”
walk around and
to
wife and
“Right before the meeting, Brad
pared anything, so
pretty
my
Ronan went with Brad
later,
Street meeting.
are
Ronan, who had no
actually meant. “I called
guys?
They
not quants.
And then they say they have a solution to the
And you’re like: ‘What? How on earth can
I even trust you?’ And then they totally explain my problem.”
Between them, Brad and Ronan told this hedge fund manager
all they had learned. They explained, in short, how the inferSo what are they?
world’s problems.
FLASH BOYS
78
mational value of everything
man
this
did with
money was
being auctioned by brokers and exchanges to high-frequency
trading firms so that they might exploit him. That was
had
a
$300 million problem on
After Brad and
Ronan had
who had
a
left his office,
this big
hedge fund,
as prey,
reconsidered the financial markets.
watching both
set
he
the president of
never before thought of himself
his personal online
He
desk
sat at his
brokerage account and his
$l,800-a-month Bloomberg terminal. In
account he
why
$9 billion fund.
his private
brokerage
out to buy an exchange-traded fund (ETF)
prised of Chinese construction companies.
Over
com-
several hours
he watched the price of the fund on his Bloomberg terminal.
It
was midnight
in China,
ETF’s price didn’t budge.
nothing was happening, and the
He
then clicked the
Buy button on
online brokerage account screen, and the price on the
berg screen jumped. Most people
who
his
Bloom-
used online brokerage
accounts didn’t have Bloomberg terminals that enabled them
to
monitor the market in something close to
investors never
would know what happened
they pressed the
Buy
symbol and
Then,
after
done anything but put
a quantity to buy.
he had bought his
nally listed, the
market
after
button. “I hadn’t even hit Execute,” says
the hedge fund president. “I hadn’t
ticker
Most
real time.
in the
ETF
And
at a
in a
the market popped.”
higher price than origi-
hedge fund president received
a
confirmation
saying that the trade had been executed by Citadel Derivatives.
Citadel was one of the biggest high-frequency trading firms.
“And
I
wondered,
Why
is
my
online broker sending
my
trades
to Citadel?”
Brad had observed and encouraged
but, as
he
Ronan’s
said, “I’d
did.
He
a lot
never seen anyone’s
just
took
off.”
Ronan,
of Wall Street careers,
star rise as
quickly as
for his part, couldn’t
RONAN’S PROBLEM
how
quite believe
a
ordinary the people on Wall Street were.
whole industry of bullshit,” he
Ronan about
know
And
is?’
I’d say,
first
want
to admit they don’t
‘No,
say,
know
I
HFT now
Then
about co-location.’
puts their servers in the same
as close as possible to the
exchange’s
matching engine, so they get market data before everyone
We
people are
like,
‘What the
fuck??!! That’s got to
how wedded
also surprised to find
Wall Street banks, even when those banks
no
there was
loyalty whatsoever,” he said.
would
investors
that the big
tell
else.’
illegal!’
trades to execute. “This
Street,” said
Maybe
because
“
told
him
there
By
five
controlled,
all
new
these other
so unlike a
and was able
whom
predator. Yet
me about
me you can’t
people who are
Wall Street person, he
to get inside the heads
he spoke. “After that
first
of
meet-
was no point in us even being in the same
“We
needed to divide and conquer.”
the end of 2010, Brad and
roughly
this
‘Wait, you’re telling
Ronan was
the Wall Street people to
I
they were
”
special access
meeting,” said Brad.
again,
was the biggest confusion to
Ronan.
trying to screw you?’
HFT
them. “In
Over and over
handled their stock market
them from
pay us because you need to pay
was granted
failed
RBC only a small percentage of their
they were willing to give
Wall
that
it.”
they were to the big
Ronan and Brad how outraged
Wall Street firms
orders had failed to protect
ing,
be
met with hundreds of people. And no one knew about
He was
I
‘Do you know what co-location
‘Oh yeah,
say,
‘You know,
building with the exchange,
And
“It’s
thing that struck
“Almost never do they
said.
Tell me.’ I’d say,
they’d
The
this industry don’t
something,” he
know.
don’t
said.
of the big investors he met was their inse-
a lot
“People in
curity.
79
Ronan between them met with
hundred professional stock market investors
among them, many
trillions
of dollars in
assets.
who
They
FLASH BOYS
80
never created a PowerPoint; they never did anything more for-
mal than
sit
down and tell people
everything they
knew
in plain
English. Brad soon realized that the most sophisticated investors
didn’t
know what was
going on in their
own
management
Rowe
firms like T.
Not
market.
Not
big mutual funds, Fidelity and Vanguard.
the big
the
money
Not
Price and Janus Capital.
even the most sophisticated hedge funds. The legendary investor
David Einhorn,
was shocked;
for instance,
famous hedge fund, Pershing Square,
up in
his office to explain
that often
ran a
bids for
might be using the information
about his trades to trade ahead of him.
Ackman.
leak every time,” says
prime broker.
man Brad
Thor
thought
because
I
at
RBC from Merrill
knew what
had no idea
I
Lynch
to help
A sales-
him mar-
“You know,
say,
was going on.”
reason, the market
A
a
did for a living but apparently not,
I
this
was
was the
it
thought.”
the so-called flash crash. At 2:45
no obvious
few minutes.
“I felt that there
thought maybe
one big investor calling to
recalls
I
“I
wasn’t the kind of leak that
It
hired
Then came
for
made
what was happening, Ackman had
started to suspect that people
I
Ackman
chunks of companies. In the two years before Brad turned
large
ket
was Dan Loeb,
so
another prominent hedge fund manager. Bill
few minutes
fell six
later, like a
on May
6,
2010,
hundred points
drunk trying
in a
to pre-
tend he hadn’t just knocked over the fishbowl and killed the
pet goldfish,
it
bounced
you weren’t watching
event
—
ket to
unless,
buy or
right back
closely
up to where
it
was before.
you could have missed the
If
entire
of course, you had placed orders in the marsell
certain stocks. Shares of Procter
for instance, traded as
Twenty thousand
low
as a
penny and
different trades
happened
as
at
high
&
as
Gamble,
$100,000.
stock prices
more
than 60 percent removed from the prices of those stocks just
RONAN’S PROBLEM
moments
before. Five
blaming the entire
months
on
fiasco
later,
the
81
SEC
published a report
a single large sell order,
of stock
market futures contracts, mistakenly placed on an exchange in
Chicago by an obscure Kansas City mutual fund.
That explanation could only be true by accident, because the
stock market regulators did not possess the information they
needed to understand the stock markets. The unit of trading
was
now the
microsecond, but the records kept by the exchanges
were by the second. There were one million microseconds
a
second.
It
was
data available
the decade.
had been
events
as
was
if,
a
crude aggregation of all trades made during
You could
a stock
see that at
market
crash.
as
he read the
SEC
some point
You could
on and around October
noticed
see
29, 1929.
report
on the
in that era there
nothing about the
The
first
flash crash
thing Brad
was
its
‘minute,’ ” said Brad. “I got eighty-seven hits.
‘second’ and got sixty-three hits.
I
I
—none of them actually relevant. Finally,
hits-
report once and then never looked at
sense of the speed with
which things
that explanations like this
he
said.
every trade.
not
exist,
No
it
To
then searched for
then searched for ‘millisec-
searched for ‘microsecond’ and got zero
right,”
I
old-
word
fashioned sense of time. “I did a search of the report for the
ond’ and got four
in
back in the 1920s, the only stock market
— someone
“You want
see
it
hits.”
again.
He
are happening,
get a
you
realize
—
are not
hitting a button
to see a single
read the
“Once you
time-stamped sheet of
what followed from what. Not only does
can’t exist, as
one could say
it
currently configured.”
for sure
what caused the
flash crash
—
for
the same reason no one could prove that high-frequency traders
were front-running the orders of ordinary
didn’t exist.
investors.
The
data
But Brad sensed that the investment community
was not persuaded by the SEC’s explanation and by the
assur-
FLASH BOYS
82
ances of the stock exchanges that
there a
a
was well
all
inside them.
of them asked the same question he was asking himself:
lot
deeper question of how
much
He watched
deadly avalanche?
respond
tors
Duncan
after
a light
went
off,” said
CEO
Niederauer, the
do with the
New
of the
goodwill tour, the pur-
a
pose of which seemed to be to explain
to
one snowball caused
this
the most sophisticated inves-
York Stock Exchange, embarked on
Exchange had nothing
A
Isn’t
why
the
New York Stock
flash crash. “That’s
Danny Moses, of Seawolf Capital,
fund that specialized in stock market investments.
a
He had
when
hedge
heard
Brad and Ronan’s
pitch.
“Niederauer was saying, ‘Hey, have
confidence in
wasn’t
us.’
was you.
us. It
Why should
I
Wait
a
minute:
be concerned that
never thought
I
was you?
it
your kid walks into your house and
says to you, ‘Dad,
dent your
my
car.’
Wait, there’s
a
dent in
to understand
explaining
it
it
opened the buy
what was going on. Because
Which meant
asking questions.
albeit
them,
to
few months
fit
later,
that
a tiny fraction
announced
was going
that
It
it
as bizarre:
Who
pay to do
it?
this
time in the
sleepy stock exchange called the
to
of
total stock
CBSX,
market volume,
to invert the usual system of fees
was now going
and charge people
Over
their bosses started
our telling the truth, and
September 2010, another strange,
which traded just
and kickbacks.
flash
willingness
side’s
more obscure, market event occurred,
A
to
call investors
perfectly.”
in
Chicago suburbs.
ity
didn’t
up meetings. His phone rang off the hook. “What the
crash did,” said Brad, “was
A
I
it
like
car?”
After the flash crash, Brad no longer bothered to
to set
was
It
“make”
to pay people to “take” liquidit.
Once
again, this struck Brad
would make markets on exchanges
But then the
CBSX
if
they had
exploded with
activity.
the next several weeks, for example,
it
handled
a third
of
RONAN’S PROBLEM
volume of the
the total
company. Brad knew that
firms
in
—but he
all
it
CBSX,
HFT
of
a favorite stock
why
in Chicago. Obviously,
could be paid to “take” on the
kers
was
Sirius
couldn’t understand
huge volume
83
shares traded in Sirius, the satellite radio
was suddenly trading
when
they saw they
the big Wall Street bro-
responded by reprogramming their routers so that their
customers’ orders were sent to the
other side of their trades, paying
CBSX. But who was on
the
more than ever had been paid
for the privilege?
That’s
when Ronan
told
Brad about
Spread Networks. Spread Networks,
to hire
ers.
Ronan
to sell
its
as
their astonishing tunneling
project and their business plans. “I told
hundred of these
firms
“They
things.
called
turned out, had tried
precious line to high-frequency trad-
They’d walked Ronan through
bananas,” said Ronan.
new company
a
it
I
them they were fucking
said they
were going to
came up with
who would potentially buy
a
list
sell
two
of twenty-eight
the line. Plus they
were charg-
ing ten point six million dollars up front for five years’ worth of
service,
sold.
and they wanted to pay
Which
is
just
an
you while I’m doing
a
this
who
it:
me
this nouP.”
now
what Spread had done but
not just
“You
well ask
Ronan
explained
been able to mention Spread before because he
HFT
The
he was free to dis-
for
whom
they had
firms like Knight and Citadel but also the
big Wall Street banks
others.
as
non-disclosure agreement with the company.
close not only
I
unpleasant experience to Brad,
agreement had expired that day, and so
done
me
blow
naturally said, “You’re telling
had signed
twelve grand for each one
it.”
Ronan mentioned
that he hadn’t
me
You might
to
insult.
— Morgan
couldn’t prove
what
Stanley,
Goldman
these guys
big deal, because they were so guarded about
Sachs, and
were doing was
a
how much money
FLASH BOYS
84
how
they were making,” said Brad. “But you could see
deal
it
how much
was by
involved.
thought,
I
industry-wide.
Ronan
itself
By
shit, this isn’t just
on just two weeks
its
HFT
shops. This
earlier.
CBSX
its
is
switch and turned
then inverted
—by paying brokers
pricing.
its
custom-
to execute
pricing
which they would normally be charged
trades for
big a
the banks were
what had just happened on
Spread Networks had flipped
inverting
ers’
And now
systemic.”
It’s
offered an explanation for
CBSX:
the
Oh
they spent.
a
fee— the
exchange enticed the brokers to send their customers’ orders to
the
CBSX
so that they
by high-frequency
mation
to
It
now very much worth
liquidity.
BATS, of enticing
from trading with
It
it
to
them
was exactly the game they had played on
brokers to reveal their customers’ intentions
tomer order from Weehawken
hard compared to racing
it
to other points in
all
from Chicago on Spread’s new
The team Brad was assembling
the pieces to the puzzle
of them than anyone
ject.
The
who
didn’t
RBC
what they already knew they
5 percent of the time
didn’t care to
want
didn’t
willing to talk openly on the sub-
know
—Brad
or
now and
Ronan met some
about the puzzle, someone
to hear their story.
Whenever Brad returned
from one of these meetings, he’d discover
whom
at
yet
simply more pieces of the puzzle. Every
—perhaps
investor
who
as
line.
a fantastically
—not —but they had more
reactions of investors to
considered
then
else
a cus-
New Jersey was
Spread was another piece of what was becoming
elaborate puzzle.
New
CBSX
in
to pay the
might exploit them elsewhere. But racing
so that they
have
New Jersey
Chicago they could use back in the markets
was
“make”
to
Networks. The infor-
that high-frequency traders gleaned
investors in
Jersey.
might be front-run back
traders using Spread
that the person to
he had just spoken depended, one way or another, on
RONAN’S PROBLEM
85
now
the revenues flowing to high-frequency traders. Every
again
—maybe another
an investor
who was
5 percent of the time
completely
and they’d be so scared inside
terrified.
their
own
“They knew
so
little,
firms that they’d rather
the meeting never happened,” said Brad.
dreds of big-time investors with
and
—they met with
whom
But most of the hun-
Brad and Ronan spoke
as T. Rowe Price’s Mike Gitlin: They
knew something was very wrong, but they didn’t know what,
and now that they knew they were outraged. “Brad was the
had the same reaction
“1 don’t
honest broker,” said Gitlin.
but he was the only guy
here and I’m watching
thing
a lot
is
saying, ‘This
gist at
is
a
people
just offensive.’ ”
—
a
it
party to
He
took
Canadian Asian guy from
Dublin handyman
bad
do
who was
—who had
a
is
that
Trust on Wall Street was
this
doing
just told
tors
who
trusted
you don’t want
still
Brad began
—just—
to share
possible.
see.
and
He was
strateat this
bank no one
a fair
him
impres-
the most
“Your biggest
me.”
to fuck
The
big inves-
whatever information they
could get their hands on from their other brokers
Brad was never meant to
actors,
that.
long look
incredible true story he had ever heard, and said,
competitive advantage
and the whole
it
who were
Vincent Daniel, the head
another way.
cared about, and this Irish guy
sion of a
know how many knew it,
say it. He was saying, ‘I’m
in this industry are afraid to
Seawolf, put
unlikely pair
and we’re
He exposed
rigged.’
of people
it
who would
—information
For instance, several demanded to
know from their other Wall Street brokers what percentage of the
trades executed
on
their behalf were executed inside the brokers’
dark pools. These dark pools contained the murkiest financial
incentives in the
Suisse ran the
new
stock market.
Goldman
Sachs and Credit
most prominent dark pools. But every brokerage
firm strongly encouraged investors
who wanted
to
buy or
sell
FLASH BOYS
86
big chunks of stock to do so in that firm’s dark pool. In theory,
the brokers
ers. If
were meant
the customer
best price
happened
to find the best price for their
wanted
buy
to
on the
to be
shares in
New York Stock Exchange,
broker was not supposed to stick the customer with
inside their dark pool.
rules
It
was
No
rules against
there
were no
it.
And
conflicts
in the dark pool:
own
traders
There were
while the brokers often protested that
of interest inside their dark pools,
dark pools exhibited the same strange property:
age of the customer orders sent into
Brad knew
inside the pool.
the
worse price
what went on
outsider could see
entirely possible that a broker’s
were trading against the customers
no
a
But the dark pools were opaque. Their
were not published.
inside them.
custom-
Chevron, and the
this
all
the
A huge percent-
dark pool were executed
a
because
a
handful of the world’s
biggest stock market investors had shared their information with
him
It
—
so that he
was hard
might help them figure out what was going on.
to explain.
best possible price in the
Sachs dark pool
—
A
broker was expected to find the
market
to take
for his customer.
one example
of the entire stock market. So
why
—was
The Goldman
than 2 percent
less
did nearly 50 percent of the
customer orders routed into Goldman’s dark pool end up being
executed inside that pool
Most of the
—
rather than out in the
the entire market, and yet
price for their customers
somehow
And because
investors
where
conditions
darkness.
a trade,
at
it
the
Even
percent of
between 15 and 60 percent of the time.
the dark pool
had executed
1
those brokers found the best
(So-called rates of internalization varied
it
wider market?
brokers’ dark pools constituted less than
from broker
was not required
to broker.)
to say exactly
and the broker did not typically
had executed
moment of
a trade,
much
less
when
tell
his
the market
execution, the customer lived in
a giant investor like T.
Rowe
Price simply had to
RONAN’S PROBLEM
take
in
it
on
faith that
As Mike Gitlin
so.
Goldman
interest, despite the
its
broker-dealer
place that
is
Sachs or Merrill Lynch had acted
obvious financial incentives not to do
said, “It’s just
very hard to prove that any
routing the trades to someplace other than the
best for you.
is
87
You
couldn’t
ker was doing.” If an investor
SEE what any
as large as T.
Rowe
given bro-
Price,
which
acted on behalf of millions of small investors, was unable to
obtain from
mine
the
if the
its
stockbrokers the information
it
needed
to deter-
brokers had acted in their interest, what chance did
guy have?
little
In this environment, the effect of trying to help investors see
what was happening
to their
money was
The
revolutionary.
Royal Bank of Canada had never been anything more than the
most
trivial player in the
U.S. stock market. At the end of 2010,
a report
from Greenwich Associates, the firm used by
Wall Street banks
to evaluate their standing in relation to their
Brad saw
Greenwich Associates interviews the
peers.
Wall
Street’s services
and privately reports
Wall Street firms. In 2009,
down Greenwich
RBC
had
—
at
investors
who
use
their findings to the
number
19
—been
far
market rankings. At the end
Associates’ stock
RBC was ranked numRBC to ask what on earth
of 2010, after only six months of Thor,
ber
1.
Greenwich Associates
called
was going on within the bank. In the history of their rankings,
they
said,
they had never seen
At the same time,
this
a
firm jump more than three spots.
movement spawned by Brad Kat-
suyama’s unhappiness with Wall Street was starting to
like a business
than
a cause.
Brad was no
radical.
feel less
As he put
“There’s a difference between choosing a crusade and having
thrust
how
on you.” He’d never
he
fit
really
into the bigger picture,
thought
all
that
much
it,
it
about
and certainly never consid-
ered himself a character upon a stage. He’d never run for stu-
FLASH BOYS
88
dent council. He’d never had anything to do with
me
always seemed to
that the things
you need
ence change had to do with glad-handing,” he
to
so phony.” This didn’t feel phony. This
felt
actions,
through
the world. After
all,
money managers about
to teach
immediate
now
he was
to influ-
like a situation in
might change
educating the world’s biggest
the inner workings of the stock market,
which strongly suggested
was willing
his
do
said. “It just felt
which
a person,
politics. “It’s
to
him
that
them how
no one
else
on Wall
Street
were
their investment dollars
being abused. The more he understood the inner workings of
the financial system, the better he might inform the investors,
big and small,
more
who were
pressure they
The deep problem with
tia.
So long
inside
it,
the system
inside
and
happiest
trading
took
a
the
to change.
kind of moral iner-
made
to investors,
was
was when
a
to
change
—though even
it,
no
to use
uncom-
serious people
his biggest concern,
that he’d be seen as just another
One
of the compliments that made
big investor said,
“Thank God,
finally
someone who knows something about high-frequency
who
him
created for
One
became
it
“sinister”
nut with a conspiracy theory.
it
was
and so Brad avoided them. Maybe
when he spoke
there’s
on the system
would ever seek
corrupt or sinister
like “corrupt”
fortable,
him
to bear
served the narrow self-interests of everyone
it
no one on the
how
matter
words
as
And
being abused by that system.
might bring
a
isn’t
an Area 51 guy.” Because he wasn’t
while to figure out that
him
a
dramatic
role,
fate
which he was obliged
night he actually turned to Ashley,
“It feels like
changed.
I
a radical,
and circumstance had
now
his wife,
to play.
and
said,
I’m an expert in something that badly needs to be
think there’s only
do anything about
Brad Katsuyama
—
a
few people
don’t
this. If
I
there’s
no one
in the
do something
to call.”
who can
now me,
world
right
—
CHAPTER FOUR
TRACKING THE
PREDATOR
B
y the end of 2010 they’d built
weapon promised
a
marketable weapon.
market from what appeared to be
ket predator.
About
that the
HFT
new kind of marsurprisingly
knew no one from
of high-frequency trading.
its
a
knew
that predator they
Apart from Ronan, Brad
world’s reach, or
The
to defend investors in the U.S. stock
He had
inside the
little.
world
only a vague idea of that
political influence.
From Ronan he knew
firms enjoyed special relationships with the public
stock exchanges, but he
knew nothing
about their dealings with
the big Wall Street banks tasked with guarding the interests of
investors.
Then
again,
many of the
people
who worked
inside
the Wall Street banks seemed to have only the faintest idea of
what those banks were up
bank, the easiest
was
way
to seek out their
to. If you
to find out
employees
worked
for a big
who were
looking for
and interview them. In the wake of the financial
big-to-fail
Wall Street
what other banks were up
crisis,
to
new jobs
the too-
end of Wall Street was in turmoil, and Brad was able
FLASH BOYS
90
who, just
to talk to people
a
few years before, would never have
Bank of Canada. By
considered working for the Royal
the time
he was finished picking their collective brains, he had spoken
to
more than
hundred employees
a
too-big-to-fail banks but
at
hired only about thirty-five of them.
he
not that they wouldn’t
said. “It’s
know how
The
was
their fear
and
on Staten
all
thing more.”
a
of the system. John Schwab
Schwab
fireman,”
him. “Every male on
More meant
said. “I
wanted
my
do some-
from
New Jersey.
Hoboken,
Banc of America
the late 1990s he took a job at
Securities,*
he rose to a position with an important-sounding
job.
to
getting a master’s in engineering
the Stevens Institute of Technology, in
New Products.
jobs,”
that they didn’t
these people, even the ones he
distrust
Island, like his father before
is
wanted
all
It’s
Schwab’s father had been a firefighter
a curious case in point.
father’s side
me.
electronic systems worked.”
thread running through
didn’t hire,
was
own
their
“They
tell
title:
In
where
Head of
His job description was more glamorous than his
John Schwab was the guy behind the scenes who handled
the boring details, like
managing relations between the
traders
on
who built stuff for them, or ensuring
with new stock market regulations. He
the floor and the tech geeks
that the
bank complied
routinely ranked in the top
1
percent of all employees in Banc of
America’s reviews of its personnel, but his status in a Wall Street
bank was akin
to
head butler to
a British upper-class family.
the grunts in the back office he might have
shot, but to the traders
*
It is
irritating to read
banc in
(here,
banks.
this case
who made
the
money he
about an American bank that
was pushed
Bank of America)
to
do
so, as
are prohibited
seemed
insists
on
To
like a big
did not.
calling itself a banc.
The
the securities divisions within
American banks
by regulators from referring
to themselves as
TRACKING THE PREDATOR
Whatever
excuse to
11,
feel loyalty for his
91
him he
frustration this caused
buried. Given an
company, he seized
September
it.
of the World Trade Center, on the eighty-first
fluke he
had been
late to
2001 he would report
plane
hit,
work
late to
morning
that
work
—
Island firemen he’d
when
the plane
the stairs rather than
been on hand
and so had
owed
down
meant
America
to feel
to feel
toward
forever,”
Then came
he
his employer.
toward
a
mind,
Which
is
“I
thought
I’d
at his
go up
a
be
debt he
to say that
Wall Street bank what
company.
to
not having
felt for
in his
and to
his
had he been
them. The guilt he
somehow became,
to his colleagues
Schwab wanted
that,
would have been
hit, his instinct
to help
first
from the window of a
known. Schwab seldom spoke
of the event, but privately he believed
desk
sheer
the only day in
— and he’d watched the
thirteen floors above his desk,
some Staten
By
floor.
distant bus. Several of his colleagues died that day,
is
Tower
2001, for instance. Schwab’s desk was in the North
a
fireman
at
Banc of
said.
the financial
crisis,
and, in 2008, the acquisition,
by Bank of America, of a collapsing Merrill Lynch.
What
hap-
pened next upended Schwab’s worldview. Merrill Lynch had
been among the most
prolific creators
prime mortgage bonds. Had they been
— had
market
Bank of America not
of the very worst subleft
saved
to the
Lynch people would have been tossed out on the
right before their acquisition, they
bonuses that Bank of America
mercy of the
—
them
the Merrill
street. Instead,
awarded themselves massive
wound up having
to pay. “It
was
incredibly unfair,” said Schwab. “It was incredibly unjust.
My
stock in this
company
I
helped to build for nine years goes into
the shitter, and these assholes pay themselves record bonuses.
was
a
It
fucking crime.” Even more incredibly, the Merrill Lynch
people ended up in charge of Bank of America’s equity division
FLASH BOYS
92
and
about firing most of the people in
set
it.
A lot of those people
had been good, loyal employees of the bank. “Wall Street
rupt,
I
decided,” said Schwall afterwards. “There
is
cor-
no corporate
is
loyalty to employees.”
who
He hid
And he
Schwall was one of the few Banc of America people
kept his job: Merrill Lynch had no one to replace him.
his true feelings,
sensed, for the
trust
him.
but he no longer trusted his employer.
first
One
time in his career, that his employer did not
day he sent himself an email from his personal
account to his work account
who had been
fired
—he was helping out some
small brokerage firm. His boss called
What
who wanted
by the bank and
the hell are they doing monitoring
him
my
to ask
friends
to start a
him about
it.
incoming emails? Schwall
wondered.
His ability to monitor his superiors exceeded their ability
to
monitor him, and he began to do
unspoken animosity,” he
said.
He
it.
“There was
a lot
of
noticed the explosion of trad-
ing activity inside of Merrill Lynch’s dark pool fueled by high-
frequency traders.
revenue
line, to
He saw
Lynch created
that Merrill
account for the
money
paid to
a
new
them by high-
frequency trading firms for access to the Merrill Lynch dark
pool.
He
noticed that the guy
electronic trading platform
in all of Merrill
company
on bank
that
Lynch
would
who had
built the Merrill
— and he’d
cater to
HFT
nevertheless quit to create a
firms.
letterhead to the Securities and
He
noticed
that “despite
in recent years in both market structure
the equity market
heard
a
rumor
is
He
saved one in
numerous changes
and participant behav-
functioning well today.”
that the Merrill people
letters sent
Exchange Commission
arguing against further stock market regulation.
which the bank’s lawyers wrote
ior,
Lynch
was one of the highest-paid people
One
day he
had assigned an analyst to
TRACKING THE PREDATOR
produce
a
93
report to prove that Merrill’s stock market customers
were better off because of whatever happened inside Merrill’s
dark pool. There was apparently some controversy around
rumor away
report. Schwall filed that
Schwall wanted to think of himself
few simple
he was more
sis
good
principles, a
this
for later use.
guy who
as a
soldier.
by
lived
a
After the financial cri-
He had
like the Resentful Butler.
a taste for
asking complicated questions, and for tracking the answers into
whatever rabbit hole they might lead him.
He
had, in short, an
obsessive streak.
It
He
Bank of
wasn’t until after he’d hired Schwall away from
America
to
work
for
should have seen
on Wall
Street:
RBC that Brad noticed this side of Schwall.
it
from Schwall’s chosen
before, simply
product manager.
A product manager,
to
role
be any
good, had to be obsessive. The role had been spawned by the
widespread belief that traders didn’t
know how
to talk to
com-
puter geeks and that computer geeks did not respond rationally
to big, hairy traders hollering at them.
A
product manager
stood between the two groups, to sort out which of the things
wanted
the traders
that
were the most important and how
best to build them. For instance, an
might demand
he could hit
a
when he wanted Thor
To design
stock.
mind-numbingly
came
in.
“He
that button
first
to execute his order to
detailed specifications. That’s
that’s
buy
might require twenty pages of
what he
where Schwall
else will
go
into,
likes to do,” said Brad.
hint that Schwall’s obsession with detail might take a
sharp turn into
ings.
stock market trader
goes into details that no one
because for some reason
The
RBC
button on his screen that said “Thor,” which
some
private cul-de-sac
came
“He’d go off on complete tangents,”
related but outer space— type stuff.”
in
company meet-
said Brad.
“Semi-
Another way Brad saw
how
FLASH BOYS
94
mind worked was
Schwall’s
in a fight that Schwall picked not
long after he started working
an offer to serve
Over Wall
as a lead
RBC. The bank
Wings Over Wall
Street.
combat amyotrophic
Wings
money
Street raised
(ALS)
lateral sclerosis
had declined
charity called
a
—Lou
to
Gehrig’s dis-
and without explaining why, Schwall blasted
ease. In response,
a
at
sponsor for
system-wide email explaining the importance of ALS research
RBC employees to get behind Wings Over
RBC executives who had made the original
and encouraging
Wall
all
The
Street.
decision understandably saw this rogue email as a political act
intended to undermine their authority. For no apparent reason,
who had
Schwall had alienated a bunch of important people
power
to fire
Brad
When
had
now found
employee and
able
just died
his
RBC
executive
who wanted
Brad
his scalp.
that his
mother
of ALS. “And he hadn’t thought to mention
“He’d spent years trying
mother.
won
himself between his new, extremely valua top
pressed, Schwall finally explained to
said Brad.
the
him.
The
mother died of the
fact his
how
to figure out
the argument, and he never mentions
disease
it.
He
it,”
to help
would have
said
it
would
have been underhanded and unprincipled.” Schwall’s problem
wasn’t an
uncharming
taste for corporate politics
but
a
ineptitude at playing them, Brad decided. (“Anyone
politically astute never
less
stumbled into
enough
that
Brad
would have done
politics often
finally
mess: a Schwalling.
“A Schwalling
would
say
is,
He
who was
neverthe-
enough and played them badly
name
for the resulting
when he
does something
came up with
unintentionally idiotic that makes
All Schwall
this.”)
charming
is
a
him look
“I just sort
stupid,” said Brad.
of get crazy from time
to time.”
He’d become obsessed with something, and
sions sent
him on
a trip to a place
his obses-
from which the journey’s
ori-
TRACKING THE PREDATOR
gin could no longer be glimpsed.
The
result
95
was
a lot
of activity
without an obvious motive.
Thor had triggered Schwab's private process. Thor, and what it
implied about the U.S. financial system, became Schwall’s great-
Before Brad explained to
est obsession.
him how Thor worked
and why, Schwab hadn’t thought twice about the U.S. stock
markets. After he
met Brad, he was
certain that the market at the
heart of capitalism was rigged. “As soon as you realize this,” he
soon
said, “as
as
you
you
realize that
someone
orders because
else
is
are not able to execute
able to identify
what you
ing to do and race ahead of you to the other exchanges,
he
said. “It
changes your mind.”
He
your
are try-
it’s
over,”
stewed on the situation; the
longer he stewed, the angrier he became. “It really just pissed
me
off,”
he
said.
from everyone
“That people
else’s
screwed, people like
set
my mom
at
pool, for instance.
The
analyst told
telling
him
basically told that
to
hell-bent
reconsidered
Early one
Monday morning,
a
cab from Schwab.
“And
I
Bank
He hunted down
that he
the
had found that
in the
a different
profit-
to hear
his report,” said
he had to find
answer they needed.”
Then he
him
change
to get the
The
He
management did not want
it
me.’
became
was actually costing the customers (while
“They kept on
recalls Brad.
make money
the controversial analysis of Merrill’s dark
ing Merrill Lynch), but that
“He was
to
Merrill Lynch after they had taken over
who had done
the dark pool
I
the screwing.”
of America’s stock trading department.
analyst
way
knew who was being
I
and pop, and
on figuring out who was doing
what he’d seen
out this
retirement account.
it.
Schwab.
way
to
do
summer of 2011, Brad had
”
“He
said,
‘Hey, I’m not
coming
in today,’
said,
‘What’s going on?’
He just
said, ‘Trust
disappeared.”
previous night
Schwab had gone out
into his backyard,
96
FLASH BOYS
with nothing but
that
a cigar, a chair,
and
some people were perpetuating
HFT, what do you
You
person.
think?
You think
don’t have a face.
specific people
behind
When
nothing.
You think
He’d
had the belief
his iPad. “I
a fraud.
You
a computer.
you think
don’t have a
But there
are
started
by Googling “front-
running” and “Wall Street” and “scandal.”
What he was looking
for, at first,
was
it
was the cause of the problem Thor had solved:
legal for a handful
than the
He
rest
of insiders to operate
of the market and, in
soon had
his answer:
Passed by the
SEC
Reg NMS,
it
best
this.”
as
at faster
from
effect, steal
How
speeds
investors?
Regulation National Market System.
2005 but not implemented
until 2007,
became known, required brokers
to find the
market prices
in
for the investors they represented.
The regu-
had been inspired by charges of front-running made in
2004 against two dozen specialists on the floor of the old New
lation
York Stock Exchange
a
$241 million
Up
till
—
a
charge the specialists settled by paying
fine.
then the various brokers
who
handled investors’ stock
market orders had been held to the loose standard of “best execution.”
tion. If
share,
What
that
you wanted
meant
to
in practice
buy 10,000
was subject
to interpreta-
shares of Microsoft at
and the broker went into the market and saw
were only 100 shares offered
at
$30
$30, he might choose not to
those hundred shares and wait until
more
sellers
a
that there
buy
turned up.
He
had the discretion not to spook the market, and to play your
hand on your behalf as smartly as he could. After the brokers
abused the trust implicit in that discretion once too often, the
government took the discretion away. Reg
NMS
replaced the
loose notion of best execution with the tight legal one of “best
price.”
To
define best price,
Reg
NMS
of the National Best Bid and Offer,
relied
known
as
on the concept
the
NBBO.
If
TRACKING THE PREDATOR
97
an investor wished to buy 10,000 shares of Microsoft, and 100
shares
were offered on the
the full 10,000 listed
at
on
BATS
exchange
$30
at
a share,
while
were offered
the other twelve exchanges
$30.01, his broker was required to purchase the 100 shares
on Bats
at
$30 before moving on
mandated routing
have to go
to
to,” said Schwall.
“And
people to front-run you.”
ties for
easier for
to the other exchanges. “It
more exchanges than you might otherwise
so
more opportuni-
as
they must send them
exchange that offered the best market
That would have been
fine but for the
manner
first
far
for taking the
measure of the entire market
—
—by compiling
offers for all
to the
which the
in
ing the National Best Bid and Offer
a
mech-
for creat-
all
the bids
U.S. stocks in one place. That place, inside
some computer, was
sor,
it
price.
market price was calculated. The new law required
anism
and
made
regulation also
high-frequency traders to predict where brokers would
send their customers’ orders,
best
created
it
The
called the Securities Information Proces-
which, because there
is
no such thing on Wall
many acronyms, became known
as
The
the SIP.
Street as too
thirteen stock
markets piped their prices into the SIP, and the SIP calculated
the
NBBO. The
SIP was the picture of the U.S. stock market
most investors saw.
Like
a lot
sensible. If
of regulations,
the rule
would have
market.
The
ify the
Reg
NMS
was well-meaning and
everyone on Wall Street abided by the
rule,
established a
new
however, contained
speed of the SIP.
rule’s spirit,
fairness in the U.S. stock
a loophole:
To gather and organize
the exchanges took milliseconds.
from
all
more
to disseminate those calculations.
It
It
failed to spec-
the stock prices
took milliseconds
The technology used
to
perform these calculations was old and slow, and the exchanges
apparently had
little
interest in
improving
it.
There was no rule
98
FLASH BOYS
against high-frequency traders setting
exchanges and building their own,
up computers inside the
much
faster,
better cared for
version of the SIP. That’s exactly what they’d done, so well that
there
were times when the gap between the high-frequency
view of the market and that of ordinary investors could
traders
be twenty-five milliseconds, or twice the time
travel
from
Reg
New York
NMS
was intended
to create equality
the U.S. stock market. Instead
A
cious inequality.
were
now
seen.
Thus
—
for
now
took to
it
of opportunity in
institutionalized a
more perni-
small class of insiders with the resources to
on what they had
create speed
it
Chicago and back again.
to
example
allowed to preview the market and trade
—
the SIP might suggest to the ordinary
investor in Apple Inc. that the stock was trading at 400-400.01.
The
investor
shares at the
would then give
market
of time between the
moment
nections.
in time
much
it
his broker his order to
price, or $400.01.
moment
The
the order
buy 1,000
infinitesimal period
was submitted and the
was executed was gold to the traders with
faster
How much gold depended on two variables:
a)
between the public SIP and the private ones and
Apple’s stock price
in time, the greater the chance that Apple’s stock price
investor with an old price. That’s
high-frequency traders:
to see
first
and to
b)
how
bounced around. The bigger the gap
have moved; and the more likely that
to
con-
the gap
exploit.
It
It
a fast trader
why
created
volatility
new
would
could stick an
was
so valuable
prices for fast traders
wouldn’t matter
if
some people
in
the market had an early glimpse of Apple’s price if the price of
Apple’s shares never moved.
Apple’s stock
February 2013,
moved
a
fornia, Berkeley,
a lot,
of course. In
team of researchers
showed
at
a
paper published in
the University of Cali-
that the SIP price of
Apple stock and
TRACKING THE PREDATOR
the price seen
by
with
traders
faster
That meant
tion differed 55,000 times in a single day.
were 55,000 times
a
day
a
99
channels of market informathat there
high-frequency trader could exploit
the SIP-generated ignorance of the wider market. Fifty-five
thousand times
a day,
he might buy Apple shares
then turn around and
price,
them
sell
at
an outdated
the new, higher price,
at
exploiting the ignorance of the slower-footed investor
end of
his trades.
And
that
high-frequency trader might use
to
on
either
was only the most obvious way
his
a
advance view of the market
make money.
Schwab
details
the
already
new
knew
NMS,
of Reg
rule for the
about the boring nitty-gritty
a lot
he had been in charge of implementing
as
whole of Bank of America. He’d seen
to
the bank’s need to build so-called smart order routers that could
given stock (the
exchange.
official best price
of any
and send the customers’ orders
to that
which exchange had the
figure out
NBBO)
By complying with Reg NMS, he now
marched
the smart order routers simply
traps laid for
them by high-frequency
traders.
“At that point
“That they
just got very, very pissed off,” he said.
understood,
investors into various
I
are ripping off
the retirement savings of the entire country through systematic
me
up the
search for greater detail.
When
fraud and people don’t even realize
it.
That just drives
fucking wall.”
His anger expressed
he saw that
itself in a
Reg NMS had been
created to correct for the market
manipulations of the old
NYSE
How had
come
He
that
corruption
discovered that the
had been exploiting
a
which of course just
led
SEC
New
specialists,
about?
he wanted to know:
He began
another search.
York Stock Exchange
specialists
loophole in some earlier regulation
Schwab
to create that regulation?
to ask:
Many
What
hours
event had led the
later
he’d clawed his
FLASH BOYS
100
way back
to the 1987 stock
out, gave rise to the
During
trading.
first,
market crash, which,
albeit crude,
as
it
turned
form of high-frequency
the 1987 crash, Wall Street brokers, to avoid
having to buy stock, had stopped answering their phones, and
small investors were unable to enter their orders into the mar-
government regulators had mandated the
ket. In response, the
creation of an electronic Small
the
little
press of a
first
Order Execution System
so that
guy’s order could be sent into the market with the
key on
taking
it
a
computer keyboard, without
from him on the phone. Because
a
a stockbroker
computer was
able to transmit trades
must
soon gamed by smart
traders, for
do with the
At which point Schwall naturally asked:
guy.*
little
From whence came
than humans, the system was
faster
purposes having nothing to
the regulation that had
made
brokers
feel
comfortable not answering their phones in the midst of the 1987
stock market crash?
As
it
Street”
when you Google “front-running” and “Wall
turns out,
and “scandal,” and you are hell-bent on following the
search to
its
conclusion, the journey cannot be finished in an
evening. At five o’clock
back inside
called
Brad
his house.
to tell
Monday morning Schwall finally went
He slept for two hours, then rose and
him he
wasn’t
coming
off for a Staten Island branch of the
“There was quite
a
of vengeance on
high school junior Schwall had been
tling
champion
in the world
he’s not.”
*
a bit
New
A year later,
lent history
in the
119-pound
most of the time,”
A streak
to
work. Then he
York Public
my
New
mind,” he
York
said.
City’s
As
wres-
division. “He’s the nicest
said Brad.
set
Library.
guy
“But then sometimes
of anger ran through him, and exactly where
in 2012, Wall Street Journal reporter Scott Patterson
of the early electronic traders called Dark
Pools.
would write an
excel-
TRACKING THE PREDATOR
it
came from Schwall could not
what triggered
it:
these people
who
he
said.
to
do
it,”
ing was Thor, but
why
he was
still
say,
injustice. “If
but he
can
I
fix
101
knew
perfectly well
something and fuck
are fucking the rest of this country, I’m going
The
trigger for his
most recent burst of feel-
had asked him on Wednesday morning
if you
digging around the Staten Island library instead
of going to work, Schwall wouldn’t have thought to mention
Thor. Instead he would have
the origins of every
United
am
trying to understand
States.”
Several days later he’d
The
said, “I
form of front-running in the history of the
entire history of
now seemed
to
worked
his
way back
to the late 1800s.
Wall Street was the story of scandals,
him, linked together
tail
to
it
trunk like circus
elephants. Every systemic market injustice arose
from some
loophole in a regulation created to correct some prior injustice.
“No
matter what the regulators did, some other intermedi-
ary found a
way
to react, so there
front-running,” he
said.
work,
library he returned to
at all
would be another form of
was done in the Staten Island
as if there
was nothing unusual
about the product manager having turned himself into a
private eye.
He’d learned
colleagues. First, there
were
When he
at
several important things, he told his
was nothing new about the behavior they
war with: The U.S.
either corrupt or about to
financial markets
had always been
be corrupted. Second, there was zero
chance that the problem would be solved by financial regulators; or, rather,
the regulators might solve the
narrow problem
of front-running in the stock market by high-frequency traders,
but whatever they did to solve the problem would create yet
another opportunity for financial intermediaries to
at
make money
the expense of investors.
Schwall’s final point
was more
aspiration than insight. For
FLASH BOYS
102
the
first
time in Wall Street history, the technology existed that
eliminated entirely the need for financial intermediaries. Buyers
and
U.S. stock market were
sellers in the
with each other without any need of
that the technology
we had
a
a
now
me
had evolved gave
able to connect
third party.
“The way
the conviction that
unique opportunity to solve the problem,” he
“There was no longer any need
they were going to
men who had
somehow
human
any
for
said.
intervention.” If
eliminate the Wall Street middle-
flourished for centuries, they needed to enlarge
the frame of the picture they were creating. “I was so concerned
that
we were
talking about
what we were doing
high-frequency trading,” he
as a solution to
was bigger than
said. “It
that.
The
goal had to be to eliminate any unnecessary intermediation.”
BRAD FOUND
IT
odd
of Wall Street scandal
lineman choosing
offensive
manager had
that his product
tigate the history
—
first,
struck
him
gets
on one of these bents
said Brad. “That’s just
a bit like
an
side career as a pri-
harmless digression, of a
as a
piece with Schwab’s tendency in meetings to go
“Once he
set off to inves-
was
to skip practice to infiltrate the
opposing team’s locker room. But Schwab’s
vate eye, at least at
it
it’s
oft'
on
tangents.
better just to
let
him
him working eighteen-hour
go,”
days instead
of fourteen-hour days.”
Besides, they
now had
far bigger
problems.
2011, Thor’s limitations were visible.
in our business the
an open market,
ter
first
“We
year and then
it
when customers were
had
By
this
offered a
banks weren’t subject to the usual open market
Wall Street banks
for
all
sorts
meteoric
flatlines,” said
product, they ditched their old product for
tors paid
the middle of
new and
it.
rise
Brad. In
bet-
Wall Street
forces. Inves-
of reasons: for research.
TRACKING THE PREDATOR
to
103
keep them sweet, to get private access to corporate execu-
tives,
or simply because they had always done
so.
The way
they paid them was to give them their trades to execute
is,
that
—
that
they believed they needed to allocate some very large per-
centage of their trades to the big Wall Street banks simply to
maintain existing relations with them.
routinely calling to say, “Hey,
much
only so
we
business
we
RBC’s
clients
now
were
love using Thor, but there
can do with you because
we
is
have to
Goldman Sachs and Morgan Stanley.”
The Royal Bank of Canada was running away with the
pay
Wall
Street’s
most popular broker by peddling
purpose was to protect investors from the
The
investors refused to
should have a
lot less to
a tool
rest
of Wall
draw the obvious conclusion
do with the
rest
of Wall
title
of
whose only
Street.
that they
Street.
RBC
had become the number-one-rated stockbroker in America and
yet
was
still
more than
only the ninth best paid: They would never attract
a tiny fraction
that fraction
guy Ronan knew
called
It’s
to
change the system.
A
the big high-frequency trading shop Citadel
genius.
And
the matter in a nutshell: I
nothing
there’s
know what
we can do about
it.
But
are only two percent of the market.
On
cess,
top of that, the big Wall Street banks, seeing
were seeking
licate
it.
saying,
‘I
“The
to
undermine
tech people
want
Allen Zhang.
ing
at
him one day and put
you’re doing.
you
of America’s stock market trades, and
would never be enough
to
The
do Thor.
earned
at
RBC
to leave.
like a
were suggesting
or
at least to
RBC’s
offering
suc-
pretend to rep-
other firms are calling
How
business people
Ronan and Rob and
something
at
it
me
and
does Thor work?’ ” recalled
at
the banks were
them
multiples of
The whole of Wall
Street
now
call-
what they
had been in
two-year hiring freeze, and yet these big banks
to
Ronan
—who had
spent the past fifteen years
FLASH BOYS
104
unable to get his foot in the door of any bank
him
as
much
Brad and told him
—
that they’d pay
million to join them. Headhunters called
as $1.5
that, if
he was willing to leave
RBC
for a
competitor, the opening bid was $3 million a year, guaranteed.
team in
Just to keep his
pool of money and
years, they
set
place,
it
Brad arranged
aside: If the
would be handed
the
for
RBC to create a
guys hung around for three
money and would wind up
being paid something closer to their market value.
to
do
it,
action himself and continued to
made
have
The
to get
Street
work
for far less than
he could
elsewhere.
bank’s marketing department proposed to Brad,
some media
way
as a
attention for Thor, that he apply for a Wall
Journal Technology Innovation Award. Brad had never
heard of the Wall
Street Journal’s
Technology Innovation Awards,
but he thought that he might use the Wall
how
the world just
His bosses
him
RBC agreed
probably because Brad did not ask for a piece of the
at
Street
Journal to
tell
corrupt the U.S. stock market had become.
RBC, when
to attend a lot of
they got
meetings
—
wind of
to discuss
They worried about
to the Wall Street Journal.
his plans,
wanted
what he might
say
their relationships
with other Wall Street banks and with the public exchanges.
“They
didn’t
was not
want
a lot
I
me
to ruffle anyone’s feathers,” says Brad.
didn’t
want
RBC
would allow him
him
saying
describe publicly
manner
in
which
it
openly.”
by the exchanges
exchanges had
He soon
realized that, while
to apply for awards,
it
would not
let
what Thor had inadvertently exposed: the
HFT
firms front-ran ordinary investors; the
conflict of interest that brokers
by
“There
couldn’t say in a small closed forum, but they
had when they were being paid
to route orders; the conflict of interest the
when
they were being paid
a billion dollars a
year
HFT firms for faster access to market data; the implications of
TRACKING THE PREDATOR
an exchange paying brokers to “take”
had found
a
way
to bill investors
had about eight things
“I
“By
Brad.
the time
nothing to
had found
say.
Wall Street
bill.
to say to the Journal ,” said
all
these meetings, there was
to say
one of them
—
that
we
to route orders so they arrived at the exchanges
way
a
got through
I
was only allowed
I
liquidity; that
without showing them the
wanted
I
105
simultaneously.”
That was the problem with being
war with
incapable of going to
thing
at all to
RBC nice:
the Wall Street Journal,
It
rendered you
Before Brad said any-
nasty.
RBC’s upper management
they needed to inform the U.S. regulators of what
felt
planned to
for the
join
SEC
him
They asked Brad
say.
down from Canada
and then flew themselves
in a big
ing and Markets
staff. “It
was more about not wanting them
thinking they were going to do something about
like
idea
what
and prepared
he
to
meeting with the SEC’s Division of Trad-
be embarrassed about not knowing about Thor than
He had no
little
on Thor
to prepare a report
a
as if
meeting
the
at
SEC was
it,”
it
to
was us
Brad
said.
supposed to be
he were testifying before Congress. As
he read straight from the document he had written, the people
around the
he
doing
is
table listened, stoned-faced. “I
When
said.
he was finished, an
SEC
was scared
staffer said,
shitless,”
What you
are
not fair to high-frequency traders. You’re not letting them get out
of the way.
Excuse me? said Brad.
The SEC
staffer
argued that
traders couldn’t post
extract information
risk
phony
it
from actual
of having to stand by them.
them
to
looked
was unfair
bids and offers
the guy:
He was
a
the exchanges to
investors without
It
was unfair
honor the markets they claimed
at
that high-frequency
on
to be
that
running the
Thor forced
making. Brad just
young Indian quant.
FLASH BOYS
106
Then
a
second
said, If they don’t
staffer, a
want
to
much
older guy, raised his
hand and
be on the offer they shouldn’t be there at
A lively argument ensued,
SEC
with the younger
all.
staffers tak-
ing the side of high-frequency trading and the older half taking Brad’s point. “There was no clear consensus,” said Brad.
“But
it
gave
me
a sense that
they weren’t going to be doing
anything anytime soon.”* After the meeting,
a study,
RBC
conducted
never released publicly, in which they found that more
than two hundred
SEC
ment jobs
for high-frequency trading firms or the firms
to
that lobbied
work
Washington on
had played central
2007 had
staffers since
their behalf.
roles in deciding
left their
govern-
Some of these
people
how, or even whether,
to
regulate high-frequency trading. For instance, in June 2010, the
associate director of the
SEC’s Division of Trading and Markets,
Elizabeth King, had quit the
SEC
like the public stock exchanges,
to
had
a
work
The SEC,
for Getco.
kind of equity stake in the
future revenues of high-frequency traders.
The argument
in favor of high-frequency traders
the argument against
them
to the U.S. regulators.
lows: Natural investors in stocks, the people
tal to
companies, can’t find each other.
The
who
had beaten
ran
It
as fol-
supply capi-
buyers and
of any given stock don’t show up in the market
sellers
the
at
same
time, so they needed an intermediary to bridge the gap, to
from the
seller
and to
market moved too
sell
to the buyer.
fast for a
human
The
fully
buy
computerized
to intercede in
it,
and so
the high-frequency traders had stepped in to do the job. Their
* “There’s a culture in the
comes
want
in,” says a staffer
to give
SEC
who
of not getting into
listened to
defensive culture.
And there were people
he was implicitly criticizing.”
a
dialogue with any individual
who
Brad Katsuyama’s presentation. “They don’t
any one person an unfair peek
at the
in the
way
the
SEC
But
a
very
room who had written some of the
rules
thinks.
it’s
TRACKING THE PREDATOR
importance could be inferred from their
quarter of
by
HFT
—
beings
between the
good
and the
offers
job, the spread, at least in the
typically a penny, or
more
computers did the
that
actively traded stocks,
one-hundredth of
1
meant more
The arguments
A
more
liquidity.
against the high-frequency traders hadn’t
spread nearly so quickly
from the SEC.
was
percent. That, said the
supporters of high-frequency trading, was evidence that
HFT
a
Back
of any given stock were
Now
of a percentage point.
a sixteenth
for investors.
the middle of the stock market, the
sat in
bids
—was
argument went
so the
sign of progress, not just necessary but
spreads
a
were made
by 2008 that number had risen to 65 percent.
firms;
when human
2005
activity: In
trades in the public stock markets
all
new market dominance
Their
107
—
at
any
rate,
Brad didn’t hear them
distinction cried out to be
made, between
“trading activity” and “liquidity.”
A new trader could leap into a
market and trade
it
value to
frantically inside
without adding anything of
Imagine, for instance, that someone passed a rule, in
it.
the U.S. stock market as
currently configured, that required
it is
every stock market trade to be front-run by
Under
ers Inc.
this rule,
of Microsoft, Scalpers
would
set off to
Inc.
buy 1,000
instant, sell
it
to
it
shares of Microsoft offered in the
you
risk
at a
of owning the stock for
higher price. Scalpers Inc.
prohibited from taking the slightest market
it
firm called Scalp-
would be informed, whereupon
market and, without taking the
even an
a
each time you went to buy 1,000 shares
has the seller firmly in hand;
when
risk;
it sells, it
the end of every trading day,
when
it
is
buys,
has the buyer in
will have
no posi-
hand; and
at
tion at
in the stock market. Scalpers Inc. trades for the sole
all
it
purpose of interfering with trading that would have happened
without
it.
In buying from every seller and selling to every
FLASH BOYS
108
buyer,
and
it
winds up:
doubling the trades in the marketplace
a)
being exactly 50 percent of that booming volume.
b)
nothing to the market but
It
adds
the same time might be mistaken
at
for the central player in that market.
This
state
of affairs,
as
it
happens, resembles the United States
stock market after the passage of
Reg NMS. From 2006
to
2008, high-frequency traders’ share of total U.S. stock market trading doubled, from 26 percent to 52 percent
never fallen below 50 percent since then.
trades
made
in the stock
market
The
— and
has
it
number of
total
from
also spiked dramatically,
roughly 10 million per day in 2006 to just over 20 million per
day in 2009.
“Liquidity” was one of those words Wall Street people threw
around when they wanted the conversation to end, and
brains to go dead, and for
people used
ing,” but
ity
it
it
as a
all
synonym
for “activity” or
obviously needed to
could be manufactured in
front-runners to
and the
it.
To
a
market
less
as displayed
mean more than
effect
on
Brad himself had
on
of
that, as activ-
market simply by adding more
it,
his screens
—
by
the effect:
felt
became
willing to take risk in that market
one might
investors’ willingness to
trade once they sense that they are being front-run
entity.
for
lot
get at a useful understanding of liquidity
by studying the
front-running
A
“volume of trad-
of high-frequency trading on
likely effects
better begin
questioning to cease.
illusory,
this
new
When
the
he became
to provide liquidity.
He
could only assume that every other risk-taking intermediary
—must have
every other useful market participant
felt
exactly
the same way.
The argument
what did
Brad.
this
“They
for
mean?
HFT
“HFT
was
that
firms go
don’t take positions.
it
provided liquidity, but
home
They
flat
every night,” said
are bridging an
amount
TRACKING THE PREDATOR
of time between buyers and
even knows
it
exists.”
sellers that’s so
109
small that no one
After the market was computerized and
decimalized, in 2000, spreads in the market had narrowed
much was
—
that
of that narrowing would have happened
true. Part
anyway, with the automation of the stock market, which made
it
easier to trade stocks priced in decimals rather than in frac-
tions. Part
of that narrowing was an
illusion:
What
appeared to
be the spread was not actually the spread. The minute you went
to
buy or
sell at
the stated market price, the price
was
Scalpers Inc. did
sort
—
which the guy
behind the mask of an old mental model
who “makes
markets”
is
moved. What
new
to hide an entirely
in
necessarily taking market risk and pro-
viding “liquidity.” But Scalpers Inc. took no market
In spirit Scalpers Inc. was
of market burden. Financial intermediation
tal;
it’s
people
rest
toll
who
put
paid by both the people
to productive use.
it
risk.*
market enabler than
less a
sort
the
of activity
who
Reduce
is
have
a
weird
on
a tax
capi-
and the
it
the tax and the
of the economy benefits. Technology should have led to a
reduction in this tax; the ability of investors to find each other
without the help of some
human
the tax altogether. Instead this
broker might have eliminated
new
beast rose up in the middle
of the market and the tax increased
had
it?
To measure
needed to
sible.
the cost to the
boasted that in five and
it
hadn’t
a
the
CEO
largest
of
dollars.
Inc.,
Or
you
made. That was not pos-
good
at
keeping their
high-frequency traders, Virtu Financial, publicly
half years of trading
made money, and
Cummings,
it
intermediaries were too
* In early 2013, one of the
billions
economy of Scalpers
know how much money
The new
—by
that the loss
it
had experienced
was caused by “human
just
one day when
error.” In
2008, Dave
of a high-frequency trading firm called Tradebot, told university
students that his firm had gone four years without a single day of trading losses. This sort
of performance
is
possible only if you have a
huge informational advantage.
FLASH BOYS
110
profits secret
entities
to guess
Secrecy might have been the signature
sat at
who
of the
trait
the middle of the stock market:
You had
what they were making from what they spent
Investors
it.
*
who now
make
to
eyeballed the situation did not find reason for
hope. “There used to be this guy called Vinny
who worked on
who had
the floor of the stock exchange,” said one big investor
observed the market for
Vinny would
Long
in
long time. “After the markets closed
a
and drive out
get into his Cadillac
Island.
Now
into his jet and
flies
used to worry a
there
is
the
guy
to his estate in
about Vinny.
little
called
Aspen
Now
for the
worry
I
house
to his big
Vladimir
who
gets
weekend.
I
about
a lot
Vladimir.”
Apart from taking some large sum of money out of the market,
and without taking
adding anything of use to that mar-
risk or
had other,
ket, Scalpers Inc.
Inc. inserted itself into the
less
intended consequences. Scalpers
middle of the stock market not just
an unnecessary middleman but
as a
middleman with
as
incentives
to introduce dysfunction into the stock market. Scalpers Inc.
was incentivized,
as possible.
at
$30
The
a share
knowing
that,
for instance, to
value of
and
it
sell
how
cal
microseconds, would
soft’s
*
A
it
was
the shares at $30.01
rise in price.
says,
“To
me
to get to
who
also
The more
volatile
and one to get into
my seat at Citadel?
magi-
Micro-
might move
once had top secret security clearance
get into the Pentagon and into
to get into the building
fall, it
—was determined
that Microsoft’s share price, in those
former employee of Citadel
took
few microseconds
share price, the higher Microsoft’s stock price
Pentagon
One
the market as volatile
buy Microsoft from you
the Microsoft share price began to
by
it
make
ability to
to hold the shares for a
even
could turn around and
likely
its
Five.”
my
area,
my area.
it
Guess
at the
took two badge swipes.
how many badge
swipes
TRACKING THE PREDATOR
111
during those microseconds, and the more Scalpers
One might
able to scalp.
profited
from market
on the
old specialists
Inc.
would be
argue that intermediaries have always
but that
volatility,
New
not really true.
is
York Stock exchange,
The
for instance,
because they were somewhat obliged to buy in a falling market
and to
sell
in a rising one, often
the most volatile days.
They
found that
Another incentive of Scalpers
The more
place:
sites at
more opportunities
the
another.
The
their worst days
thrived in times of relative
Inc.
is
to fragment the market-
which the same
changed hands,
stocks
to front-run investors
bosses at Scalpers Inc.
were
stability.
would
from one
site
thus encourage
to
new
exchanges to open, and would also encourage them to place
themselves
had
at
some
distance
from each
other. Scalpers Inc. also
very clear desire to maximize the difference between the
a
speed of their private view of the market and the view afforded
The more time
the wider public market.
could
sit
the chance that the price might
earnest employee of Scalpers Inc.
slow
down
The
that Scalpers Inc.
with some investor’s stock market order, the greater
move
in the interim.
would look
for
the public’s information or to speed
final
new
ways
up
his
Thus an
either to
own.
incentive introduced by Scalpers Inc. was per-
haps the most bizarre.
The
easiest
needed
the information
it
trade with them.
At times
it
way for Scalpers
Inc. to extract
to front-run other investors
was possible
was
to
to extract the necessary
information without having to commit to
a trade. That’s
what
the “flash order” scandal had been about: high-frequency traders
being allowed by the exchanges to see other people’s orders
before anyone
But
for the
investor
else,
most
without any obligation to trade against them.
part, if
was about
you wanted
to do,
you needed
him. For instance, to find out
to find out
to
do
that, say, T.
what some big
a little bit
Rowe
of it with
Price
wanted
FLASH BOYS
112
buy
to
5 million shares of
Google
Rowe
That
Google
to T.
Price.
any investor and Scalpers
Inc.,
initial
was
Inc.
you needed
some
—
a loss
little as
pos-
like the bait in a trap
leader.
For Scalpers
sible to
acquire the necessary information
Inc., the
to sell
market contact between
goal was to spend as
—
make
to
those initial
trades, the bait, as small as possible.
To an
NMS,
row
astonishing degree, since the implementation of
had evolved
the U.S. financial markets
interests
Reg
to serve the nar-
of Scalpers Inc. Since the mid-2000s, the average
trade size in the U.S. stock market had
plummeted, the markets
had fragmented, and the gap in time between the public view
of the markets and the view of high-frequency traders had widened.
also
The
by
rise
of high-frequency trading had been accompanied
a rise in stock
market
— over and above
volatility
turmoil caused by the 2008 financial
The
crisis.
within each trading day in the U.S. stock market between
ity
2010 and 2013 was nearly 40 percent higher than the
between 2004 and 2006,
in
the
price volatil-
which
the
volatility
for instance.
was higher than
volatility
There were days
in the
most
in 2011
volatile days
of
dot-com bubble.
The
financial crisis brought with
it
a great deal
of stock mar-
ket volatility; perhaps people just assumed that there was sup-
posed to be an unusual amount of drama in the stock market
evermore. But then the financial
crisis
abated and the drama
remained. There was no good explanation for
now had
a
glimmer of one.
runner operates.
A
It
front-runner
some stock to discover that you
and buys everything
happen
tested the effects
to
sells
to
this,
but Brad
do with the way
you
are a buyer
else in sight,
(or the opposite, if you
Canada had
had
a front-
hundred shares of
a
and then turns around
causing the stock to pop higher
be
a seller).
The Royal Bank of
on stock market
volatility
of using
TRACKING THE PREDATOR
113
Thor, which stymied front-runners, rather than the standard
order routers used by Wall Street, which did not.
The
sequential
cost-effective router responded to the kickbacks
and
fees
various exchanges and went to those exchanges
them
the most to
do
The
so.
suggests, just sprayed the
market order
Every
to arrive at the different
when
router,
of that stock
—which,
spray router
bought
it
a bit higher.
ten seconds later
—
name
as its
effort to
compel
a stock
exchanges simultaneously.
stock, tended to drive the price
But when the stock had
settled differently
it
of the
that paid
market and took whatever stock was
— did not make any
available, or tried to
first
with each
—
settled
say,
The
router.
sequential cost-effective router caused the share price to remain
higher than the spray router did, and the spray router caused
move
Brad. “This
is
purely a theory. But with
Thor
the
to
HFT firms are
trying to cover their losses. I’m short when I don’t want
need
it
higher than Thor did. “I have no scientific evidence,” said
to
buy
to cover, quickly.”
HFT
is
position,” said Brad,
to be, so I
other two routers enabled
wound up
to front-run, so they
the other two,
The
HFT
being long the stock. “[With]
in a position to trade
around
winning
a
“and they can do whatever they can do
to force the stock even higher.”
(Or lower,
triggered the activity
They
is
a seller.)
if
the investor
who
had, in those privileged
microseconds, the reckless abandon of gamblers playing with
house money.
The new
choppiness in the public U.S. stock markets was
spreading to other financial markets,
high-frequency traders.
They were
less
and
less
It
was what
able to
buy and
as they,
investors
sell
too,
embraced
most noticed:
big chunks of stock
in a gulp. Their frustration with the public stock exchanges
had
led the big Wall Street banks to create private exchanges: dark
pools.
By
the middle of 2011, roughly 30 percent of
all
stock
FLASH BOYS
114
market trades occurred off the public exchanges, most of them
in
The
dark pools.
Street banks
—was
appeal of these dark pools
that investors could
market orders without
WHAT BOTHERED
said the
would be
fear that those orders
RICH Gates, at least at
—
Wall
expose their big stock
exploited.
was the tone of
first,
the pitch he was hearing from the big Wall Street banks. All
through 2008 and 2009 they would come to
him why he needed
stock market. This algo
is
like a tiger that lurks in the
for the prey and then jumps on
in a tree.
The
algos
his office
and
tell
their algorithms to defend himself in the
had names
it.
Or: This
like
algo
is
woods and waits
like
an anaconda
Ambush and Nighthawk and
Raider and Dark Attack and Sumo. Citi had one called Dagger,
Deutsche Bank had Sheer, and Credit Suisse had one named
which came,
Guerrilla,
with
a
scowling.
What
the hell was that about? Their very
Rich Gates wary; he
selling
in the bank’s flip-chart presentation,
menacing drawing of Che Guevara wearing
them
from what?
told
him
Why
also didn’t like
they’d
come
how
and
loudly the brokers
to protect
did he need protection?
a beret
names made
him. Protect him
From whom
did he
need to be protected? “I’m immediately skeptical of people saying they are looking out for
cially
on Wall
Gates ran
a
my
interests,”
Gates
said.
“Espe-
Street.”
mutual fund, TFS Capital, that he had created in
1997 with friends from the University of Virginia. Fie liked to
think of himself as
math geek
Chester.
a hick,
He managed
small investors but
mind,
as
but in truth he was
a
keenly analytical
in the perfectly pleasant Philadelphia suburb of West
nearly $2 billion belonging to 35,000
still
positioned himself, even in his
an industry outsider.
He
own
believed that mutual funds
TRACKING THE PREDATOR
were
less
often exercises in smart
creepy marketing, and that
many of the
funds should be doing something
2007, to
make
this point,
115
money management
people
who
with their
else
than in
ran mutual
Back
lives.
he dug out of a stack of league
in
tables
America’s worst-performing mutual fund: the Phoenix Market
Neutral Fund. Over the prior decade, Gates’s firm had earned
Over
investors returns of 10 percent per year.
Fund had
the Phoenix Market Neutral
its
investors
—
the investors
that
.09 percent a year for
lost
would have been
better oft
hopping
Neu-
over the fence of the president of the Phoenix Market
tral
Fund’s
wrote
home and burying
a letter to the
so obviously inept at
the
money
Phoenix president
managing money
The
saying, in effect, You are
me and
a favor by turning over all of your assets to
for you.
in his backyard. Gates
you could do your
that
letting
what struck Gates
Street’s algorithms,
noticed a lot of bullshit,” he
test to see if there
said.
was anything
test, specifically,
He and his
combined with
mind.
new
in this
would show him
stock market to fear.
when he
if,
ripped off by some unseen predator.
He
buy
sent in an order to a single
that stock at the
“mid-market”
that the shares of Chipotle
100.10. Gates
Chipotle
at
would submit
$100.05. There
other investor
Mexican
it
Mexican
Grill, for
Wall Street dark pool
example,
were trading
buy
a
at
100—
thousand shares of
would normally just
came along and lowered
getting
by identifying
price. Say, for
Grill
his bid to
entered an
wound up
started
stocks that didn’t trade very often. Chipotle
He
“I just
colleagues devised a
order into one of Wall Street’s dark pools, he
to
investors
run them
of nonsensical talk about the need
as a lot
for trading speed, stirred his naturally suspicious
instance.
me
president failed to reply.
The machismo of Wall
The
its
same period,
his price
sit
until
some
from $100.10
to
$100.05. Gates didn’t wait for that to happen. Instead, a few sec-
FLASH BOYS
116
onds
to
he sent a second order to one of the public exchanges,
later,
Chipotle
sell
What
at
$100.01.
should have happened next was that his order in the
dark pool should have been fdled
price in the market.
He
new
$100.01, the official
at
best
should have been able to buy from him-
he was selling
$100.01. But that’s not
what hap-
pened. Instead, before he could blink his eye, he had
made two
self the shares
He had bought
trades.
at
Chipotle from someone inside the Wall
Street dark pool at $100.05
and sold
public exchange for $100.01.
He’d
ing with himself.
Only he
to exploit the
with their
In the
else
on the
effect, trad-
some
third
order he had sent to the public
sent to the dark pool.
wound up making hundreds of such
own money,
Wall Street dark pools.
in several
half of 2010 there was only one Wall Street firm in
first
whose dark pool
the
sell
buy order he had
Gates and his colleagues
tests,
someone
4 cents by, in
hadn’t traded with himself;
party had obviously used the
exchange
to
it
lost
the test
Goldman dark
pool,
came back
positive:
Goldman
Sachs. In
Sigma X, he got ripped off a
than half the time he ran the
As Gates traded
test.
more
bit
in lightly
traded stocks, and high-frequency trading firms were over-
whelmingly interested
in heavily traded ones, these tests
have been vastly more likely to generate
positives. Still,
he was
Goldman, seemed
else to
a bit surprised that
to be
running
a
would
than
false
Goldman, and only
pool that allowed someone
front-run his orders to the public stock exchanges.
called his broker at
“because
not just
false negatives
it
Goldman. “He
wasn’t just them.
He
said
said,
wasn’t
it
‘It’s
fair,” said
happening
all
He
Gates,
over.
It’s
”
us.’
Gates was dutifully shocked.
these
tests,
could
tell,
I
“When
thought: This obviously
no one seemed much
is
I first
saw the
results
not right. As far
as
of
he
to care that 35,000 small inves-
TRACKING THE PREDATOR
tors
117
could be so exposed to predation inside Wall
most
Street’s
prominent bank. “I’m amazed that people don’t ask the questions,”
he
said.
“That they don’t dig deeper.
West Chester, PA, can
in
figure
it
people did, too.” Outraged, Gates called
at
the Wall Street Journal.
and seemed
interested, but
piece in the Journal
be.
(Among
that the
some schmuck
a
came
reporter
two months
— and Gates sensed
knew
reporter he
to see Gates’s tests
was
later there
that there
still
no
might never
other things, the reporter was uncomfortable
Goldman
tioning
The
If
out, I’ve got to believe other
men-
Sachs by name.) At which point Gates noticed
Dodd-Frank Wall
Street
Reform and Customer Pro-
tection Act, soon to be passed, contained a whistle-blower provision. “I’m like, ‘Holy crap, I’m trying to out this
can get paid, too
—
great.’
The people who worked
If
I
SEC’s Division of Trading
in the
—nothing
and Markets were actually great
lic
anyway.
”
what the pub-
like
imagined. They were smart and asked good questions and
even spotted small mistakes in Gates’s presentation, which he
appreciated
—though,
as
with Brad Katsuyama, they gave him
no idea how they might respond
to the information he’d given
who was
them. They wondered, shrewdly, exactly
investors in
Goldman
Goldman’s dark pool. “They wanted
Sachs’s
answer
for that.
took the other side of the trade,” he
he’d been ripped
ripped
off,
know
if
prop group was on the other side of the trade,”
He had no
said Gates.
ripping off
to
in exactly the
off,
when you
can’t see the
“They
said.
don’t
All he
tell
you who
knew was
way you might expect
market trading in
real
that
to
be
time
and others can.
And that,
whistle,
business.
at least for a
laid low,”
I
I
few months, was
Gates
said. “I just
that.
wanted
don’t get off throwing bombs.”
“After
I
blew the
to focus
Then came
on our
the flash
FLASH BOYS
118
and the Wall
crash,
Street Journal’s interest
paper published a piece on Rich Gates’s
tioning
Goldman
world on
them
Sachs by name. “I think
fire,” said
comments
teen
at
Gates. “It didn’t
the
both the
BATS
BATS
on the
going to
set the
are
bottom of the piece on the Web, and
But the piece led
a
fif-
all
of
person
exchange and Credit Suisse to get in
touch with Gates with a suggestion:
cifically
—without men-
it’s
do anything. There
are Russian mail order brides.”
close to
was rekindled. The
tests
Run
your
tests again,
spe-
exchange and the Credit Suisse dark pool
called Crossfinder. Just to see.
Toward
the end of 2010, Gates ran
another round of tests.
Sure enough, he was able to get himself ripped
the
dark pool
— on
the
BATS
however, the
first
tests
were
time,” he said, “it
When we
IN
in exactly
exchange, and inside the Credit Suisse
dark pool, and in some other places, too. At
it
off,
same way he had been ripped off in the Goldman Sachs
did
it
six
MAY
2011,
negative.
worked
months
worked everywhere
Rob
now
at
later
it
Goldman
didn’t
Goldman
“When we
Sachs,
did
work
at
the
else.
Goldman, but
else.”
the small team Brad had created
Park, a couple of others
—
sat
around
—
Schwall,
Ronan,
a table in Brad’s office,
surrounded by the applications of past winners of the Wall
Journal’s
it
but nowhere
Technology Innovation Awards. As
it
Street
turned out,
RBC’s marketing department had informed them of the awards
the day before submissions
to figure out in
how
to
make Thor sound
everywhere,” said Rob.
people
who
were due
which of several
—
so they
were scrambling
categories they belonged,
and
life-changing. “There were papers
“No one sounded
like us.
There were
had, like, cured cancer.” “It was stupid,” said Brad,
TRACKING THE PREDATOR
119
“there wasn’t even a category to put us into.
we ended
think
I
up applying under Other.”
the purposelessness of the exercise hanging in the
With
Rob
had
said, “I just
a sick idea.”
air,
Rob’s idea was to license the
technology to one of the exchanges. (Schwall had patented Thor
RBC.) The
for
line
between Wall
vate exchanges.
The stock exchanges,
become
a bid to
brokers.
The
now
orders,
which they would then
course, but also to others.
The
now
hand them
route.
ran their
for their part,
bigger ones
that enabled brokers to simply
To
service
brokerage-like service opened up,
new
possibility. If just
their
pri-
offered a service
own
market
exchange, of
was used mainly by small
own
at least in
routers, but
Rob’s mind,
a
one of the exchanges was handed the tool
for protecting investors
from market predators, the small brokers
from around the country might
the
own
were making
their stock
regional brokerage firms that didn’t have their
this
and exchanges
Street brokers
had blurred. The big Wall Street banks
flock to
it,
and
it
might become
mother of all exchanges.
“Screw
said Brad.
that,”
“Let’s just create
our
own
stock
exchange.”
“We just
sat
there for a while,” said
each other. Create your oum
Rob. “Kind of staring
stock exchange.
What
at
does that even
mean?”
A
on
few weeks
later
the idea of an
Brad flew to Canada and sold
RBC-led
2011, he canvassed a handful of the world’s biggest
agers (Janus Capital, T.
Rowe
Price,
hedge fund managers (David Einhorn,
Loeb).
They
all
fall
of
money man-
BlackRock, Wellington,
Southeastern Asset Management) and some of
tial
his bosses
stock exchange. Then, in the
Bill
its
most influen-
Ackman, Daniel
had the same reaction. They loved the idea of a
stock exchange that protected investors
from Wall
Street’s
pred-
FLASH BOYS
120
ators.
ibly
They
Not even
Street bank.
create the
his
thought that
also
independent of Wall
nice as
as
it
on
RBC.
If Brad
Street jobs to
He’d need
capital to
get the people
I
to find
money. He’d
of their current
for tiny fractions
and possibly even supply the
was asking: Can
need?
I
salaries
pay themselves to work.
How
long can
survive without getting paid? Will our significant others
do
this?”
He
also
to
to quit
of highly paid people to quit their Wall
a lot
work
Wall
a
wanted
own.
his
challenges were obvious.
need to persuade
“I
stock exchange, to be cred-
could not be created by
mother of all stock exchanges, he would need
job and do
The
bank
a
new
a
Street,
needed to find out
if the
let
we
us
nine big Wall Street
banks that controlled nearly 70 percent of all stock market orders*
would be willing
It
would be
far
fairness if the
to send those orders to a truly safe exchange.
more
difficult to start
an exchange premised on
banks that controlled the vast majority of the cus-
tomers’ orders were committed to unfairness.
For
a surprisingly
ment about the
long time, Brad had reserved
of hope that the people
orders were
at [each]
bank who handled the
removed from the prop group,” he
sprang mainly from his
handled the
own
clients’ orders,
experience: At
knew
he barely
had not created
idea. Still,
he
knew
a
* Those nine banks, in order of their
Morgan,
clients’
His hope
RBC, where
he
a
reason for
this:
Wall Street banks had
its
and that there were people in each of them
highest to lowest: Credit Suisse,
Sachs, J.P.
said.
dark pool, because Brad had killed the
that each of the big
own internal politics,
Goldman
judg-
the prop traders and
had no idea what they were doing. There was
RBC
final
biggest Wall Street banks. “I held out a degree
(fairly
Morgan
Barclays,
evenly distributed) 2011 market share, from
Stanley,
UBS,
Citi,
Bank of America,
Deutsche Bank.
Merrill Lynch,
TRACKING THE PREDATOR
who wanted
do the
to act in the
right thing
these people, in
the
places,
121
of their firms and
interests
their customers. His
by
some of these
John Schwall’s
By
long-term
hope was
some of
that
had power.
private investigations put an
end
to that hope.
of 2011 Schwab had become something like
fall
a
con-
noisseur of the uses of Linkedln to find stuff out about people
in
and around high-frequency trading. He’d put
frequency trading, or rather two
that certain people
I
maybe twenty-five guys
lot
I
crash of 1987
cal
called kingpins
—Wall
Schwab. “I’d
—
the people
way
forties
whose
born of the regulations passed
Street guys
careers
or another, to the early elec-
who might
after the
have some techni-
background but whose identity was more trader than pro-
gramming
geek.
The new
future
players in the financial markets, the kingpins of the
who had
the capacity to reshape those markets, were a
different breed: the
ten years in
Chinese guy
American
who had
universities; the
from
FERMAT lab;
PhD
in electrical engineering.
degrees.
that so
I
remember thinking
many
tors rather
scientists
spent the previous
French particle physicist
the Russian aerospace engineer; the Indian
“There were
these people,” said Schwab. “Basically
to
all
just thousands of
of them with advanced
myself how unfortunate
it
was
engineers were joining these firms to exploit inves-
than solving public problems.” These highly trained
and technicians tended to be pulled onto Wall Street by
the big banks and then, after they’d learned the ropes, to
on
who
on.” At the very top of the food
of white guys in their
could be traced back, one
tronic stock exchanges
said
on high-
to anticipate
could see their network. There were
knew what was going
chain were a
a face
began
were in on the game,”
connect to them so that
actually
faces. “I
to smaller
move
high-frequency trading shops. They behaved more
FLASH BOYS
122
like free agents
Linkedln
than employees of
a big
corporation. In their
they revealed
profiles, for instance,
all sorts
of infor-
mation that their employers almost certainly would not want
revealed.
Here Schwall stumbled upon the
The employees of the
big Wall Street banks
toward the banks than the banks
The employees of
ple.
man
felt
predator’s weakness:
felt
no more
loyalty
toward them.
Credit Suisse offered the clearest exam-
Credit Suisse’s dark pool, Crossfmder, vied with GoldSachs’s
Sigma
X
to
be Wall
Street’s biggest private stock
exchange. Credit Suisse’s biggest selling point to investors was
that
it
put their interests
it
was
first
and protected them from whatever
that high-frequency traders
were doing. Back
in
2009, the head of Advanced Execution Services (AES)
Suisse,
ing,
Dan
Mathisson, had testified before
a
Housing, and Urban Affairs Committee
at a
“High-frequency traders make
their
hearing on
somehow
the high-frequency trading debate simply does not
said.
Credit
U.S. Senate Bank-
dark pools. “The argument that dark pools are
he’d
October
at
part of
make
sense,”
money by
digest-
ing publicly available information faster than others; dark pools
hide order information from everyone.”
That, Schwall thought, because Brad had explained
him, was simply wrong.
It
was true
Wall Street bank an order
that
when,
say, a
it
all
to
pension fund
gave
a
soft,
and the Wall Street bank routed the order to the dark pool,
to
buy 100,000
shares of Micro-
the wider world was not informed. But that was just the begin-
ning of the
story.
The pension fund
the dark pool, and could not see
inside
ple,
how
did not
the
know
of it. The pension fund would not be able to
whether the Wall
traders to
know
Street
bank allowed
of the big buy order, or
their (faster than the dark pool)
the rules of
buy order was handled
if
its
say, for
own
exam-
proprietary
those traders had used
market connections to front-run
TRACKING THE PREDATOR
on the public exchanges. Even
the order
temptation to trade for
resisted the
was
123
Wall Street bank
if the
itself against its
no chance they
resisted the
own
there
sell
access to the dark pool to high-frequency traders.
virtually
Street banks did not disclose
them
paid
had
for special access to their dark pools, or
was standard
Raising, again, the obvious question:
to
The
pool?
straight
answer was that
typically large,
and
its
was
was forced
The
its
own
a
customer’s stock market
prey.
The
order was
especially predictable:
detectable pattern for hanit
to spend inside the dark pool before accessing the
“You could front-run an
it,
dark pool on a bicycle.”
buy 100,000
The pension fund
trying to
shares of Microsoft could, of course, specify that
the Wall Street
at all
would anyone pay
order was also slow, because of the time
wider market. As Brad had put
order in
a
Why
and juicy
movements were
Each Wall Street bank had
dling orders.
fat
how much they
practice.
Wall Street bank’s dark
the customers’ orders inside a
order, inside a dark pool,
The Wall
which high-speed trading firms had
paid, but selling that access
for access
custom-
temptation to
ers,
bank not take
but simply
rest
its
orders to the public exchanges
hidden, inside the dark pool. But an
it,
order hidden inside a dark pool wasn’t very well hidden.
who had
decent high-frequency trader
paid for
a special
Any
con-
nection to the pool would ping the pool with tiny buy and
orders in every listed stock, searching for activity.
Once
sell
they’d
discovered the buyer of Microsoft, they’d simply wait for the
moment when
and
sell it
Microsoft ticked lower on the public exchanges
to the pension
higher “best” price
It
was
(as
riskless, larcenous,
The way Brad had
were permitted
to
fund in the dark pool
Rich
and
described
know
Gates’s tests
legal
it,
it
—made
was
the scores of
as if
last
at
the stale,
had demonstrated).
so
by Reg
NMS.
only one gambler
week’s
NFL
games,
FLASH BOYS
124
with no one
casino
else
aware of his knowledge.
on every game and waits
He
places bets in the
for other gamblers to take the
other side of those bets. There’s no guarantee that anyone will
do
so;
but
if
they do, he’s certain to win.
In his investigation of the people
dark pool, one of the
things
first
who managed Credit Suisse’s
Schwab noticed was
in charge of electronic trading: Josh Stampfli,
the
guy
who had joined
Credit Suisse after seven years spent working for Bernie Madoff.
(Madoff had pioneered the idea of paying brokers
for the right to
execute the brokers’ customers’ orders, which should have told
people something but apparently did not.) This, of course, only
heightened Schwab’s suspicions, and sent
him digging around
in old articles in trade journals about Credit Suisse’s dark pool.*
There he found references and
if
allusions that
Credit Suisse had planned, right from the
made
start,
sense only
to be deeply
involved with high-frequency trading firms. For instance, in
April 2008 a guy
named Dmitri
head of liquidity strategy
ties
Technology Monitor that
placed computer servers in
at
many of Credit
Weehawken,
Suisse’s “clients”
Weehawken were Ronan’s
high-frequency trading firms.
No
had
New Jersey, to be closer
The only people who put
to Credit Suisse’s dark pool.
next to dark pools in
Galinov, a director and the
Credit Suisse, had told the Securi-
servers
old clients
stock market investor
—
the
went
to
such lengths to shave microseconds off trading time.
“Client,” to Credit Suisse, appeared to
Schwab
to be a cat-
egory that included “high-frequency trading firms.” Schwab’s
suspicion that Credit Suisse
seeming
to
gave to the
do
so
New
grew
after
wanted
to service
he read an interview
York Times in
November
* Stampfli has not been charged with any wrongdoing.
2009.
HFT
while not
Dan Mathisson
TRACKING THE PREDATOR
Q:
Who
clients at
from using
benefit
a
your
are
a dark
CrossFinder
pool
as
[sic]
opposed
125
and
to just
how do
they
going through
broker and trading on the exchange?
A:
Our
clients are
mutual funds, pension funds, hedge funds
and some other large broker-dealers, so
clients
.
.
it is
always institutional
.
All the large high-frequency trading firms, Schwall knew,
were “broker-dealers.” They had
to be, to gain the special access
they had to the public stock exchanges. So Mathisson had not
ruled out dealing with them.
explicitly rule out dealing
The only
would not
reason he
with them, Schwall assumed, was that
he was dealing with them.
The Linkedln
searches
MadofF employee’s
became
profile led
him
a
new
obsession.
to the people
The former
who worked for
the people who
the former
MadofF employee, who
led
worked
them, and so on. Even
Credit Suisse tried to appear
as if it
ees
for
as
him
to
had nothing to do with high-frequency trading,
begged to
Suisse’s
differ.
its
employ-
Schwall dug out dozens of examples of Credit
computer programmers boasting on
resumes about
their
“building high-frequency trading platforms” and “implementing
high-frequency trading strategy,” or of experience
titative trader
trading.”
on equity and equity
One guy
derivatives:
as a
“quan-
high-frequency
explained that he had “managed on-boarding
of all high-frequency
clients to Crossfinder.”
built the Credit Suisse Crossfinder dark pool
Another
and
said
he had
now worked
in
high-frequency trading market making. Credit Suisse claimed
dark pool had nothing to do with high-frequency trad-
that
its
ing,
and yet
it
somehow employed,
in
and around
mother lode of high-frequency trading
talent.
its
dark pool, a
FLASH BOYS
126
By
the time he’d finished, Schwall
had
Suisse dark pool organization chart.
Brad incredulously.
charts,” said
boards, with the drug kingpins.”
on Credit
Suisse, the
bank
itself as safe to investors,
ably over inside
way
all
that
built the entire Credit
“He’s got these people
one of those FBI
like
“It’s
Looking over Schwall’s
went
to the
most trouble
Brad decided that the game was prob-
the big Wall Street banks. All of them, one
or another, were probably using the unequal speeds in the
market to claim their share of the prey.
He
further assumed that
the big Wall Street banks must have stumbled
to high-frequency front-running,
use
by
charts
to sell
it,
his solution
because they had too great a stake in the profits generated
that front-running. “It
were the
What
first
that
be much,
were
upon
and must have chosen not to
became very obvious
to discover Thor, because
meant
much
to
me was
harder to solve.
that the
It
we
to
me why we
weren’t,” he said.
problem was going
also told
so in the dark, because the clients rely
me why
to
the clients
on brokers
for infor-
mation.” Creating an exchange designed to protect the prey
from the predator would mean
starting a
war on Wall
between the banks and the investors they claimed
Street
to represent.
Schwall’s private investigations also revealed to Brad just
little
“It’s
not like you are building a bridge connecting two
pieces of land,” he said.
doing.”
gists
how
the technical people understood of their role in the financial
world.
“You
described their activities
charming obliviousness.
“I
to pull out these resumes,”
a policy
can’t see the effects
The openness with which
of saying
ally doing.
made him aware of a
was
totally
fire
larger,
almost
shocked when John started
he recalled. “The banks had adopted
as little as possible
They’d
of what you are
the Credit Suisse technolo-
about what they were actu-
people for being quoted in the newspaper,
but in their Linkedln pages those same people said whatever they
TRACKING THE PREDATOR
From
wanted.”
new
way
the
127
the engineers described their roles in the
had no clue about
financial system, he could see that they
me
that these tech guys
were
completely oblivious to what they were working on,” he
said.
the injustices of that system. “It told
“They were tying
the
bank
to
make markets
mated systems
for the
you never would
It’s
I
bank
if you
know
this
were working on
—helping
in their dark pools; building auto-
with
to use
its
customers
—
in a
way
understood what the banks were doing.
on your Linkedln
like saying
robber and
these things they
profile,
one house
‘I
have
intimately.’
all
the skills of a
”
Schwall had started out looking for the villains
committing crimes against the
life
who were
Ameri-
savings of ordinary
own villainy. He wound up finding,
people who had no idea of the meaning
cans, fully aware of their
mainly, a bunch of
of their
else,
own
though
lives.
at first
prisingly large
Street
In his searches, Schwall noticed something
he didn’t
know what
number of the people
to
make of it:
A
sur-
pulled in by the big Wall
banks to build the technology for high-frequency trad-
ing were Russians. “If you went to Linkedln and looked
at
one
of these Russian guys, you would see he was linked to
all
the
other Russians,” said Schwall. “I’d go to find Dmitri and I’d also
find
sians
Misha and Vladimir and Tolstoy or whatever.” The Rus-
came not from finance but from telecom,
research, university
fields.
The
big Wall Street firms had
ing analytically
Schwall
math departments, and
minded Russians
filed that fact
thinking about.
away
physics, medical
a lot
of other useful
become machines
for turn-
into high-frequency traders.
for later, as
something perhaps worth
CHAPTER FIVE
PUTTING A FACE ON HFT
ergey Aleynikov wasn’t the world’s most eager
S
Russia in 1990, the year after the
left
Wall, but
more
in sadness than in hope.
haven’t imagined leaving
Russia.
I
I
thought
cried
I
it,”
he
when Brezhnev
says. “I
died.
fall
“When I was
was very
And
I
to study
that
what he wanted
its
nineteen
always hated English.
He wasn’t religious in any
a
Jew, which had been
noted on his Russian passport to remind everyone of the
a
Jew he expected
exams
I
patriotic about
government wouldn’t allow
to study.
conventional sense, but he’d been born
As
He’d
of the Berlin
was completely incapable of learning languages.” His
problem with Russia was
him
immi-
grant to America, or, for that matter, to Wall Street.
to
be given especially
difficult
to university, which, if he passed them,
access to just
one of two Moscow
fact.
entrance
would grant him
universities that
were more
accepting of Jews, where he would study whatever the authorities
permitted Jews to study. Math, in Serge’s
willing to tolerate this state of
affairs;
case.
however,
as
it
He’d been
happened.
PUTTING A FACE ON HFT
He
he’d also been born to program computers.
on
computer
a
until 1986,
when he was
thing he’d done was to write
first
computer
to
draw
a picture
was
said,
He
The
instructed the
When
of a sine wave.
the computer
was hooked. What hooked
actually followed his instructions, he
him, he
hadn’t laid hands
already sixteen.
program:
a
129
“its detailed orientation.
an ability to see the problem and tackle
The way
from
it
it
requires
different angles.
not just like chess, but like solving a particular problem in
It’s
chess.
The more
challenging problem
engaged him not just
ing
a
program
is
He found
that
coding
intellectually but also emotionally.
“Writ-
like giving birth to a child,”
creation.
Even though
this level
of satisfaction.”
He
not to play chess but
is
code that will play chess.”
to write the
it is
technical,
it is
a
he
said. “It
work of art. You
is
a
get
applied to switch his major from mathematics to computer
science, but the authorities forbade
it.
to accept the idea that perhaps Russia
me,” he
says.
“When
“That
is
they wouldn’t allow
is
what tipped me
not the best place for
me
to study
computer
science.”
He
arrived in
dorm room
en’s
at
Hebrew
New
the
York City
92nd
Street
in 1990
YMCA. Two
things
new home:
his
a
Wom-
Association, a sort of Jewish
shocked him about
and moved into
Young Men’s and Young
the diversity of the people
on
the streets and the fantastic range of foods in the grocery stores.
He
took photographs of the rows and rows of sausages in
hattan and mailed
seen so
many
them
to his
sausages,” he says.
mother in Moscow.
But once he’d marveled
American cornucopia, he stepped back from
just
how necessary
all
of this food was.
He
it all
it
a little bit further
and ask what
at
the
and wondered
read books about fast-
ing and the effects of various highly restrictive
to look at
Man-
“I’d never
is
diets. “I
beneficial
decided
and what
FLASH BOYS
130
is
he
not,
said. In the
don’t think
“I
think
all
to get
to
it.
America with no money
He
a
resume was
asked Serge to
ity,
‘Who
are
length
your
how
again.
him about
himself.
and no
His
“To
first
and nothing
are
you born?’
man
at
great
long line of Jewish scholars
a
else.
really,
interviewer
Russian mental-
a
means ‘Where
that question
real idea
speak English,
“He
me
tells
I
will hear
from
never do.” But he had an obvious talent for pro-
gramming computers and soon found a job doing it,
hour, in a
says.
to apply for a job. “It
says. “I didn’t
he had come from
I
at all,
siblings?’ ” Serge described for the
and academics
him
finicky vegetarian. “I
a totally alien concept.”
tell
said Serge,
how
took a course on
was quite frightening,” he
and
a
you gain comes from food,” he
comes from your environment.”
it
He’d come
how
end he became
the energy
New Jersey
medical center.
From
for $8.75
an
the medical center
he landed a better job, in the Rutgers University computer
sci-
ence department, where, through some complicated combination of jobs and grants, he
was
able to pursue a master’s degree.
After Rutgers he spent a few years working
until, in 1998,
he received
at
job offer from
a
Internet start-ups
a big
New Jersey
telecom company called IDT. For the next decade he designed
computer systems and wrote the code
calls
joined the company
had
to route millions
each day to the cheapest available phone
five
it
had
five
thousand, and he was
its
star technologist.
That year
fierce
Street for his particular skill: writing
parsed huge amounts of information
Serge
knew nothing
fast,
at great
it
a
new
code that
speed.
about Wall Street and was in no par-
ticular rush to learn about
ing computers go
he
hundred employees; by 2006
headhunter called him and told him that there was
demand on Wall
of phone
When
lines.
it.
but his
His singular talent was for mak-
own movements were
slow and
PUTTING A FACE ON HFT
The headhunter
deliberate.
pressed
131
upon him
a
bunch of books
about writing software on Wall Street, plus a primer on
make
through
it
on Wall
he could make
Street,
making
year he was
how
Wall Street job interview, and told him
a
a lot
more than
the $220,000 a
the telecom company. Serge
at
to
that,
felt flattered,
and liked the headhunter, but he read the books and decided
Wall Street wasn’t
at
He
him.
for
enjoyed the technical challenges
the giant telecom and didn’t really feel the need to earn
A
money.
year
By
again.
time
this
was beginning
company
to
IDT was
worry
on the
least
people are said to
management was running
He had no
savings to speak
their third child,
of.
the
His
and they’d need to
Serge agreed to interview with the Wall
Street firm that especially
At
him
in serious financial trouble; Serge
that the
was carrying
a bigger house.
more
in early 2007, the headhunter called
into the ground.
wife, Elina,
buy
later,
wanted
come
to
America
to
meet him: Goldman
Aleynikov had the
surface, Serge
for.
sort
He’d married
Sachs.
of
life
a pretty
fellow Russian immigrant and started a family with her. They’d
sold their
sey,
had
two-bedroom Cape-style house
and bought
a
nanny.
a bigger colonial-style
They had
On the other hand,
had no
real clue
all
what
that
that close to each other.
know him
know
Serge did was work, and his wife
work
He
They
involved; they weren’t actually
didn’t encourage people to get to
well or exhibit a great deal of interest in getting to
them.
had very
all
New Jer-
Little Falls.
of Russians they called their
a circle
friends.
in Clifton,
one in
He was
acquiring
little interest.
a lot
The lawn
of the general problem.
When
of possessions in which he
in Clifton
was
a fair
example
he’d gone hunting for his
first
own
The moment he
house, he’d been enchanted by the idea of having his very
lawn. In
Moscow
owned
lawn, he regretted
a
such a thing was unheard
it.
of.
(“A pain in the butt to mow.”)
A
FLASH BOYS
132
Russian writer named Masha Leder,
well
as
who knew
anyone, thought of Serge
as
as
lectually gifted but otherwise typical Russian
programmer,
for
whom
the Aleynikovs
an exceptionally intel-
Jewish computer
became an excuse
technical problems
not to engage with the messy world around him. “All of Serge’s
life
was some kind of mirage,” she
He
not aware of things.
He
married
said.
off and she
ass
a
who
dream.
He was
loved to dance.
and managed to have three kids with her
a girl
before he figures out he doesn’t really
ing his
“Or
liked slender girls
know
He was work-
her.
would spend the money he was mak-
He would come home and she would cook him
He was serviced, basically.”
And then Wall Street called. Goldman Sachs
ing.
vegetarian
dishes.
through
a series
put Serge
of telephone interviews, then brought him
in for a long day of face-to-face interviews. These he found
extremely tense, even
One
brain teasers, computer puzzles,
even some light physics.
was
(it
he
to Serge) that
was being asked than
day,
Goldman
and thought
Goldman
at
feeling,”
it’s
weird. “I was not used to seeing peo-
into evaluating other people,” he said.
dozen Goldman employees
after another, a
him with
a bit
much energy
ple put so
he
it
over:
says. “I
must have become
him back
He
wasn’t
clear to
Goldman
At the end of the
for a second day.
all
stump
about most of the things he
his interviewers did.
invited
Sachs.
It
knew more
tried to
math problems, and
that sure he
“But the next morning
should conclude
it
I
first
He went home
wanted
had
to
work
a competitive
and try to pass
it
because
a big challenge.”
He’d been surprised
More than
half the
to find that in at least
programmers
at
one way he
Goldman were
fit in:
Russians.
Russians had a reputation for being the best programmers on
Wall
Street,
and Serge thought he knew why: They had been
PUTTING A FACE ON HFT
133
forced to learn to program computers without the luxury of
endless
Many
computer time.
of computer time, Serge
them
before typing
still
into the machine. “In Russia, time
computer was measured in minutes,” he
a
program, you are given
sequently
we
time
a tiny
before you committed
lot
plenty
said.
make
slot to
on the
“When you
it
write
work. Con-
learned to write the code in ways that minimized
amount of debugging. And
the
when he had
years later,
wrote out new programs on paper
of computer time creates
have an idea and type
it
so
you had
to paper.
it
this
mode
.
.
.
to think about
The
it
a
ready availability
of working where you just
and maybe erase
ten times.
it
Good
Russian programmers, they tend to have had that one experience
to
at
some time
—
in the past
the experience of limited access
computer time.”
He
returned for another round of Goldman’s grilling, which
ended in the
office
— another
of a senior high-frequency trader
Russian, Alexander Davidovich.
tor
had just two
The Goldman managing direc-
final questions for Serge,
his ability to solve problems.
The
first: Is
both designed to
3,599
a
test
prime number?
Serge quickly saw that there was something strange about
3,599:
It
was very
close to 3,600.
He jotted down
the following
equations:
3599 = (3600 -
1)
=
2
(60
-
2
l
)
=
(60
-
1)
(60
+
1)
= 59 x
61
3599 = 59 x 61
Not
a
prime number.
The problem
wasn’t that difficult, but, as he put
harder to solve the problem
it
quickly.”
It
when you
might have taken him
as
it,
“it
was
are anticipated to solve
long
as
two minutes
to
FLASH BOYS
134
finish.
The second
asked
him was more
Goldman managing
question the
involved, and involving.
Serge a room, a rectangular box, and gave
He
sions.
says there
coordinates. There
its
me
its
coordinates
on the
a spider
is
is
also a fly
Then he
as well.
spider can’t fly or swing;
it
Serge figured,
it
was
three dimen-
me
and he gives
and he gives
ceiling,
can take to reach the
fly.”
can only walk on surfaces. The
between two points was
shortest path
its
director
described for
asked the question: Calcu-
late the shortest distance the spider
The
him
floor,
on the
He
a straight line,
and
so,
matter of unfolding the box, turning a
a
three-dimensional object into a two-dimensional surface, then
using the Pythagorean theorem to calculate the distances. This
took
him
several
minutes to work out;
Davidovich offered him
salary plus
bonus came
HE’D JOINED
GOLDMAN
at
a
job
when he was
Goldman
at
to $270,000.
an interesting
both the firm and Wall
Street.
moment
its
books and disguise
against them.
was adapting
fail,
its
so that they
turning into something
New Jersey
years there
might make money by betting
equities
to radical changes in the U.S. stock
market was about to
were
all
crash.
A
department
market—just
as
once sleepy oligopoly domi-
New York Stock Exchange was rapidly
else.
The
thirteen public stock exchanges
trading the same stocks. Within a few
would be more than
owned by Goldman
to rig
and by designing subprime mort-
At the same time, Goldman’s
nated by Nasdaq and the
in
debt,
of
global financial
a
most infamously by helping the Greek government
gage securities to
that
in the history
By mid-2007 Goldman’s bond
trading department was aiding and abetting
crisis,
done,
Sachs. His starting
forty dark pools,
Sachs, also trading the
same
two of them
stocks.
PUTTING A FACE ON HFT
The fragmentation of the American
by Reg
part,
NMS,
which had
stock market trading.
Much
135
stock market was fueled, in
huge amount of
also stimulated a
of the
new volume was
by old-fashioned investors but by the extremely
generated not
fast
computers
controlled by the high-frequency trading firms. Essentially, the
more
places there
nity there
was
for
were to trade
stocks, the greater the
between buyers on one exchange and
was perverse. The
to
opportu-
high-frequency traders to interpose themselves
initial
on
sellers
another. This
promise of computer technology was
remove the intermediary from the
financial market, or at least
reduce the amount he could scalp from that market.
The
turned out to be a windfall for financial intermediaries
— of some-
where between $10
billion
and $22 billion
whose estimates you wanted
financial intermediary, that
a year,
to believe. For
reality
depending on
Goldman
Sachs, a
was only good news.
The bad news was that Goldman Sachs wasn’t yet making
much of the new money. At the end of 2008, they told their
high-frequency trading computer programmers that their trading unit had netted roughly $300 million. That same year, the
high-frequency trading division of a single hedge fund, Citadel,
made
$1.2 billion.
The
ing their profits, but
sian
HFT
guys were already
known
between one of them,
a lawsuit
named Misha Malyshev, and
for hida
Rus-
former employer, Citadel,
his
revealed that, in 2008, Malyshev had been paid $75 million in
cash.
guys
Rumors
circulated
—they turned out
who had left Knight
lion a year each.
A
for Citadel
headhunter
who
sat in
market and saw what firms were paying
“Goldman had
figured
The
it
out.
started to figure
They
it
to
be true
— of two
and guarantees of $20 milthe middle of the
for
geek talent
says,
out, but they really hadn’t
weren’t top ten.”
simple reason
Goldman
wasn’t
making much of the big
FLASH BOYS
136
money now being made
market had become
slow.
A
lot
a
in the stock market
was
that the stock
war of robots, and Goldman’s robots were
of the moneymaking strategies were of the winner-
take-all variety.
When
thing, the player
who
every player
gets
all
the
trying to do the same
is
money
is
whose com-
the one
puters can take in data and spit out the obvious response to
first.
That
In the various races being run,
is
why
place: to
Goldman was seldom
they had sought out Serge Aleynikov in the
improve the speed of
their system.
problems with that system, in Serge’s view.
system
as
first
There were many
It
much
wasn’t so
an amalgamation. “The code development practices
IDT were much more
man,” he
says.
organized and up-to-date than
Goldman had bought
it
first.
at
a
at
Gold-
the core of its system fifteen
years earlier in the acquisition of one of the early electronic trad-
ing firms, Hull Trading.
The massive amounts of old
(Serge guessed that the entire platform had as
lion lines of code in
it)
and
fifteen years
many
of fixes to
it
software
as
60 mil-
had created
the computer equivalent of a giant rubber-band ball.
When
of the rubber bands popped, Serge was expected to find
fix
it
one
and
it.
Goldman
Sachs often used complexity to advantage.
The firm
designed complex subprime mortgage securities that others did
not understand, for instance, and then took advantage of the
ignorance they had introduced into the marketplace.
mation of the stock market created
ity,
with
lots
a different sort
of unintended consequences.
One
The
auto-
of complex-
small example:
Goldman’s trading on the Nasdaq exchange. In 2007, Goldman
owned
the (unmarked) building closest to Nasdaq.
ing housed Goldman’s dark pool.
When
The
build-
Serge arrived, tens of
thousands of messages per second were flying back and forth
between computers
inside the
two
buildings. Proximity, he
PUTTING A FACE ON HFT
Goldman
assumed, must offer
why
else
buy the building
looked into
Nasdaq,
it
it
he found
a signal
would
more than
to
much time
as
as
to
is
the friction caused
street in Carteret traveled in
—
by man.” The
say, if the signal
something
“Everything
friction could
moving
less direct
than
could be caused by computer hardware. But
be caused by slow, clunky software
the
New York and back
like seven milliseconds,” said Serge.
that
on
York. “The theoretical
from Chicago
be caused by physical distance
It
New
to
all,
when he
take, a couple of years later, for a signal to travel
something
line.
after
from Goldman
took 5 milliseconds, or nearly
limit [of sending a signal]
is
—
exchange? But
closest to the
that, to cross the street
network from Chicago
fastest
137
Sachs some advantage
— and
that
it
across a
a straight
could also
was Goldman’s
problem. Their high-frequency trading platform was designed,
in typical
Goldman
style, as a
centralized hub-and-spoke system.
Every signal sent was required to pass through the mother ship
in
Manhattan before
it
went back out
into the marketplace.
“But
the latency [the 5 milliseconds] wasn’t mainly due to the physical distance,” says Serge. “It
through
layers
and
layers
was because the
traffic
was going
of corporate switching equipment.”
Broadly speaking, there were three problems Serge had been
hired to solve.
tronic trade.
They corresponded
The
first
was
to the three stages of an elec-
to create the so-called ticker plant,
or the software that translated the data from the thirteen public
exchanges so that
it
could be viewed
as a single stream.
Reg
NMS had imposed on the big banks a new obligation: to take in
the information
from
all
the exchanges in order to ensure that
they were executing customers’ orders
price
—
IBM
at
the
$20
NBBO.
a share
If
Goldman
on the
of a customer without
first
at
the official best market
Sachs purchased 500 shares of
New York Stock Exchange
on behalf
taking the 100 shares of IBM offered
FLASH BOYS
138
at
$19.99 on the
The
lation.
problem was
exchanges
BATS
easiest
—
exchange, they’d have violated the regu-
and cheapest solution
to use the
Some of them
the SIP.
for the big
them
a dated
this
did just that. But to assuage
the concerns of their customers that the SIP
offered
banks to
combined data stream created by public
view of the market,
a
was too slow and
few banks promised
to create a faster data stream
—but nothing they
tomers’ orders was as
what they created
fast as
created for cus-
for themselves.
Serge had nothing to do with anything used by Goldman’s
customers. His job was to build the system that
own
would use
proprietary traders
went without saying
that
used by the customers.
to
make Goldman’s
at
IDT
route:
The
first
phone
To
in the stock
to place
its
computers
The
a lot
make
of that code to
As
it
that, too.
he was building
a
Goldman
its
private ticker plant,
as close as possible to
the
software that took the outit
to figure out smart trades
He
run
faster.
The
third stage
market to be executed. Serge
didn’t think of it this way, but in effect
created for
purposes, of course.
Goldman’s prop
it
high-frequency trading firm within
The speed he
many
to the
sounds, this was the software that
sent those trades back out into the
for
cheapest
market was the second stage of the process: Serge
called “order entry.”
Sachs.
calls to find their
acquire the information for
put from the ticker plant and used
worked on
it
than anything
and most obvious thing he did
from the various exchanges back
exchange’s matching engine.
rewrote
faster
up separate mini-Goldman hubs inside each of the
set
Goldman needed
was
be
decentralized Goldman’s system. Rather than have
signals travel
exchanges.
to
Sachs’s
—and
robots faster was exactly what he had done
to enable millions of
He
hub, he
needed
it
Goldman
in their activities
traders’
It
Goldman
Goldman
Sachs could be used
could be used simply to execute
smart strategies
as
quickly
as possible.
PUTTING A FACE ON HFT
139
could also be used by Goldman’s prop traders to trade the
It
slow-moving customer orders in
the wider market.
example, to
buying
by Goldman’s prop
people
it
from him
know what
traders.
the speed
Goldman with whom he
high
was being used
view of the
a global
first
employer.
No
one
for
The
effects
Goldman
at
computer software,
firm’s
He figured that out on the
his
understood the
dealt
of what he did but not their deep causes.
had
at a
lower price
As he worked, he became aware of
understanding between himself and
at
at a
exchange.
a public
Serge actually didn’t
a gulf in
dark pool against
Chipotle Mexican Grill to Rich Gates
sell
price in the dark pool while
on
own
their
Serge gave them could be used, for
The speed
for instance:
when they asked him to look
how the different components
day,
into the code base and figure out
talked to each other. In doing so, he saw that there was shockingly
documentation
little
left
behind by the people
written that code, and that no one
it
to him.
He, in turn, was not privy
of his actions
—
want him
know
said.
to
“The
better
it is
less
it is
them.
think
“I
if they
had wanted him
unclear Serge
are
done
it is
to
intentionally,” he
much more
is
You
one of these people.”
He
know.
who
left
make money
can’t really
to
“I
think the
interesting than the busi-
just
in the right pocket or the
Sachs.
know how the money was
would have cared
pens that the companies that
Goldman
effects
you know about how they make the money, the
ness problems,” he says. “Finance
wind up
explain
commercial
in part, he sensed, because his superiors did not
engineering problems are
it
to the
for them.”
But even
made,
who had
Goldman could
at
win
gets
pocket?
are the
in that
money. Does
It
just so
hap-
companies
game
unless
like
you
understood that Goldman’s quants
were forever dreaming up new trading
strategies, in the
form of
FLASH BOYS
140
algorithms, for his robots to execute, and that these traders were
meant
He
to be extremely shrewd.
grasped further that
algorithms are premised on some sort of prediction
“all their
—predicting
something one second into the future.” But you needed only
to observe the
man
2008 stock market crash from
Sachs, as Serge had, to see that
Day
often was not.
after volatile
inside of
Gold-
what seemed predictable
day in September 2008, Gold-
man’s supposedly brilliant traders were losing tens of millions
of
dollars. “All
of the expectations didn’t work,”
“They thought they
controlled the market, but
the fact that they couldn’t control anything at
gambling game
a
a
gambler by nature.
programming
and he never
tem
illu-
“The
know
faster,
from
traders
underneath
.
Finance
He
wasn’t
world of speculation,
connection between his work and
about Goldman’s business was that the
world of high-frequency trading was inse-
were always
but he could never
scratch,
.
preferred the deterministic world of
afraid
of the small
He was making Goldman’s
it.
.
traders’.
Serge did
he put
all.
enjoy gambling.”
to the pseudo-deterministic
firm’s position in the
cure.
He
fully grasped the
Goldman
What
who
for people
is
as
was an
Everyone would come into work and were blown away by
sion.
the
recalls Serge.
it
make
it
as fast as a
without the burden of 60 million
it.
Or
a
system
that, to
HFT
shops,”
bulky, inefficient sys-
change
it
system built
lines
of old code
in any
major way,
did not require six meetings and signed documents from infor-
mational security
as the
nimble
small
as
HFT
officers.
Goldman hunted
firms, but
those firms:
No
it
big Wall Street
advantage a big bank enjoyed was
prey:
its
firm put
in the
could never be
its
as
same jungle
quick or
as
bank could. The only
special relationship to the
customers. (As the head of one high-frequency trading
it,
“When
one of these people from the banks inter-
PUTTING A FACE ON HFT
views with us for
he always
a job,
algos are, but sooner or later he’ll
tomer he
can’t
about
talks
tell
141
you
how
smart his
without
that
his cus-
make any money.”)
After a few months working on the forty-second floor
One New York
came
Plaza, Serge
at
to the conclusion that the
do with Goldman’s high-frequency trad-
best thing they could
ing platform was to scrap
and build
it
a
new one from
scratch.
His bosses weren’t interested. “The business model of Goldman
Sachs was, if there
let’s
do
that,”
he
is
money
an opportunity to make
“But
says.
right away,
was something long-term,
if there
they weren’t that interested.” Something would change in the
— an exchange would introduce
— and change would
stock market
rule, for instance
opportunity to
a
make money. “They’d want
ately,” says Serge.
“But
if you
existing system constantly.
new, complicated
create an
that
think about
The
to
it, it’s
do
immediate
it
immedi-
just patching the
existing code base
becomes an
elephant that’s difficult to maintain.”
That
is
how
he spent the vast majority of his two years
Goldman, patching
Goldman programmers
he and the other
to
open source software
programmers and made
freely available
for financial markets, but they
man’s plumbing.
had
a
one-way
He
resorted, every day,
— software developed by
on the
and components they used were not
tools
collectives of
Internet.
The
specifically designed
could be adapted to repair Gold-
discovered, to his surprise, that
Goldman
open source. They took huge
relationship with
amounts of free software off the Web, but they did not return
after
he had modified
slight
it,
even
when
and of general, rather than
his modifications
financial, use.
a
component
that
was not even used
at
to
it
were very
“Once
some open source components, repackaged them
with
at
the elephant. For their patching material
I
took
come up
Goldman
Sachs,”
FLASH BOYS
142
he
says.
was
“It
like one, so if
perform the
behave
to
basically a
task.”
to
make two computers look
When you
way
a neat
He
as the stand-in for another.
way:
for
open source,
as
was
He went
Open
his inclination.
recalls Serge.
and
described the pleasure
you reduce
essentially,
named
to his boss, a fellow
Schlesinger, and asked if he could release
man’s property,”
in
one computer
created something out of chaos.
“It
something out of chaos,
create
the entropy in the world.”
jump
the other could
He’d created
ot his innovation this
Adam
way
down
one went
“He
“He was
said
it
back into
it
was now Gold-
quite tense.”
source was an idea that depended on collaboration and
and Serge had
sharing,
didn’t fully understand
to benefit so greatly
long history of contributing to
a
how Goldman
could think
it
it.
He
was okay
from the work of others and then behave so
selfishly
toward them. “You don’t create intellectual property,”
he
“You
said.
create a
program
that does something.”
then on, on instructions from
everything on
Goldman
erty. (Later, at his trial, his
code: the original, with
the
Goldman
it
had just been
Goldman
Sachs’s prop-
even
if
lawyer flashed two pages of computer
its
open source
license
on
top,
and
a
Sachs license.)
that Serge actually liked
Adam
and most of the other people he worked with
He
liked
in.
“Everyone lived
less
get satisfied
when
as
with the open source license stripped off and replaced by
The funny thing was
inger,
But from
Schlesinger, he treated
Sachs’s servers,
from open source,
transferred there
replica,
Adam
the
made no
the environment the firm created for
when
number
sense to
for the
the bonus
is
not.
him
is
sizable
way people were
to
said.
and you get not
is
Schles-
Goldman.
them
year-end number,” he
Everything there
the
at
work
“You
satisfied
very possessive.”
It
paid individually for
achievements that were essentially collective achievements.
“It
PUTTING A FACE ON HFT
was quite competitive. Everyone’s trying
individual contribution to the team
is.
to
143
show how good
their
Because the team doesn’t
get the bonus, the individual does.”
More
to the point, he felt that the
created for
its
environment Goldman
employees did not encourage good programming,
because good programming required collaboration. “Essentially
there was very
minimal connections between people,” he
says.
“In telecom you usually have some synergies between people.
Meetings when people exchange
in the
same way. At Goldman
it
ideas.
They
broken and we’re losing money because of it. Fix
programmers assigned
to fix the
spoke to one another.
“When two
wouldn’t just do
to
one of the
it
code
around the
stress
sat in
now.’ ”
it
cubicles
is
The
and hardly
people wanted to talk they
“They would go
out on the floor,” says Serge.
offices
under
aren’t
was always, ‘Some component
and
floor
close the door.
never
I
had that experience in telecom or academia.”
By
the time the financial crisis
hit,
Goldman
rate recruiters outside
firm.
as
Serge had
the best
says a
reputation
headhunter
to
corpo-
programmer
“There were twenty guys on Wall Street
what Serge could do,”
a
He was known
of which he himself was unaware:
who
who
in the
could do
recruits often for
high-frequency trading firms. “And he was one of the
if
not the best.”
ket for
Goldman
also
had
a
best,
reputation in the mar-
programming talent— for keeping
its
programmers
in
the dark about their value to the firm’s trading activities.
The
programmer types were
The
context.
from the trader
types.
more
alive to the bigger picture, to their
They knew
their
worth
were
the last penny.
they did and
at
different
far
trader types
They understood
in the marketplace
the connection
how much money was made, and
down
to
between what
they were good
exaggerating the importance of the link. Serge wasn’t like
FLASH BOYS
144
that.
“1
He was
a little-picture person, a
know
think he didn’t
“He compensated
own
his
for being
narrow problem
solver.
value,” says the recruiter.
narrow by being good. He was
that good.”
Given
and
his character
his situation,
it’s
hardly surprising
market kept finding Serge Aleynikov and
that the
telling
him
A
few
what he was worth, rather than the other way around.
months into
other week.
new job,
his
A year into
headhunters were calling him every
new job, he had an
his
the Swiss bank, and a promise to
a year.
just to
bump up
offer
Serge didn’t particularly want to leave
go and work
Goldman
at
offered to
he had another
call,
$400,000
Goldman
Sachs
another big Wall Street firm, and so
when
match the
with
ate a trading platform
from UBS,
his salary to
a
offer,
he stayed. But in early 2009
very different kind of offer: to cre-
from scratch
for a
new hedge fund run by
Misha Malyshev.
The
prospect of creating a
stantly patching
willing to pay
new
platform, rather than con-
an old one, excited him. Plus Malyshev was
him more than
a million dollars a year to
and he suggested that they might even open an
near his
home
then told
in
New Jersey.
Goldman he was
common
to
do
it,
Serge
Serge accepted the job offer and
leaving.
tion letter,” he said, “everyone
to quit
office for
“When put in the resignato me one by one. The
I
comes
perception was that if they had the right opportunity
Goldman
they would do that in no time.” Several hinted
him how much
they would like to join
him
at his
new
firm.
His bosses asked him what they could do to persuade him to
stay.
“They were trying
to pursue
sion,” says Serge. “I told
chance to build a
his
new
them
it
me
into this
monetary discus-
wasn’t the money.
system from the ground up.”
telecom work environment. “Whereas
at
IDT
I
It
was the
He
missed
was
really
PUTTING A FACE ON HFT
145
seeing the results of my work, here you had this monstrous sys-
tem and you
are patching
the whole picture.
knows how
it
I
works
as a
right
it
had
and
left.
No
no one
a feeling
one
giving you
is
Goldman
at
really
whole, and they are just uncomfortable
admitting that.”
He agreed to hang around for six weeks and teach other Goldman people everything he knew, so that they could continue
to find
and
fix the
broken bands in
Four times in the course of
their gigantic rubber ball.
that last
month he mailed himself
The
source code he was working on.
contained
files
a lot
of
open source code he had worked with, and modified, over the
two
past
years,
mingled with code
was obviously proprietary
to
that wasn’t
Goldman
open source but
He hoped
Sachs.
to dis-
entangle one from the other in case he needed to remind him-
how
self
he had done what he had done with the open source
code; he might need to do
way he had
month on
me
to
into
it
it
again.
He
the job at
about
it,”
he
He
clicked the
link
first
on the
code took about eight seconds.
always done since he’d
first
deleted his bash history
—
own Goldman computer
was required
history, his
since his
list.
To
And
started
the
said a
first
word
pulled up his browser and typed
Up popped
the words: “free subversion repository.”
of places that stored code for free and in
He
week
Goldman. “No one had ever
says.
same
sent these files the
sent himself files nearly every
a
a list
convenient fashion.
find a place to send the
then he did what he had
programming computers: He
commands he had typed
into his
keyboard. To access the computer, he
to type his password. If he didn’t delete his bash
password would be there to
see, for
anyone
who had
access to the system.
It
wasn’t an entirely innocent
be happy about
it,”
he
said,
act. “I
because he
knew
knew
that they wouldn’t
their attitude
was
FLASH BOYS
146
that anything that
happened
to be
on Goldman’s
wholly owned property of Goldman Sachs
himself had taken that code from open source.
he
felt
when he
did
it,
he
servers
was the
— even when Serge
says, “It felt like
When
asked
how
speeding. Speeding
in the car.”
FOR MUCH OF the
flight
plane, he noticed three
from Chicago he’d
men
of the Jetway reserved for baby
confirmed
slept.
Leaving the
in dark suits waiting in the alcove
strollers
and wheelchairs. They
his identity, explained that they
were from the FBI,
handcuffed him, searched his pockets, removed his backpack,
told
him
to
remain calm, and then walled him
other passengers. This
six feet tall
oft'
feat.
from the
Serge was
but weighed roughly 140 pounds: To hide
you needed only
to turn
these actions, but he
black refused to
first
was no great
last act
He
sideways.
resisted
him
none of
was genuinely bewildered. The men in
him
tell
him
He
his crime.
tried to guess
it.
His
guess was that they’d gotten
other Sergey Aleynikov. Next
it
him mixed up with some
occurred to him that his new
employer, Misha Malyshev, then being sued by Citadel, might
have done something shady.
until the plane
Newark Airport
puter code
The
to
Wrong on both
counts.
It
wasn’t
had emptied and they’d escorted him into
him
that they told
owned by Goldman
his crime: stealing
com-
Sachs.
agent in charge of the case, Michael McSwain, was
new
law enforcement. Oddly enough, he’d spent twelve years,
until 2007,
cantile
working
Exchange.
business
as a
He
currency trader on the Chicago Mer-
and others
by Serge and people
like
like
him
him had been
—
or,
more
put out of
exactly,
by the
computers that had replaced the traders on the floors of every
PUTTING A FACE ON HFT
U.S. exchange.
Wall Street ended the same year
McSwain marched
to the
Serge into
that Serge’s began.
town
black
a
car
and drove him
FBI building in lower Manhattan. After making
McSwain
of stashing his gun,
room, handcuffed him
him
147
wasn’t an accident that McSwain’s career on
It
Miranda
his
led
wall, and, finally, read
Then he explained what he knew,
thought he knew: In April 2009 Serge had accepted
new
show
a
into a tiny interrogation
on the
to a rod
rights.
him
a
job
or
at a
high-frequency trading shop, Teza Technologies, but had
remained
at
Goldman
April and June
for the next six weeks.
when
5,
Serge
left
Goldman
Between
early
he sent
for good,
himself, through the so-called subversion repository, 32
mega-
bytes of source code from Goldman’s high-frequency stock trad-
ing system.
McSwain
clearly
Serge used was called
in
Germany. He
had used
a site
also
porn
its
sites
seemed
him
it
damning
to think
that
it
and
social
him
Goldman
Goldman
McSwain had no
nefarious,” the
media
why
far.
“I
its
sites
employees from
Finally, the
FBI
his bash history.
he always erased his bash history, but
FBI agent would
seem very
was
Sachs, even after Serge
had erased
“The way he did
interest in his story.
All of which was true,
it
did not block any
and suchlike.
sites
to admit that he
Serge tried to explain
that the website
significant that Serge
programmers but merely blocked
agent wanted
didn’t
found
subversion repository, and that
not blocked by
tried to explain to
used by
a
it
seemed
later testify.
as far as
thought
it
it
went, but, to Serge, that
was
like, crazy, really,”
he
says.
“He was
stringing these computer terms together in ways
that
made no
sense.
He
didn’t
seem
to
know
anything about
high-frequency trading or source code.” For instance, Serge had
no idea where the subversion repository was physically
It
was just
a place
on the
located.
Internet used by developers to store the
FLASH BOYS
148
code they were working on. “The whole point of the Internet
is
to abstract the physical location of the server
cal address,”
he
said.
To
Serge,
from
McSwain sounded
logi-
its
man
like a
him
repeating phrases that he’d heard from others but that to
meant nothing. “There
actually
ken Phone,” he
phone.
said
“It felt like
What
—
a variation
he was playing
Serge did not yet
covered his downloads
a
is
game
on the American game Telethat.”
know was
Goldman had
that
— of what appeared
to be the
few days
earlier,
dis-
code they
used for their proprietary high-speed stock market trading
a
Bro-
in Russia called
—
-just
even though Serge had sent himself the
first
batch of code months ago. They’d called the FBI in haste and
had put McSwain through what amounted to
a crash
course in
high-frequency trading and computer programming. McSwain
later
conceded
to study the
out
why
independent expert advice
that he didn’t seek out
code Serge Aleynikov had taken, or seek to find
he might have taken
Goldman employees,” he
said.
“I relied
on statements from
He had no
idea himself of the
it.
value of the stolen code (“representatives from
Goldman
me
it
all
it
was worth
a lot
of money”), or
that special (“representatives of
were trade
man
files
secrets in the code”).
important,
why
told
was actually
Sachs told us there
agent noted that the Gold-
at
Newark
remained unopened.
hadn’t Serge looked at
them
Airport, but he
(If
in the
they were so
month
Goldman?) The FBI’s investigation before the
consisted of
stuff to
Goldman
The
from Serge
failed to note that the files
left
any of
were on both the personal computer and the thumb
drive that he’d taken
he’d
if
Goldman
McSwain
since
arrest
explaining some extremely complicated
that he admitted he did not fully understand
but trusted that
Goldman
did. Forty-eight
called the FBI,
McSwain
arrested Serge.
hours after
Thus
Goldman
the only Gold-
PUTTING A FACE ON HFT
man
Goldman had done
a financial crisis
employee Goldman asked the FBI to
On
that a
much
so
was the
to fuel
arrest.
the night of his arrest, Serge waived his right to call a
lawyer. Fie called his wife, told her
what had happened, and
bunch of FBI agents were on
seize their computers,
and to please
had no search warrant. Then he
clear
149
Sachs employee arrested by the FBI in the aftermath of
up the confusion of
without an
this
asked himself.
in,
down and
FBI agent
politely tried to
arrested
him
was
figure out if this
he’d done, in his view, was
to
although they
who had
understand what was taken?” he
What
said
home
to their
them
let
“Flow could he
arrest warrant.
a theft if he didn’t
sat
way
the
recalls
having
what he
trivial;
—violating both the Economic Espionage Act
stood accused of
and the National Stolen Property Act
he thought that
all. Still,
— did not sound
the agent understood
it
how
trivial at
computers
and the high-frequency trading business actually worked, he’d
apologize and drop the case.
“The reason
him was
was nothing
to
show
that there
was explaining
I
was completely not interested in the content of what
ing.
He
just kept saying to
talk to the
a
judge and
me,
‘If
you
go easy on
he’ll
tell
you.’
it
to
there,” he said. “Fie
me
It
I
am
say-
everything,
I’ll
appeared they had
very strong bias from the very beginning. They had goals they
wanted
The
to fulfill.
One was
to obtain an
immediate confession.”
chief obstacle to the FBI’s ability to extract his confes-
sion, oddly, wasn’t Serge’s willingness to provide
agent’s ignorance
it
but
its
own
of the behavior to which Serge was attempting
to confess. “In the written statement he
was making some very
obvious mistakes, computer terms and so on,” recalled Serge.
“I
was
saying, ‘You
know,
walked the agent through
July
4, after five
this
is
not correct.’” Serge patiently
his actions.
hours of discussion,
At
1:43 in the
McSwain
morning on
sent a giddy one-
FLASH BOYS
150
line email to the U.S. Attorney’s office:
“Holy crap he signed
a
confession.”
Two
minutes
later,
he dispatched Serge to
politan Detention Center.
The
a cell in the
Metro-
prosecutor, Assistant U.S. Attor-
ney Joseph Facciponti, argued that Serge Aleynikov should be
The Russian computer programmer had
denied
bail.
session
computer code
kets in unfair ways.”
that could
The
in his pos-
be used “to manipulate mar-
confession Serge had signed, scarred by
phrases crossed out and rewritten by the FBI agent, later
be presented by prosecutors to
was being cautious, even
what happened,”
a
jury
tricky,
said Serge.
as the
with
his
work of a
would
thief who
words. “That’s not
“The document was being
crafted
by someone with no previous expertise in the matter.”
Sergey Aleynikov’s signed confession was the
from him,
at least directly.
testify at his trial.
He had
He
last
anyone heard
declined to speak to reporters or
a halting
manner,
a
funny accent,
a
beard, and a physique that looked as if it had been painted by El
Greco: In
a
lineup of people chosen randomly from the streets,
he was the guy most likely to be identified
a character
from the original episodes of
discussions he
which was
had
great
mind-numbing
a
as the
Russian
tendency to speak with extreme precision,
when he was
dealing with fellow experts but
to a lay audience. In the court
of U.S. public
opinion, he wasn’t well suited to defend himself, and
advice of his attorney, he didn’t.
after
spy, or
Star Trek. In technical
He
so,
on
the
kept his long silence even
he was sentenced, without the possibility of parole, to eight
years in a federal prison.
CHAPTER
SIX
HOW TO TAKE BILLIONS
FROM WALL STREET
onan
R
his
how much
didn’t intend to tell his father exactly
money he made,
ing, but
or anything else that sounded like boast-
he wanted
him
to
know
he needn’t worry about
son any longer. For Christmas, in 2011, he’d
fly
back to
Ireland, as he did every year, only this year he’d travel
a conversation.
“I don’t
felt
belong there
everywhere.
lost its
He
When
charm.”
He
I
no
toward
particular attachment to the place.
at all,”
he
said.
“There’s fucking
was growing up there was no
missed his family, nothing more.
When
arrived at their house in the Dublin suburbs, his parents
be waiting with
a list
talk.
said
satellite signal,
he’d
sit
“American parents get into
Ronan. “In
he
would
of their stuff that needed to be repaired or
reprogrammed. After he’d rebooted
tured their
kids
fat
fat kids. It’s
still
living, or, for that matter,
this
their fucking kids’ business,”
Ireland they don’t.
ing business.” His father
their computer, or recap-
down with them and have
had no
They mind
clear idea
why a big Wall
their
own
what he did
Street
fuckfor a
bank would find
FLASH BOYS
152
him
useful.
But
“He
didn’t think
my dad,
if I said to
you know about
I
kinda wanted him to
just
was semi
him
to set
a
trading?’ ” His life
“My mom and dad, know
I
was
I
fucking
teller
‘I’m a trader,’ he’d say,
was
his life, theirs
they love me.
know
at ease.
I
was
It’s
was
theirs.
just Irish love.
And
legit in this business.
want him
didn’t
I
or something.
‘What the fuck do
to think
I
It
was
putting the family in jeopardy.”
Ireland’s
weight of a
economy had
advice from
were
friends
be taking
American
still
RBC
It
Many
didn’t
days before
of Ronan’s childhood
seem
to create
time to
like the best
Ronan was
to fly back to Ire-
Brad Katsuyama had pulled him into
with John Schwall and
left
financiers.
out of work.
a risk. Just
land, however,
he
collapsed three years earlier, under the
of American-style financial machinations and bad
lot
a
meeting
Rob Park. Brad had wanted to know, if
a new stock exchange, who might leave
with him. They’d taken turns answering the same question: You
in?
On
ing
as
some
level,
Ronan
could not believe what he was hear-
he listened to the sound of his
entire career trying to get a job
finally
to
had one, the guy
throw
it
away.
who had given
On another level,
“Too much was riding on me,” he
Brad.
He was
who
the one
own
on Wall
gave
me
voice:
it
to
He’d spent
and
Street,
now
him was asking him
the question answered
said.
his
that he
“And
a chance.
I
felt
I
like
I
itself.
owed
trusted him: He’s
not a fucking idiot.”
By
mind,
as
the end of 2011, there
too.
persuasive to
here
I’ll
of a
him
become
They were
clear.
was something
He’d now seen Wall
all
full
as
he had expected
of shit,” he
very
Street
much
in;
else
from the
it
on Ronan’s
inside.
It
wasn’t
to be. “It’s like if I stay
said.
what they were
in for
was
less
Until they found someone willing to pay for the building
new stock exchange,
they couldn’t very well quit their jobs to
HOW TO TAKE
do
it.
FROM WALL STREET
BILLIONS
Ronan’s commitment to Brad was
153
promise of imme-
less a
diate action than a promissory note to be cashed at
some point
in
the indefinite future. But they did have a goal: to restore fairness
—
market
to the U.S. stock
for the first
time in Wall Street his-
tory, perhaps, to institutionalize fairness.
deploy Thor
idea: to
stock exchange, to
so that
they had
a
rough
new kind of
which brokers could send stock market orders
Thor might
none of them,
yet
And
the backbone of a strange
as
route
least
them
of
to
all
the other exchanges.
Ronan, believed
all
And
Thor alone
that
could change the stock market, mainly because they doubted
that the big brokerage firms
able
commodity
(their
third party to execute.
would hand over
They
also suspected that other
Thor
unfairness plagued the market, problems that
to address. “I give
of working,”
I
what we have
Ronan
now
right
told his colleagues.
wanted
Ronan
Brad’s office,
left
to have with his father
father’s advice.
a ten percent
quit a telecom job in
panned
out:
lion bucks
RBC
told
me
could
I
that
name my
would
wanted
know
him
if he
price.”)
to
a
a third
would
his
when he had
of
a million a
that. It
bonus of nearly
like to
know
one
As
if
a
had
mil-
run the more
his
plane dipped toward
he was out of his mind to
that paid
quite possibly be paid to
himself invested in the
to
He needed
risk,
market trading operation. (“They
quit his $910,000-a-year job for
money
out.”
had changed:
had just handed him
and was asking him
the Irish coast, he
it
which he’d made nearly half
lucrative half of their stock
chance
realized that the talk he
He’d already taken one big
year for a Wall Street job that paid
forms of
didn’t begin
“But with the four of us
give us a seventy percent chance of figuring
After he
most valu-
their
customers’ stock market orders) to any
new company. His
$2,000
a
month
him out of funds he
father
might not care
the details, but he’d grasp the gist of his predicament.
FLASH BOYS
154
“I
wanted
dice?’
I
‘Is
there a time
didn’t
sat his father
gist
when you stop rolling the
know if RBC was that time.” But when he finally
down, Ronan realized he couldn’t explain even the
to ask him:
of his predicament unless he confessed the
“When I was
telling
him
sand dollars he about had
I’d
a
mean, he doubled over in
At length
said,
far.
then looked up
risks
seem
the fuck not?”
in
New
York on Tuesday, January
The
first
was from Brad, announcing
from the Royal Bank of Canada. As Ronan
moment, “The next ten messages
suyama just fucking
resigned.’ ”
insistence that
bank
it
would be
also
new
all
3,
messages
his resignation
later recalled the
‘Holy
shit,
that
concerned
Brad Kat-
RBC’s
artfully, to deal
better for
to pursue an idea he
bank but
said,
Ronan knew
up in Canada had been refusing,
for the
son and
at his
to have paid off so
2012, turned on his BlackBerry, and watched the
quit the
“I
his chair.”
his father recovered,
Ronan landed back
flood in.
ten thou-
fucking heart attack,” said Ronan.
“You know what, Ro, your
Why
of his bonus.
size
made nine hundred and
bosses
with Brad’s
if he
not only
had conceived whde working
took several of the bank’s most valuable
employees with him. The bosses in Canada clearly didn’t like
the sound of any part of this.
for time,
They assumed
Brad would come to
his senses.
that if they stalled
What
kind of Wall
Street trader quits a secure $2-million-plus-a-year job to start
a risky business
—
a business for
which he
doesn’t have even the
financial backing?
At baggage claim, Ronan reached Brad by phone.
wanted
to ask him:
He was tired of all these supposedly
who ran this supposedly important bank nodwhen he tried to speak to them about something
in surprisingly
few words:
important people
ding politely
“I just
What the fuck is going on?’ ” Brad told him,
HOW TO TAKE
that
was
far, far
BILLIONS
FROM WALL STREET
more important than any one person or any one
bank. “They were thinking he’d never do
he was
Ronan rang
said
it,”
Ronan. “And
‘Oh yeah, motherfucker?’ And he did
like,
155
off,
he thought:
Well, he’s
pushed me
it!”
When
all in.
BRAD GOT TO work around 6:30 every morning. That
first
morn-
ing after the Christmas break, he went to his immediate superior
and told him
was done. Then he went to
that he
wrote one email
to
desk and
his
Ronan, Rob Park, and John Schwab, and
another to three senior guys in Canada. Five minutes
phone rang.
It
was Canada, outraged. What
asked the senior manager on the other end of the
do
To which Brad
this.
He
left
the
tainty that
as
it
a
—no
bank with nothing
turned out,
Goldman
You
can’t
no code, no cer-
paper,
a clear idea for a business.
Brad had received
Like everyone
when
a jolt
else
he read that
Sachs high-frequency programmer had gone to
mailing himself computer code. Goldman’s sensitivity
confirmed
his suspicion that,
around 2009, the big Wall Street
banks, previously distracted by the financial
woken up
to the value of the
dark pools.
who,
fear
finally
own
and intimidation to control
ultimately, could exploit that value;
the culture of finance suddenly was
secretive
had
crisis,
customer orders inside their
They were using
the technologists
becoming more
and
closed and
—which was saying something. The people who now
did what
Ronan had once done
firms, for instance,
that
line.
said: I just did.
anyone would actually follow him out, and not even,
in the stock market,
jail for
later his
the hell are you doing?
for the big
would not be allowed
Ronan had been allowed
were now using the
to see
legal system to
and
banks and
to see
hear.
make
it
HFT
and hear
And
all
the banks
harder for their
FLASH BOYS
156
more
technical employees to leave. “I said to
around,’ ” recalled Brad.
“He
said,
ing I’d want to take from here anyway.’
They’d be
the stock market gained
only sustainable advantage
The
use the insights about
from Thor, but Thor
itself
belonged
Royal Bank of Canada. Their main advantage
to the
were
”
They could
starting fresh.
Rob, ‘No fucking
‘Don’t worry. There’s noth-
investors
not,
on
—was
their
the receiving end of Wall Street’s sales pitches
by nature,
trusting; or, if they
were reshaped by
their natures
—
that investors trusted them.
were trusting by nature,
their environment. People
Wall Street were simply paid too much to
lie
on
and dissemble and
obfuscate, and so every trusting feeling in the financial markets
simply had to be followed by
Brad had led investors
Whatever
people
that was,
who
after
who
quit, to
powerful that
trust
a
him
computer code
scale.
million or so to hire the people
to design his
that
new
would be
— assumed, even—
him with
grander
these very people raised questions about
He needed $10
him
a
RBC,
he might restore
walked away from millions of Wall
as
Street dollars
could help
to leave, so that
markets on
— even he
— some of
yet
his motives.
him.
group of
controlled roughly one third of the entire
allow
trust to the financial
hoped
sufficiently
States stock market, petitioned his superiors at
he had
And
doubt. Something about
ran some of the world’s biggest mutual funds and
hedge funds, and
United
was
it
a trailing
lower their guard and to
to
the basis for that market.
that these big investors
the capital to build the
who
stock market, and to write the
new
He’d
would supply
stock exchange, but eight
of every ten pitch meetings began with some version of the same
question:
“Why
system that has
are
you just go along with
rich
it?”
Why
you attacking
a
and will make you even richer
if
you doing
made you
this?
are
As one investor put
it,
behind Brad’s
HOW TO TAKE
BILLIONS
FROM WALL STREET
back, “I have a question about Brad:
he’s
Robin Hood?”
playing
Brad’s
answer to that question was the thing he’d told
first
The
himself:
become grotesquely
stock market had
badly needed to be changed, and he’d
didn’t
do
it,
no one
“They’d just
say,
couple of times
over
to
it.
157
Have you figured out why
If this
it
simply didn’t
would. “That didn’t
happened,
really
a lot
he
well,” he recalled.
bullshit.’
The
first
bothered me.” Then he got
stock exchange flourished,
—maybe
feel
it
and
unjust,
to see that, if
sit
‘That sounds like complete
new
make money
else
come
of money.
He
its
founders stood
wasn’t
a
monk; he
any need to make great sums of money. But
he noticed, weirdly, that
when he
he himself might make from the
how much money
stressed
new
stock exchange, potential
—
new business warmed to him and so he started
how much money he might make. “We had a saying
seemed to appease everyone when they asked why we are
investors in his
to stress
that
doing
first
he
this,”
...
well.
said.
are long-term greedy.
That worked very
my
answer.”
He
spent six
months running around
he didn’t really
He
dening:
to
“We
always got a better response out of them than
It
do
so,
wanted
feel, to
put
couldn’t get the people
it
to
him. Just about
banks either asked him outright
exchange or wanted
tors.
But
its
friends
if
at least to
at ease. It
should give
was mad-
him money
if
all
who
of the big Wall Street
they might buy
be considered
a stake in his
as possible inves-
he took their money, his stock exchange would lose
independence and
its
and family in Toronto
new company. They
Brad had
who
and he couldn’t take the money from the people
to give
both
New York faking greed
money people
let
credibility
also all
presented a different
them know,
with investors. His
wanted
issue.
via email, that he
to invest in his
Two
hours after
was pounding the
FLASH BOYS
158
pavement
to raise
money
for a
up, collectively, $1.5 million.
to take risks
new
stock market, they ponied
Some of these
people could afford
with their money, but some had no more than
thousand dollars in savings. Before he allowed them to
Brad
him bank
insisted that they send
few
a
invest,
statements to prove that
they could afford to lose whatever they invested. “Your brother
has never failed
wrote
at
anything he has ever done,” one old friend
to Brad’s older brother, Craig, to explain
business wasn’t at
all risky,
and to ask him
why
new
the
to intercede
on
his
behalf and overrule Brad’s decision not to take his money.
What he needed was
had
said they
that
is,
for the big stock
wanted him
to quit
who
market investors
RBC to fix the stock market
the mutual funds, pension funds, and hedge funds
put their
money where
of excuses
why
their
mouth
was.
great idea, but the compliance
offered
managers thought
arm simply
it
“The amount of money we were
it
all
wanted him
from
to give
it
capital to
all
do
also
it.
assumed
Many
was indeed outside the mission of
invest in start-ups.
Still, it
of those fucking friends
a
hoped
that
to benefit
else
had good excuses
a giant
say he’ll back
ass
They
someone
pension fund to
was disappointing. “They’re
who
ask-
pain in the
to us,” said Brad.
to build his exchange; they all
that exchange; but they
would supply the
it
was too much of
how
to figure out
a
wasn’t equipped to
ing for was so small that
them
to
to
was
evaluate Brad; and so on.
for
—
all sorts
They weren’t designed
they couldn’t help:
invest in start-ups; the investment
They
you up
like
one
in a fight
and
they don’t do anything,” said Ronan, after one long and frustrating day of begging for capital. “You’re on the ground, bloody,
and only then do they jump in and throw
Some of them were
a
like that; but not all
punch.”
of them. The giant
mutual fund manager Capital Group pledged
to invest
— on
the
HOW TO TAKE
BILLIONS
FROM WALL STREET
159
condition that they weren’t the lone investor but part of
sortium; so did another, Brandes Investment Partners.
were
several that voiced a
was pitching
that existed
them was
to
why
con-
sound objection: The business Brad
foggy proposition
—
a stock
exchange
mainly to route their stock market orders to
other exchanges.
but
a
a
And there
all
the
How would that work? Thor had worked great,
did Brad imagine that the predators
who
operated with
such abandon on America’s public and private exchanges would
not adapt to
it?
And why did he
think Wall
would subcontract the routing of their
new exchange? Because
it
was
“fair”?
selling the banks’
going to turn on
a
dime and
to sell
now we’re going to
we can’t sell you out
but
so
Brad didn’t
ate until the
fully
give
say,
you out
all
The
banks’ salesmen ran
to high-frequency traders,
the stock market orders to Brad,
any longer.”
understand the enterprise he needed to cre-
market forced him
for the enterprise
banks
own routers. They weren’t
“Oh yeah, we’ve been paid
around every day
huge sums of money
Street’s biggest
stock market orders to his
to,
by not giving him the
capital
he thought he wanted to create. Fuller under-
standing arrived in August 2012, in
a
meeting with David Ein-
who ran the hedge fund Greenlight Capital. After listening
Brad’s pitch, Einhorn asked him a simple question: Why aren’t
horn,
to
we
all just
picking the same exchange?
Why didn’t investors organize
themselves to sponsor a single stock exchange entrusted with
guarding their
interests
and protecting them from Wall Street
predators? There’ d never been any collective pressure brought
by investors on the big banks to route
to any
one exchange, but
good reason
places
to prefer
on which
that
their stock
market orders
was only because there was no
one exchange over another: The
stocks
were traded were
all
fifty
or so
designed by finan-
cial intermediaries, for financial intermediaries. “It
was
so obvi-
FLASH BOYS
160
ous
it
was almost embarrassing,”
been our
pitch:
but
we
[that]
we
“That should have
said Brad.
should route the orders using Thor
should create the one place investors would choose
That
to go.”
not that
they shouldn’t simply seek to defend investors
is,
on the existing stock exchanges. They should seek
to put
all
the
other exchanges out of business.
By mid-December
ferent big
money
from four new
lion
he’d sewn up $9.4 million from nine dif-
managers.* Six months later he’d raise $15 milinvestors.
The money Brad needed
didn’t get he kicked in himself:
life
savings
on the
By January
that he
2013, he’d put his
1,
line.
At the same time, he went looking
for people: software devel-
opers and hardware engineers and network engineers to build
the system, the operations people to run
to explain
it
to
Wall
Street.
who knew him—-just
He had no
entrust
him with
tried to explain
a
a flier
on
why
a
RBC
shockingly large
apparently
dozen people had hinted
year to
new
work
Still,
big Wall Street
at a
business that
had neither
fired for
Zhao was made redundant
first
doing.
He
bank than
a clear plan
nor
people followed. Allen Zhang, the
sending
code to himself and instantly turned up
The
number
the urge to
of bizarre conversations, in which he
Golden Goose himself, got
*
felt
they were better off being paid hundreds of
a
penny of financing.
Billy
and the salespeople
him and do whatever he was
a series
thousands of dollars
taking
at
their careers. Several
that they’d like to join
found himself in
A
the opposite.
of people he’d worked with
it,
trouble attracting people
after
at
RBC’s computer
Brad’s front door.
he automated
a
compli-
round of investors included Greenlight Capital, Capital Group, Brandes
Investment Partners, Senator Investment Group, Scoggin Capital Management, Belfer
Management, Pershing Square, and Third Point
Partners.
HOW TO TAKE
BILLIONS
FROM WALL STREET
161
cated task so well that the bank no longer needed his help to do
He came on board, too. But Brad needed people who didn’t
know him, and who knew things he did not know. He needed,
it:
people with
especially,
deep understanding of high-frequency
a
And
trading and stock exchanges.
Don
the
first
person he found was
Bollerman.
— even
—was how badly he wanted not
WHAT EVERYONE NOTICED about Don Bollerman
didn’t quite put
surprised by his
it
way
this
own
life.
On
him
top of that, he’d
Bronx and
carried with
the
off cigarettes before he
a
filters
if
grown up
they
to be
in the
He ripped
He weighed
a resistance to sentiment.
smoked them.
hundred pounds more than he should and ignored entreat-
ies
from
gonna
much
his colleagues to exercise or take care
die
the
disdain.
young anyway,” he’d
way he
“Much
is
say.
treated his body, with
made of a kind
of himself. “I’m
His finer feelings he treated
something approaching
heart,” he said. “I’m
more of a
feed-yourself-or-die kind of guy.”
To
Don’s
eliminate the possibility of surprise required not that
life
be especially unsurprising but that he control
ings about whatever surprise
to
manage
small
produced.
On
new
September
his feel-
How much he wished
these emotions could be seen
their least manageable.
at a
it
11,
electronic stock exchange
when
they were
2001,
Don worked
on
at
the twelfth floor
of 100 Broadway, five hundred yards from the World Trade
Center. He’d arrived
seven that morning. Before the stock
at
market opened, he heard
come from
upstairs.
ing heavy equipment,” he
office
a
bump, which sounded
“What we thought
memos.” He and
said.
is
that
it
“Five minutes later
his colleagues
went
as if
it
had
was guys mov-
to the
it’s
snowing
window and
FLASH BOYS
162
TV
heard the news on the office
of the towers.
“I
and so he was
thought
less
The second
Stock Exchange.
it
a direct
Then
pulls
the
By
staircase.”
my
face
—
back
first
hit. “I felt
he
that feeling,”
tall
tower
enough
fell.
“That’s
east.
He walked
Once
mind from
to drink.
attack,
new
who had
Don
feel like a bit
What
couldn’t
my
to his
stuck out in
arrived in Harlem,
homes with
fruit juice
throat,” he said.
of a pussy, that
He
got to
it
and the ensuing market convulsions, killed off
electronic stock exchange that
anyway, went back to
in, his
employed him. Don,
thought that the business was probably going to die
then on to
NYU
a career at the
to finish his college degree,
Nasdaq stock exchange. Seven
job was to deal with everything that happened
trade occurred, but his specific role
his general
that
fell
that way.”
The
the
one
ran for the
Harlem River
all.
when he
outside their
“That one caught in
I
discussed
if
alone and matter-of-factly up Third
the day was how,
added quickly, “Actually,
me
when we
across the bridge over the
some women were waiting
him
They
them
outside, in the blizzard,
apartment in the Bronx, sixteen miles in
for
said.
to reach
the heat
the time they got to the sixth floor,
Avenue and then
his
across
on
plane
see his hands in front of his face.
he headed
by what hap-
view of the Twin Towers,
window. You open the barbecue and your
whether the towers were
over.
right away,” he said,
his colleagues
Church graveyard, over the top of the American
face through the
feels like
about the plane hitting one
was an attack
shocked than
pened next. They had
the Trinity
it
Don
understanding
was
less
and
years
after a
important than
—both Ronan and Schwab thought
Bollerman knew breathtakingly more about the inner
workings of the stock exchanges than anyone they had ever met.
He’d been privy
to just about everything that
happened inside
HOW TO TAKE
FROM WALL STREET
BILLIONS
163
Nasdaq, and brought an understanding not just of what had
gone wrong but how
it
might be
What had gone wrong,
ing or complicated.
power of
its
ability to gain
had to do with human nature, and the
It
The
incentives.
new
rest
By
giving
HFT
what
rest
of the market
exchanges, like
it
wanted
understood; and pay-
new
against), the
NYSE,
what they asked
them
for
he
it.
said.
“It
for
did
it
speed, and
was being used
for.
new wants and
needs.”
2005, a year after
was incentivized
to
make
in the nature of the exchange,
consequences.
“It’s
“It
It
a
a public
went from
is
‘Is
company
had earnings
decisions,
with
The
in
targets to
and to make changes
focus
on
hard to be forward-thinking
of corporate America
Don.
it.
fully
experience and then
Nasdaq had become
Don had joined
we
just thought,
don’t think
I
We
new
rules caused people to have a
it
HFT
to charge
you couldn’t do anything about
like
all this
had
couldn’t speak
— and then figuring out how
was almost
“We
understood what
hit;
Don
but he had watched Nasdaq respond by giving
firms
new
HFT
stock exchanges had stolen
market share from the old stock exchanges.
it,”
cre-
and Direct
to brokers for their customers’ orders, so that
something to trade
for
BATS
(speed, in relation to the
HFT
of the market; complexity only
ment
— and
—had
of high-frequency trading
rise
an edge on the
ated an opportunity for
Edge.
set right.
in Don’s view, wasn’t all that surpris-
their short-term
when
the
whole
about the next quarter’s earnings,” said
this
good
for the market?’ to
‘Is
this
bad
And then it slides to: ‘Can we get this through
the SEC?’ The demon in this part of the story is expediency.”
By late 2011, when Bollerman quit his job (“I felt there was a
for the market?’
lack of leadership”),
derived,
Don
more than two-thirds of Nasdaq’s revenues
one way or another, from high-frequency trading
wasn’t shocked or even
all
that disturbed
firms.
by what had
FLASH BOYS
164
happened,
or, if
Wall Street
he was, he disguised his feelings.
were inherently
life
The
brutal, in his view.
facts
of
There was
nothing that he couldn’t imagine someone on Wall Street doing.
He was
fully
aware that the high-lrequency traders were prey-
ing on investors, and that the exchanges and brokers were being
paid to help
them
to
do
it.
He
refused to feel morally outraged
or self-righteous about any of it. “I
would
ask the question,
‘On
the savannah, are the hyenas and the vultures the bad guys?’ ” he
said.
It’s
“We
have a
not their
boom
fault.
in carcasses
on the savannah. So what?
The opportunity
is
there.”
of thinking, you were never going to change
though you might
itself.
alter the
To Don’s way
human
environment in which
it
nature
expressed
Or maybe
kind of like the
hit,” said
Brad,
that’s just what Don wanted to believe. “He’s
mob guy who cries every now and then after a
who thought that Don was exactly the sort of
person he needed. Brad wasn’t in the market for self-righteousness, or for
people
who
sentiment. “Disillusion
soldiers.”
THEIR
Don was
defined themselves by their fine moral
isn’t a
NEW EXCHANGE needed
Exchange, which
was not
useful emotion,” he said. “I need
a soldier.
a
name. They called
wound up being
to exterminate the hyenas
subtly, to eliminate the
it
the Investors
shortened to IEX.*
Its
goal
and the vultures but, more
opportunity for the
kill.
To do
that,
they needed to figure out the ways that the financial ecosystem
favored predators over their prey. Enter the Puzzle Masters.
* In the interest of clarity, they d hoped to preserve the
a
problem doing
com. To avoid
so
when
they
set
full
name, but they discovered
out to create an Internet address: investorsexchange.
that confusion, they created another.
HOWTO TAKE
Back
when
in 2008,
market had become
human
ordinary
it
its
had
understanding, he’d gone looking for techno-
who might
contents.
named Dan
RBC. The
a pile at
165
occurred to Brad that the stock
first
He’d
Aisen,
him open
help
started
Rob
with
One was
precision, he gathered others.
ford junior
FROM WALL STREET
box whose inner workings eluded
black
a
logically gifted people
understand
BILLIONS
a
the
box and
Park; with less
twenty-year-old Stan-
whose resume Brad discovered
in
him was “Winner of
line that leapt out at
the Microsoft College Puzzle Challenge.” Every year, Microsoft
sponsored
thon.
It
this
one-day, ten-hour national brain-twisting mara-
math and computer
attracted thousands of young
science
and three friends had competed, in 2007, against
types. Aisen
one thousand other teams and had
won
the
whole
thing.
“It’s
kind of a mix of cryptography, ciphers, and Sudoku,” explained
Aisen.
The
solution to each puzzle offered clues to the other
puzzles; to be really
good
at
it,
a
person needed not only tech-
nical skill but exceptional pattern recognition. “There’s
some
element of mechanical work, and some element of ‘aha!’” said
Aisen. Brad had given Aisen both a job and a nickname, the
Puzzle Master, soon shortened, by
was one of the people
who had
RBC’s
helped
Puz’s peculiar ability to solve puzzles
relevant. Creating a
a casino:
know
Puz
create Thor.
was suddenly even more
stock exchange
is
a bit like creating
creator needs to ensure that the casino cannot in
Its
some way be
to
new
traders, to Puz.
him
exploitable
exactly
how
by the patrons. Or,
his
at
worst, he needs
system might be exploited, so that
he might monitor the exploitation
—
as a casino
“You
monitors card
counting
at
said Puz,
“and you don’t want the system to be gameable.” The
the blackjack tables.
trouble with the stock market
exchanges
—was
that they
—with
were
all
are designing a system,”
of the public and private
fantastically
gameable, and had
FLASH BOYS
166
been gamed:
first
by clever guys in small shops and then by prop
traders at the big
Wall Street banks. That was the problem, Puz
From
thought.
ers,
the point of view of the most sophisticated trad-
the stock market wasn’t a
mechanism
for
channeling capital
to productive enterprise but a puzzle to be solved. “Investing
shouldn’t be about
about something
The
simplest
gaming
he
a system,”
should be
“It
said.
else.”
way
to design a stock
exchange that could not
be gamed was to hire the very people best able to game
encourage them to take their best
Brad didn’t
shots.
other national puzzle champions, but Puz did.
The
it,
and
know any
per-
first
son he mentioned was his former Stanford teammate Francis
Chung. Francis worked
as a trader at a
high-frequency trading
him
firm but didn’t like his job. Brad invited
view. Francis turned up
Brad gazed across
—and
a table:
The young man was round-faced
and shy and sweet-natured but
“Why
are
you good
Francis thought about
it
at
a
in for a job inter-
just sat there.
essentially noninteractive.
solving puzzles?” Brad asked him.
moment.
how good I am,” said Francis.
won the national puzzle-solving championship!”
“I’m not sure
“You just
Francis thought about that
“Yeah,
I
Brad had done
whose
if
some more.
guess,” he said.
skills
a lot
of these interviews with technologists
he could not judge.
they could actually write code.
He left it to Rob to figure out
He just wanted to know what
kind of people they were. “I’m just looking for the type of people
who
won’t get along here,” said Brad. “Typically,
the
way
they describe their experience, and the things they
are very self-serving.
I’m overlooked.’
‘I
don’t get
It’s all
enough
credit for
it’s
what
because
I
say,
do,’ or
about me. They’re obsessed with
titles
HOW TO TAKE
BILLIONS
FROM WALL STREET
and other things that don’t matter.
work with other
they do?
idea.
I
try to find out
I
people. If they don’t
know
167
how
they
something, what do
look for sponges, learners.” With Francis he had no
Every question
elicited
some choked
reply.
Desperate to get
something, anything, out of him, Brad finally asked, “All right,
me:
just tell
What do you
“I like to dance,”
he
After Francis had
left,
this
do?” Francis thought about
like to
said.
Then he went completely
down
Brad hunted
it.
silent.
Puz. “Are you sure
the guy?” he asked.
is
“Trust me,” said Puz.
took roughly
It
enough
Francis
six
to speak up.
who would
weeks
the
computer
them
to
he put
game.”
was Francis
some loophole
worry
a
in their logic.
whom
problem
is
what
upset
—including
his
for
The only problem with
a
and show them
which the kid
him,” said
whose theory
Don
he’s
will
Boiler-
going to
own.”
the Puzzle Masters
of them had ever worked inside
brought in
nothing
thought they had
step in
level to
really separates
man, “without any prior concern
is
Bollerman dubbed The
would
“The
more than anyone
so simple there
Spoiler, because every time the other guys
figured something out, Francis
was
had the entire logic of
in his head. Francis fought
it
It
the rules they created for
into step-by-step instructions
“making the system
it,
And
all
to follow. Francis alone
new exchange
for, as
wouldn’t shut up.
did, he
eventually take
the exchange and translate
for a
for Francis to get comfortable
Once he
a stock
was
that neither
exchange. Bollerman
guy from Nasdaq, Constantine Sokoloff, who had
helped to build the exchange’s matching engine. “The Puzzle
Masters needed a guide, and Constantine was that guide,” said
Brad. Constantine was also Russian, born and raised in a small
town on
the Volga River.
He had
a
theory about
why
so
many
FLASH BOYS
168
wound up
Russians had
inside high-frequency trading.
old Soviet educational system channeled people
humanities and into math and science.
also left
its
The
The
away from the
old Soviet culture
former citizens oddly prepared for Wall Street in
the early twenty-first century.
The
Soviet-controlled
economy
was horrible and complicated but riddled with loopholes. Everything was scarce; everything was also gettable,
to get
it.
“We
had
if you
“People learn to work around the system.
tine.
knew how
system for seventy years,” said Constan-
this
The more you
who know how to work around the
you will have who know how to do it
cultivate a class of people
system, the
more people
well. All of the Soviet
are skilled at
Union
for seventy years
were people
who
working around the system.” The population was
thus well suited to exploit megatrends in both computers and the
United
States financial markets. After the fall
of the Berlin Wall,
a lot
of Russians fled to the United States without
lish;
one way to make
the locals
never
was
to
a living
program
a lot
their computers. “1
know
programmed computers but when they
people
who
get here they say
they are computer programmers,” said Constantine.
also
of Eng-
without having to converse with
A
Russian
tended to be quicker than most to see holes built into the
U.S. stock exchanges, even
if
those holes were unintentional,
because he had been raised by parents, in turn raised by their
own
parents, to
The
role
game
a
flawed system.
of the Puzzle Masters was to ensure that the
stock exchange did not contain aspects of a puzzle. That
no problem
inside
listed the features
them
its
gears that could be “solved.”
To
it
new
had
begin, they
of the existing stock exchanges and picked
apart. Aspects
of the existing stock exchanges obviously
incentivized bad behavior. Rebates, for instance:
taker system of fees and kickbacks used
by
all
The maker-
of the exchanges
HOW TO TAKE
was simply
a
method
BILLIONS
FROM WALL STREET
169
paying the big Wall Street banks to
for
screw the investors whose interests they were meant to guard.
The
rebates
were the
The moving
traps.
bait in the
high-frequency
were order
parts of the traps
types
—
who
submits the order to buy or
—
“market” and “limit”
like
over his order after
acknowledgment
on the exchange
sell
stock retains
some control
has entered the marketplace.*
it
Order
that the person
so
exist
traders’ flash
types.
They
are an
that the investor cannot be physically present
micromanage
to
exist, less obviously, so that the
Order types
his situation.
person
who
is
buying or
also
selling
stock can embed, in a single simple instruction, a lot of other,
smaller instructions.
The old order types were simple and straightforward and mainly
The new
sensible.
order types that accompanied the explosion of
high-frequency trading were nothing like them, either in detail
or
When,
spirit.
room
*
order
is
the
buy 100 shares of Procter
in
Don
P&G
is,
this case,
say,
flash crash
80-80.02.
If he
To
was
a
P&G
market order comes with
a
is
submitted and the time
dramatic illustration of that
a share for
risk: Investors
P&G
and
shares
might
at
an investor wishes to
a risk: that the
it
who
selling those
say, for instance: “I’ll
of eighty dollars and three cents a share.”
all,
order type
Say, for instance,
a
fifty
—
in
market will
reaches the market.
The
submitted market orders
same shares
for a
penny
control the risk of a market order, a second order type was invented, the limit
not pay $100,000 a share; but
shares at
and Schwall in
submits a market order, he will pay the offering price
the time the order
The buyer of P&G
order.
a limit
and simplest type.
first
wound up paying $100,000
apiece.
Rob
& Gamble. When he submits his order, the market for the shares
$80.02 per share. But
move between
the Puzzle Masters gath-
and Ronan and
them, there were maybe one hundred
to think about
The market
summer of 2012,
in the
ered with Brad and
is
$80
this
may
By doing
so,
buy
a
hundred
shares,
with
he will ensure that he does
lead to a missed opportunity
—he may not buy
the
because he never gets the price he wanted. Another simple, and long-used,
“good
a share,
’til
canceled.”
“good
he buys them, or does not.
’til
The
investor
who
says
he wants to buy 100 shares of
canceled,” will never have to think about
it
again until
FLASH BOYS
170
What purpose did each serve? How might
New York Stock Exchange had created an order
different order types.
each be used?
The
type that ensured that the trader
the order
on
the purpose
buying
seemed
a small
to crush the
who
used
it
would
trade only if
own
the other side of his was smaller than his
to
order;
be to prevent a high-frequency trader from
number of shares from an
market with
order type that, for even
huge
a
investor
who was
about
Direct Edge created an
sale.
more complicated
reasons, allowed the
high-frequency trading firm to withdraw 50 percent of its order
the instant
someone
something called
a
tried to act
100 shares of Procter
a
hundred
on
shares of Procter
&
a rebate
from the exchange.” As
the Post-Only order type
Post-Only order to buy
at
if that
a thing?
—would
cents a share, Post-Only,
One
say, for
—
for
who
example,
“I
With
else
a
Hide
could or
want
buy
to
of eighty dollars and three
at a limit
Hide Not
can collect
even more dubious per-
Slide order, for instance.
P&G
I
weren’t squirrely enough,
Slide order, a high-frequency trader
hundred shares of
eighty dollars a share,
of the trade, where
now had many
The Hide Not
would use such
a
A
Gamble
am on the passive side
if I
Not
All of the exchanges offered
& Gamble at $80 a share says, “I want to buy
but only
mutations.
it.
Post-Only order.
Slide.”
of the joys of the Puzzle Masters was their ability to
figure out
what on earth
order types filed with the
The
that meant.
SEC
often
and were in themselves puzzles
descriptions of single
went on
—written
for
twenty pages,
in a language barely
resembling English and seemingly designed to bewilder anyone
who
dared to read them. “I considered myself a somewhat expert
on market
with
A
me
structure,” said Brad.
to fully understand
Hide Not
Slide order
“But
I
needed
a
Puzzle Master
what the fuck any of it means.”
—
it
was
just
problems the Puzzle Masters solved
one of maybe
—worked
fifty
such
as follows:
The
HOW TO TAKE
was willing
trader said he
FROM WALL STREET
BILLIONS
to
buy the
171
shares at a price ($80.03)
was on
above the current offering price ($80.02), but only if he
the passive side of the trade,
He
where he would be paid
did this not because he wanted to buy the shares.
this in case
the shares offered at $80.02.
him
He
along and bought
came
at
purchase
into the market to
who
$80.02 expressed further demand for
at
the higher price.
A Hide
high-frequency trader to cut in
created the line in the
whoever happened
to
The Puzzle Masters
Not
line,
place,
first
be
Slide order
ask,
is
HFT
at
we found
common: They were
the expense of investors.
a disadvantage for the
who
was
person
market
rock
wanted
as possible,
investors.
to
we
who was
to hardwire into the
—
at
wasn’t a high-frequency trader.
the high-frequency traders
tions of stock
want
the point of that order, if you
exchange’s brain the interests of high-frequency traders
cheaply and risklessly
to
“Most of the order types were designed
actually there to trade.” Their purpose
expense of everyone
for
working through the many
not trade, or at least to discourage trading. [With] every
turned over,
way
and take the kickbacks paid
spent days
‘What
a
the front of the line.
at
designed to create an edge for
“We’d always
was
ahead of the people who’d
order types. All of them had one thing in
to trade?’ ” said Brad.
all
Hide
trader’s
those shares. This was the case even if the investor
them
did
channeling
as first in line to
shares if a subsequent investor
had bought the shares
a
a real investor,
The high-frequency
Slide order then established
P&G
sell
—
— came
an actual buyer of stock
capital to productive enterprise
Not
a rebate.
the
And
to obtain information, as
about the behavior and inten-
That
is
why, though they made
only half of all trades in the U.S. stock market, they submitted
more than 99 percent of
the orders: Their orders
for divining information about ordinary investors.
were
a tool
“The Puzzle
FLASH BOYS
172
Masters showed
to
—
me
the length the exchanges
were willing
The Puzzle Masters might not have thought of it
first,
this
way
but in trying to design their exchange so that investors
came
to
were
also divining the
it
would remain
stalked their prey.
safe
from high-frequency
As they worked through the order
that led to a vast
appeared
it
as if
there
amount of grotesquely
—
in the stock market.
were three
when he
to Brad,
him
traded
—using
second they called “rebate arbitrage”
game
activities
The
first
seeing an investor try-
ing to do something in one place and racing
(What had happened
traders
types, they
unfair trading.
they called “electronic front-running”
at
who
traders, they
ways in which high-frequency
taxonomy of predatory behavior
created a
Broadly speaking,
to
go
to
to satisfy a goal that wasn’t theirs,” said Brad.
the
at
to the next.
RBC.) The
new complexity
the seizing of whatever kickbacks the exchange offered
without actually providing the liquidity that the kickback was
presumably meant to
entice.
The
third,
and probably by
far
the most widespread, they called “slow market arbitrage.” This
occurred
when
a
high-frequency trader was able to see the price
of a stock change on one exchange, and pick off orders
sitting
on
other exchanges, before the exchanges were able to react. Say, for
instance, the
sellers sit
in
on
market
on both
the
for
sides
NYSE
P&G shares is
on
all
80-80.01, and buyers and
of the exchanges.
High-frequency traders buy on
NYSE
A big seller comes
down
and knocks the price
at
to 79.98—79.99.
$79.99 and
sell
on
all
the other exchanges at $80, before the market officially changes.
This happened
all
day, every day,
and generated more
dollars a year than the other strategies
billions
of
combined.
All three predatory strategies depended
on speed, and
to
speed the Puzzle Masters turned their attention, once they were
done with the order
types.
They were
trying to create a safe
HOW TO TAKE
place,
where every
when
that,
faster
a
BILLIONS
FROM WALL STREET
than everyone
else?
They
do
couldn’t very well prohibit high-
exchange— an exchange
offer fair access to all broker-dealers.
And, anyway,
wasn’t high-frequency trading in itself that was pernicious;
its
to
handful of people in the market would always be
frequency traders from trading on the
needed to
173
How
same chance.
dollar stood the
predations.
It
traders; all that
to eliminate the unfair advan-
by speed and complexity.
Rob
Park put
you know something before everyone
Some
—some people always
people will always get
can control
is
traders
starting point
You
they can
was
can’t stop
make
to
— co-locating
tion about whatever
else.*
it.
is
first.
What you
monetize
it.”
to prohibit high-frequency
from doing what they had done on
exchanges
one
it last.
how many moves
The obvious
will get the information
it
You
else.
are in a privileged state. Eliminating the position of privilege
impossible
it
was
wasn’t necessary to eliminate high-frequency
was needed was
tages they had, gained
best: “Let’s say
it
inside them,
all
other
the
and getting the informa-
happened on those exchanges before every-
That helped, but
it
did not entirely solve the problem:
High-frequency traders would always be
faster at processing the
information they acquired from any exchange, and they would
always be faster than anyone else to exploit that information on
* The value of the microseconds saved by proximity to the exchanges explained
exchanges expanded, bizarrely,
have thought
to
that,
when
after the
people inside them had vanished.
the whole of the stock market
accommodate thousands of human
moved from
New
York Stock Exchange
building on the corner of Wall and Broad streets was 46,000 square
Mahwah, which housed
box was
so great, the exchanges
enclose greater amounts of that space so that they might
roughly the
size
feet.
The
NYSE
the exchange, was 400,000 square feet. Because
the value of the space around the black
pily inside a space
needed
traders into a single black box, the building that
housed the exchange might shrink. Think again. The old
data center in
why the
You might
a floor that
of a playhouse.
sell
it.
expanded
to
IEX could function hap-
FLASH BOYS
174
new exchange would be
other exchanges. This
to execute trades
the orders
it
on
and
itself
was unable
The Puzzle Masters wanted
to execute.
to encourage big orders,
and larger-sized
investors with a lot of stock to sell
who had
investors
a lot
P&G
trades, so that honest
might
with honest
collide
of stock to buy, without the intercession
of HFT. If some big pension fund came to
shares of
required both
to route, to the other exchanges,
and found only 100,000
IEX
to
buy
for sale there,
a
million
would
it
be exposed to some high-frequency trader figuring out that
demand
wanted
ply of
to
stock
unsatisfied.
“We
said Brad.
“randomized
HFT firm
delay.”
of ideas about
all sorts
to the sup-
how
to solve the
had professors coming through here conFor instance, one professor suggested
Every order submitted
exchange would be assigned,
it
its
The Puzzle Masters
on the other exchanges.
entertained
speed problem.
stantly,”
was
shares
be sure that they could beat any
P&G
They
P&G
for
entered the market.
at
new
to the
random, some time lag before
The market information some
quency trader obtained with
a
stock
high-fre-
his 100-share sell order, the sole
intention of which was to uncover the existence of a big buyer,
might thus move so slowly
An order would become,
The Puzzle Masters
HFT
that
it
would prove of no
use to him.
like a lottery ticket, a matter
instantly spotted the problem:
of chance.
Any
decent
firm would simply buy huge numbers of lottery tickets
to increase
chances of being the 100-share
its
collided with the massive
buy
order.
“Someone
the market with orders,” said Francis.
sell
order that
will just flood
“You end up massively
increasing quote traffic for every move.”
It
to
was Brad
who had
get in as close
away
as possible?
to the
Put
the crude
first idea:
exchange as possible.
Why
Everyone
is
fighting
not push them as far
ourselves at a distance, but don’t
let
anyone
else be
HOW TO TAKE
there.
FROM WALL STREET
BILLIONS
In designing the exchange, they
the regulators
would
wanted. Brad kept
tolerate;
a close
they couldn’t just do whatever they
eye on what the regulators already had
New York
approved, and paid special attention
when
Exchange won the SEC’s approval
for the strange
had done in Mahwah. They’d
fortress in the
175
needed to consider what
the
Stock
thing they
built this 400,000-square-foot
middle of nowhere, and they planned to
sell,
to
high-frequency traders, access to their matching engine. But
the
moment
they announced their plans, high-frequency trad-
ing firms began to buy up land surrounding the fort
—
so that
NYSE matching engine, without paying
privilege. In response, the NYSE somehow
they might be near the
the
NYSE
for the
persuaded the
SEC
to let
banks or brokers or
space inside the fort
in one of
two
HFT
the
to
firms were
put
HFT’s
their
They’d
NYSE
do
idea
buyers and
distance
was
The
Mahwah
and so the banks and brokers and
Why
not create the distance that under-
it,”
Brad
said.
(the
“There was
traders
precedent:
let
IEX
IEX computer
that
have to
matching engine)
from the place
a
“Unless the regulators
” they’d
to establish the
sellers
places to
without selling high-frequency traders the right
‘You must allow co-location,’
The
NYSE
or Manhattan.
from those
computers in the same building?
let
Any
forced to buy space inside the fort from
thought:
strategies,
to connect to the
New Jersey,
a signal
strategies;
all
NYSE. Brad
mines
Newark,
move
undermined EIFT
a rule for themselves:
firms that did not buy (expensive)
would be allowed
places:
time required to
them make
HFT
at
said,
forbid
it.
matched
some meaningful
connected to
“point of presence”), and to require anyone
IEX (called the
who wanted to
trade to connect to the exchange at that point of presence. If
you placed every participant in the market
far
enough away
from the exchange, you could eliminate most, and maybe
all,
FLASH BOYS
176
of the advantages created by speed. Their matching engine,
Weehawken,
New Jer-
sey (they’d been offered cheap space in a data center).
The only
they already knew, would be located in
question was:
it
Where
to put the point of presence? “Let’s put
someone
in Nebraska,”
said,
but they
all
knew
would be
it
harder to get the already reluctant Wall Street banks to connect
to their
it.
market
if
The
Nebraska.
once
it
Omaha
the banks had to send people to
Actually, though,
it
wasn’t necessary for anyone to
delay needed only to be long
enough
to
do
move
to
for
had executed some part of a customer’s buy order,
IEX,
to beat
HFT in a race to any other shares available in the marketplace at
the same price
—
that
to prevent electronic front-running.
is,
needed to be long enough,
moved on any exchange,
also, for
to process the change,
prices of any orders resting
off
—in the way,
he ran his
on
it,
determine
if he
and to move the
so that they didn’t get picked
320 microseconds;
case, to
NYSE
that
The
off,
when
was being ripped off inside the
dark pools run by the big Wall Street banks. (That
“slow market arbitrage.”)
It
a share price
Rich Gates had been picked
say, that
tests to
IEX, each time
to prevent
is,
necessary delay turned out to be
was the time
it
took them, in the worst
send a signal to the exchange farthest from them, the
in
Mahwah.
Just to be sure, they
rounded
up
it
to
350
microseconds.
The new
stock exchange also cut off the food source for
identifiable predators. Brad,
when he was
cheated because his orders had arrived
HFT
a trader,
first
guys had picked up his signal and raced
exchanges.
The
fiber routes
through
New
at
BATS, where
him
to the other
Jersey that
handpicked were chosen so that an order sent from
other exchanges arrived
at
them
all at
all
had been
precisely the
IEX
Ronan
to the
same time.
(He thus achieved with hardware what Thor had achieved with
HOW TO TAKE
BILLIONS
FROM WALL STREET
Rich Gates had gotten himself picked
software.)
Street dark pools because the dark pools
enough
had made
the Wall Street banks’
it
—
To prevent
legally.
new
it
fast
possible for a high-frequency trader (or
own
traders) to exploit the orders inside
same thing from happening on
the
IEX needed
exchange,
had not moved
The slow movement of the dark
to re-price his order.
pools’ prices
177
off in the Wall
to
be extremely
—much
fast
their
faster
than any other exchange. (At the same time that they were slowing
down
everyone
speeding themselves
exchanges,
IEX
who
up.)
traded on their exchange, they were
To
“see” the prices
didn’t use the SIP or
on the SIP but instead created
their
tures of the entire stock market.
for paths
from
their
on the other stock
some phony improvement
own
HFT-like pic-
private,
Ronan had
scoured
computers in Weehawken to
New Jersey
exchanges; there turned out to be thousands of them.
the fastest subterranean routes,” said
used was created by EIFT for
The 350-microsecond
race.
It
ensured that
delay
worked
wider market than even the
be
fastest
“We
Ronan. “All the
HFT. One hundred
IEX would
the other
all
like a
head
faster to see
used
fiber
we
percent of it.”
start in a foot-
and
react to the
high-frequency trader, thus
preventing investors’ orders from being abused by changes in that
market. In the bargain,
who would
everyone
else’s to
orders onto
To
the
it
prevented high-frequency traders
inevitably try to put their computers nearer than
IEX’s in
IEX more
create the
Weehawken
—from submitting
quickly than everyone
350-microsecond
new exchange roughly
delay, they
thirty-eight miles
their
else.
needed
to
keep
from the place the
brokers were allowed to connect to the exchange. That was a
problem. Having cut one very good deal to put the exchange in
Weehawken, they were
presence in
a data
offered another: to establish the point of
center in Secaucus,
New Jersey. The
two
data
FLASH BOYS
178
were
centers
than ten miles apart, and already populated
less
by other stock exchanges and
(“Were going
came from
a
them from an
and
new
stick
it
A
HFT firm:
Coil the
fiber.
Instead ot running straight
places, coil thirty-eight miles
compartment the
in a
bright idea
who had just joined
employee, James Cape,
between the two
fiber
the high-frequency traders.
all
into the lion’s den,” said Ronan.)
size
the effects of the distance.
And
mation flowing between
IEX and
that’s
what they
all
of fiber
of a shoebox to simulate
did.
the players
The
on
it
infor-
would
thus go round and round, in thousands of tiny circles, inside the
magic shoebox. From the high-frequency
it
was
been banished
as if they’d
to
traders’ point
West Babylon,
Creating fairness was remarkably simple.
They would not
any one trader or investor the right to put
to
to the exchange, or special access to data
They would pay no kickbacks
both
instead, they’d charge
nine one-hundredths of
to brokers or
sides
a cent
They’d allow just three order
Peg,
which meant
his
from the exchange.
banks that sent orders;
of any trade the same amount:
(known
per share
types: market, limit,
as
9 “mils”).
and Mid- Point
that the investor’s order rested in
were quoted in the wider market
$80.02 or
$80.01.
sell at
“It’s
$80), a
sell
computers next
between the
current bid and offer of any stock. If the shares of Procter
ble
of view,
New York.
& Gam-
80-80.02 (you can buy
at
Mid-Point Peg order would trade only
at
kind of like the
at
Brad.
fair price,” said
Finally, to ensure that their
own incentives remained as closely
aligned as they could be with those of stock market investors, the
new exchange
it
to
own
who needed
The
yield
did not allow anyone
any piece of
first
to
design of the
all
sorts
of
it:
hand
new
new
Its
who
could trade directly on
owners were
all
ordinary investors
their orders to brokers.
stock exchange was such that
it
would
information about the inner workings of
HOW TO TAKE
BILLIONS
FROM WALL STREET
— and, indeed,
the U.S. stock market
For instance,
ers
formed
do
still
Once
on
to trade
It
it.
so, after their
the
new
markets, they should
unfair advantages had been eliminated.
stock exchange
how much
watching what,
trad-
high-frequency traders per-
a valuable service in the financial
be able to see
new
welcomed high-frequency
did not ban but
it
who wished
179
the entire financial system.
opened
of what
HFT
for business,
IEX would
did was useful simply by
anything, high-frequency traders did on the
it
exchange, where predation was not possible.
The Puzzle
Masters’ only question was whether, in their design, they had
accounted for every possible form of market predation. That was
the one thing even they did not
know: whether they had missed
something.
THE HIDDEN PASSAGES and trapdoors that riddled the exchanges
enabled a handlul ot players to exploit everyone
didn’t understand that the
the former.
need
As Brad put
it,
“It’s like
you run
game of Texas Flold’em by
the deck doesn’t have any jacks or queens in
tell
the other people
who come
get people into the casino?
there.”
By
the
were designed
summer
to
to play
You pay
it,
ers,
You
few
them
that
telling
and
and you
invite a
that
you won’t
with them. Flow do you
the brokers to bring
them
of 2013, the world’s financial markets
maximize the number of
collisions
ordinary investors and high-frequency traders
of ordinary investors,
precisely for
this casino,
to get players in to attract other players.
players in to start a
the latter
else;
game had been designed
and
for the
—
at
between
the expense
benef it of high-frequency trad-
exchanges, Wall Street banks, and online brokerage firms.
Around
those collisions an entire ecosystem had arisen.
Brad had heard many firsthand accounts about the nature
FLASH BOYS
180
One came from
of that ecosystem.
who,
until 2012,
TD
for
Omaha, where
TD Ameri-
“You go out
said.
Everything
a share.
order flow
is
as
good.’”
is
publish
for the
off-the-record as possible,” said Nagy.
“They
For
us.”
how much
its
paper
a
trail.
phone
part,
TD
You had
call.
on
Ameritrade was required to
per share they were
a line labeled
down
to fly
making from
but not the total amounts, which were buried on
statements
no one
“The payment
a
never have an email or even
meet with
deals
to a steak
negotiations were always done face-to-face, because
involved wanted to leave
tice
Nagy
you two cents
dinner. ‘We’ll pay
to
fly to
was based, and negotiate with Nagy. “Most of the
tend to be handshake deals,”
The
Chris Nagy,
for selling the order flow
Ameritrade. Every year, people from banks and high-
frequency trading firms would
trade
man named
a
had been responsible
the prac-
its
income
“Other Revenue.” “So you can
see
the income, but you can’t see the deals.”
In his years selling order flow,
things
— and he
related
them both
Nagy
to
noticed
Brad and
a
couple of
team when
his
he came to
visit
them
to find out
why
he kept hearing about
this strange
new
thing called IEX.
The
first
ket complexity created by
Reg
NMS — the
was
rapid
number of stock markets, and in high-frequency
mar-
that the
growth
trading
in the
—
raised
the value of a stock market customer’s order. “It caused the value
of our flow to
triple, a least,”
Nagy
couldn’t help but notice was that not
said.
all
The
other thing he
of the online brokers
appreciated the value of what they were selling.
trade
was
able to sell the right to execute
to high-frequency trading firms for
The
its
TD
Ameri-
customers’ orders
hundreds of millions
a year.
bigger Charles Schwab, whose order flow was even
valuable than
TD
Ameritrade’s, had sold
in 2005, in an eight-year deal, for only
its
flow to
UBS
more
back
$285 million. (UBS
HOW TO TAKE
FROM WALL STREET
BILLIONS
181
charged the high-frequency trading firm Citadel some undisclosed
sum
“Schwab
to execute Schwab’s trades.)
billion dollars
on the
table,”
ing their customers’ orders,
Nagy
it
A
said.
seemed
lot
way
to
money high-frequency
know would be
traders
sell-
Nagy, had no idea of
to
the value of the information the orders contained.
unsure; the only
left at least a
of the people
Even he was
to find out
how much
were making by trading against
slow-footed individual investors. “I’ve tried over the years
find out
how much money was
trading],”
Nagy
said.
“The market makers
to share their performance.”
simple
What Nagy
stock market order was,
retail
high-frequency traders, easy
kill.
don’t have algos.
Our
are always reluctant
did
know was
that the
from the point of view of
“Whose
valuable?” he said. “Yours and mine.
We
[to
being made by high-frequency
order flow
is
the most
We don’t have black boxes.
—
quotes are late to the market
a full
second behind.”*
High-frequency traders sought to trade
with ordinary investors,
who had
as
often as possible
They
slower connections.
were able to do so because the investors themselves had only the
of what was happening to them, and also because
faintest clue
the investors, even big, sophisticated ones, had
trol their
own
orders.
stock market order to
that order as
its
own
When,
say, Fidelity
no
ability to
Investments sent
Bank of America, Bank of America
— and behaved
as if
it,
the information associated with that order.
not Fidelity,
cona
big
treated
owned
The same was
true
* In 2008, Citadel bought a stake in the online broker E*Trade, which was floundering in the credit
crisis.
The
deal stipulated that
E*Trade route some percentage of
customers’ orders to Citadel. At the same time, E*Trade created
trading division, eventually called
orders for
itself.
Citadel’s founder
G1 Execution
and
CEO, Kenneth
out E*Trade publicly for failing to execute
its
its
own
its
high-frequency
Services, to exploit the value of those
Griffin, pitched a
customers’ orders properly.
fit,
and called
FLASH BOYS
182
when an
broker.
individual investor bought stock through an online
The moment he
pressed the
Buy
icon on his screen, the
business was out of his hands, and the information about his
intentions belonged, in effect, to E*Trade, or
TD
Ameritrade
or Schwab.
But the
of the nine big Wall Street banks that
role in this
controlled 70 percent of all stock market orders was
plicated than the role played
by
more com-
TD Ameritrade. The Wall Street
banks controlled not only the orders, and the informational value
of those orders, but dark pools in which those orders might be
executed.
The banks took
different approaches to
milking the
value of their customers’ orders. All of them tended to send the
orders
first
to their
own
dark pools before routing them out to
the wider market. Inside the dark pool, the
against the orders themselves; or they could
bank could trade
sell
special access to
the dark pool to high-frequency traders. Either way, the value
of the customers’ orders was monetized
—by
bank, for the big Wall Street bank.
If the
execute a stock market order in
own
directed that order
kickback for
first
—when
it
its
the big Wall Street
bank was unable
to
dark pool, the bank
exchange that paid the biggest
to the
the kickback was simply the bait for
some
flash trap.
It
the Puzzle Masters
were
right,
nated the advantage of speed,
investors’ stock
exploited
on
and the design of IEX elimi-
IEX would
market orders to zero.
this
new exchange
tained was worthless
—
if the
—who would pay
reduce the value of
If the orders couldn’t
be
information they con-
for the right to execute
them? The big Wall Street banks and online brokers charged by
investors with routing stock market orders to
IEX would
sur-
And
that, as
everyone involved understood, wouldn’t happen without
a fight.
render billions of dollars in revenues in the process.
HOW TO TAKE
One
BILLIONS
afternoon during the
FROM WALL STREET
summer of
183
2013, a few months
before the exchange planned to open for business, Brad called
a
how to make the big Wall Street banks
IEX had raised more capital and hired more peoand moved to a bigger room, on the thirtieth floor of 7
meeting
feel
ple
to figure out
watched.
World Trade Center. There
window
whiteboard met
a
9/11 memorial.
Don
was no separate place
still
however, so they gathered in
a corner
that offered a spectacular
front of the whiteboard
The twenty
a
view of the
leaned with his back against the window,
Rob
along with Ronan, Schwall, and
bin.
to meet,
of the big room, where
and took
a
Park, while Brad stood in
whiteboard marker out of a
or so other employees of IEX remained
at their
desks in the room, pretending that nothing was happening.
Then Matt Trudeau appeared and joined
only person in the
room who had
in.
Matt was the
ever opened a brand-new
stock exchange, and so he tended to be included in every busi-
Oddly enough, among them he was
ness discussion.
nature, a businessman.
He’d entered college
to
and then, deciding he lacked the
talent to
and thinking he might make
an academic, had
the anthropology department.
it
as
He
didn’t
gist, either.
Atter college he’d found
ance claims
—
a
by
make
it
as a painter,
moved
into
become an anthropolo-
work
job he judged to be
least,
major in painting
adjusting auto insur-
among
the world’s most
soul-sucking.
One
day on
sion switched
on
CNBC and wondered, “Why are there two
to
separate ticker tapes?”
years
in the
later,
style stock
said.
lunch break, he noticed a televi-
began
to study the stock market. Five
mid-2000s, he was opening new, American-
exchanges in foreign countries for
mystifying
he
He
a
name Chi-X
“We
spent the
a
company with
the
Global. (“It was marketing gone awry,”
first
fifteen
minutes of every meeting try-
ing to explain our name.”) He’d been one part businessman and
FLASH BOYS
184
He met
one part missionary:
with
ments, wrote white papers, and
sat
officials
of various govern-
on panels
to extol the virtues
of American financial markets. After opening Chi-X Canada,
he’d advised firms trying to open stock exchanges in Singapore,
Tokyo, Australia,
Hong Kong, and London. “Did
doing God’s work?” he said
efficiency
was something important
As he spread
but notice
the
American
for the
—
it
some of the
that
economy.”
the
HFT
exploit ordinary investors.
In 2010,
felt less
and
He
less
showed
exchange’s matching
Then he began to
hear
guys might be shady, that stock
exchanges had glitches built into them that
doing, but he
and nothing
until the high-frequency traders
engine, and turned the exchange around.
—
was
I
financial gospel, he couldn’t help
stuck their computers beside
things
think
I
did think market
I
A new exchange would open,
a pattern:
would happen on
up,
“No. But
later.
HFT
could use to
couldn’t point to specific
wrong-
easy about his role in the universe.
Chi-X promoted him
to a big
new job.
Global
Head of
Product; but before he took the job he came across an Internet
post by Sal
fine detail,
Arnuk and Joseph
how
Saluzzi.*
The
post showed, in
data about investors’ orders provided to high-
frequency traders by two of the public exchanges,
Nasdaq, helped
investors,
HFT discern investors’
Arnuk and
BATS
trading intentions.
Saluzzi wrote, “have
no
and
Most
idea that the pri-
vate trade information they are entrusting to the market centers
is
being made public by the exchanges. The exchanges are not
making
this clear to their clients,
but instead are actively broad-
* Arnuk and Saluzzi, the principals of Themis Trading, have done more than anyone
explain and publicize the predation in the
in this
book than they
Markets.
new
stock market.
receive but have written their
They deserve more
own book
to
lines
on the subject, Broken
HOW TO TAKE
BILLIONS
order flow.” “It was the
at
BATS
of
HFT
185
in order to court their
credible evidence of Big Foot,”
first
He dug around on
said Matt.
FROM WALL STREET
HFTs
casting the information to the
his
own
and saw that the
and Nasdaq that queered the market
glitches
for the benefit
weren’t flukes but symptoms of a systemic problem,
and that “many other
market quirks were there that were
little
potentially being exploited.”
He was
man
then in an
for the
new
awkward
position: that of a public spokes-
integrity of that market. “I’m at the point
I
who doubted
American-style stock market
where
I
no longer
can authentically defend high-frequency trading,” he
look
us exporting our business
at
model
the
feel
said. “I
to all these different
He was
thirty-
four years old, and married, with a one-year-old child.
Chi-X
countries and
I
think.
It’s like
exporting a disease .”
was paying him more than $400,000
idea
what he was going
want
“I don’t
limited
years
to say I’m
do to earn
to
an
amount of time on
of.”
He
this planet.
I
to
I
hadn’t lived
want
my
to
near Liberty Plaza, and
open
a
new
Ronan
stock exchange.
for
doomed. Then, afterwards,
November and
new exchange.
In
life
a
be twenty
in a
I
at
the
explained he’d just
“My
first
way
I
McDonleft
RBC
reaction was, I feel so
his future.
They’re just
asked myself, ‘What causes a bunch
a million a year to quit?’ ”
asked
to
whom he’d met when
HFT inside his Canadian
badfor the guy,” said Matt. “He’s just destroyed
of people making
quit.
Ronan,
run cables
exchange. In October 2012 they met for coffee
ald’s
he up and
“But you have
said.
don’t
with no
yet,
kicked around for the better part of a
year before he thought to call
Ronan came through
a living,
he
idealist,”
from now and thinking
could be proud
And
a year.
Ronan some more
He came
back in
questions about this
December, Brad hired him.
Standing in front of the whiteboard, Brad
now
reviewed the
FLASH BOYS
186
problem
hand:
at
It
was unusual
an investor to direct his bro-
for
ker to send his order to one exchange, but that
were preparing
determining
to
if the
do with IEX. But these
is
what
investors
investors
had no way of
Wall Street brokers followed their instructions
and actually sent the orders to IEX. The report investors typically received
sis,
or
as to
from
their brokers
—
the Transaction Cost Analy-
TCA—was useless, so sloppily and inconsistently compiled
be beyond
Some of it came time-stamped
analysis.
second; some, time-stamped in tenths of microseconds.
it
told
you which exchange you traded on. As
no way
know
it
and the one immediately
hardly determine if you had traded
‘Where did
“What
if
“We
tor
It isn’t
to allow
really possible.”
ever got here?” asked
Don.
investor
“It violates
Rob
we
Park sensibly.
our confidentiality agree-
might hand Bank of America an order and
also ask that
IEX
to route
it
to
IEX. The inves-
be permitted to inform
him of the
And yet Bank ol America might refuse, on principle,
IEX to inform the investor that they had followed his
instructions
— on
of America’s
“Why
Pandora’s
an answer to the
brokers.”
An
outcome.
“It’s
trade?’
I
Bank of America broker
might
at a fair price. “It’s a
said Brad. “Just getting
if they
can’t,” said
True.
ask the
after. If you didn’t
they [investors] send us their trade orders and
check them to see
ment with
of
was
the order of the trades in the stock market, you could
box of ridiculousness,”
question:
a result, there
determine the context of any transaction, the event
to
immediately before
even
to the
None
the grounds that doing so
would
reveal
Bank
secrets!
can’t
we just
publish what happened?” asked
the banks’ information,” said
Ronan.
Don.
“We can't publish what happened to an investor’s trade because
what happened
to the investor
is
Goldman
Sachs’s information?”
HOWTO TAKE
Ronan was
FROM WALL STREET
BILLIONS
incredulous
—but then he knew
less
187
about
than
this
the others.
“Correct.”
“What can
they do to us if we do
“Probably just
a slap
—
it
on the wrist the
Brad wondered aloud
if it
was
shut us
first
camera,” he
fact that
it’s
Don. He wore
a
rugby
banks
a t-shirt that said
but he didn’t
They
Don later put
“The
it,
maybe because he sensed
“It's like
said Brad,
feel as
saying,
‘I
know
didn’t
Life,
didn’t put
all
it
that they all
not.
But
my
“We
Or
can
I
there’s
still
this
coffee pots won’t
ing
camera.
knew
“I
camera.
know
It
it.
it’s
this office,’”
can run in and run out
try to catch
may be plugged
And whoever
if
“We just want
Somewhere
is
room
honking
a
it,
—
or
steal-
on.”
it,”
added
phone rang, and the sound was
in a small
The room was an open
the people in
in
fucking
the brokers scared they’ll check.”
in the big
as jolting as a car
with those
decide to hate us, we’re
don’t really give a fuck if the investors use
Ronan.
night.
install a
he
so bluntly to the others,
and run in and run out and keep checking and
someone.
as
big Wall
market power. As
think people are stealing in
with growing enthusiasm.
at
to deal
their
said
and tossed
comfortable
guys had worked
brokers, if they
End of story.” He
fucked.
community,”
Love Aquatic
I
none of them had ever had
customer.
where
security
alter behavior.”
ball to himself,
as a
a
don’t care if it’s even turned on. Just the
might
to appear. All these other
Street banks;
real time,
market orders. “Like
finger in the eye of the brokerage
“It’s a
wished
“You
said.
there
Don.
mechanism
possible to create a
through which investors might be informed, in
their brokers sent their stock
down?”
time,” said
but the young
pit,
men
town
in the middle of the
with no barriers between
inside
it
behaved
as if
they
FLASH BOYS
188
worked with
They were,
walls around them.
men. The exception, Tara McKee, had been
at
RBC
Brad found
until
personal assistant. (“The
what
out
do
—
I
just
when he
left
of it,
I
as
new
2009, and asked her to be his
time
work
I
met him,
I
said,
don’t care
‘I
for him.’ ”) She’d followed
him
the bank, even after he tried to talk her out
The
of technologists Brad had assembled
cast
place Tara found even
put together
said.
to
but one, young
he couldn’t pay her properly and didn’t think she could
tolerate the risk.
this
want
her, in
first
all
a research associate
at
RBC.
“Some of them
“For geniuses, they are
They were
They
don’t think
at
the one he’d
dumb,” she
really
pampered: They
are really
together a cardboard box.
They think you
more peculiar than
can’t
even put
you do something.
somebody.”
call
amazingly self-contained. This meeting con-
also
cerned them all— compelling the big Wall Street banks’ cooperation
might mean the difference between success and
they
all at least
feigned indifference.
The
— even about each
of willed incuriosity
with
a lot
we need
solvers,
of the guys
to
and
work
is
on.”
yet, to
other.
was funny. To
a
was
—but
a
kind
“Communication
not that great,” said Brad.
It
failure
etiquette here
“It’s
something
man, they were puzzle
each other, they remained unsolved puzzles.
Schwab looked over
the desks and shouted,
“Whose phone
is
that?”
“Sorry,”
“It’s a
someone
nanny,” said
demeaning.
It
said,
and the ringing stopped.
Don, of Brad’s
could be
a strain
on
security camera idea.
“It’s
the relationship.”
“When you get patted down in the airport, do you
who pat you down?” asked Brad.
hate the
people
“I fuckin’ hate
them,” said Don.
“I say, ‘I’m glad you’re
checking
my
bags, because that
you’re checking other people’s,’ ” said Brad.
means
HOW TO TAKE
“The problem
is
that
BILLIONS
FROM WALL STREET
everyone
is
carrying marijuana through
it’s
because they’re guilty,” said
189
the checkpoint,” said Schwab.
“If anyone gets fucking angry
Brad
hotly.
“I’m sorry,” said Don. “I’m
bomb this airplane.
and white and I’m not gonna
fat
shouldn’t get extra swabbing.” He’d stopped
I
tossing the rugby ball.
“Is there
some use
He was
Schwab.
for this other than policing brokers?” asked
“Can we
asking,
the secrets of others believed
own
police
The person among them most
realizing it?”
it
was
them without
adept
at
IEX
possible for
their
uncovering
keep
to
its
affairs secret.
“No,”
“So
said Brad.
it’s
a
nanny,” said Schwab with
1
Don.
“Broker Nanny,’ said
patent
“It’s a
a sigh.
great
name. Shame
we
can’t
it.”
The meeting went
quiet.
This was just one of a thousand
arguments they’d had in designing the exchange. The group was
roughly
Brad)
—between people (Ronan and,
split
who wanted
banks, and people
to a lesser extent,
to pick a fight with the biggest
who
thought
it
was insane
Wall Street
to pick that fight
Rob and Matt
hadn’t yet
(Don
and, to a lesser extent, Schwab).
come
clean, but for different reasons. After his initial suggestion
had been swatted away,
from the chaos,”
Rob had gone
said Brad.
“He
doesn’t
solutions to the problems they [the
are illogical because they solve a
Matt Trudeau,
also
observe. “I’ve always
I
quiet,
web.
He may
said.
“Rob
is
farthest
Wall Street brokers] create
problem that
is
illogical.”
often tended to step back and
felt a little
hung around with,” he
silent.
meet with brokers. The
outside the groups of people
He was
a natural conciliator as
have quit his job on principle, but he didn’t enjoy
FLASH BOYS
190
even the internal kind.
conflict,
Matt now
we
wildly successful and
of
all
Matt.
we
say
No
moment
firsthand
launch and we’re
roll this out.”
arrival:
successful the
He knew
might not be jaded enough,”
let’s
never have to
That thought was dead on
would be wildly
“I
“But
said carefully.
one believed they
they
launched—least
what happened when
exchange opened: nothing. Chi-X Canada was
success
—20 percent of
month
it
now
—but
the Canadian market
had traded 700 shares
total.
in
new
a
huge
a
first
its
Entire days passed with-
out a single trade on that exchange; and the next few months
much
weren’t
IEX
better.
And
that
didn’t have the luxury
Their
new
tion, but
effects
was what success looked
of going months without
like.
activity.
stock exchange didn’t need to be an instant sensa-
had
it
to host
enough trading
to illustrate the positive
of honesty. They needed to be able to prove to inves-
tors that
an explicitly
investors than
needed
all
fair
exchange yielded better outcomes
the other exchanges.
To prove
data; to generate that data, they
needed
trades. If the
big Wall Street banks colluded to keep trades off IEX, the
exchange would be
stillborn.
And
they
all
“They’re gonna be pissed,” said Schwab
“We’re in
instructions
discussion.
a fight,” said Brad. “If
It’s
new
it.
finally.
every client
felt like
their
were being followed, we wouldn’t be having
It’s
not about
IEX wanting
ker in the face for no reason.
enemy?’
knew
about saying
It’s
to
for
the case, they
this
go punch some bro-
not about saying,
Who
is
our
who we are aligned with. We’re aligned
with the investor.”
“They’re
“Are
we
still
gonna be
pissed,” said
Schwab.
really in the police business?” asked
“Maybe we
don’t have to have
“Maybe we just have
it
at
to create the illusion
all,”
we
Don.
added Schwab.
have
it.
We talk to
HOW TO TAKE
buy
the
that
side
FROM WALL STREET
BILLIONS
about having
it,
and they whisper to
might be enough.”
“But
they’ll
know,”
all
keep the brokers’ junk
clients’
junk
private.
Brad offered one
Don. “They know we have
said
And
private.
And
a chat
as
room
which
in
investors
was happening.
the trade
they can always get their broker on the phone and
me what
the fuck
is
to
the broker has to keep the
the client can’t opt out.”
last idea:
could converse with their brokers
“Or
191
their brokers
on,’ ”
going
he
said.
say, ‘Tell
always been a
“It’s
solution.”
“They’ve never done
it,”
said
Ronan.
“They’ve never been motivated
Investors
had never been given
a
to
do
it,”
said Matt. True:
compelling reason to favor one
stock exchange over another.
“You
get
Danny Moses
in a chat
Brad, referring to the head trader
“But Danny’s
“
Argy-bargy
I
a bit
“You got
room with Goldman,”
wanker. Tosser.
Don.
Don
teaching
Now you
Irish epithets,
one
at a
time.
got argy-bargy,” said Ronan.
“You do nothing, and everyone does what they want,”
Brad.
“You do something and you can
by creating the
eliminate?
By
tool,
Is it
said
influence behavior. But,
do we incentivize behavior we want
shining the light, do
outside the light?
said
Seawolf. “He’ll ask them.”
argy-bargy,” said Ronan.
like that,” said
Ronan had been
at
like
we
to
create a gray zone, just
Reg NMS, where you
create the very
thing you’re trying to get rid of?”
“Shining
a light creates
create this bright line,
you
shadows,” said Don. “If you try to
are going to create gray zones
on
many
we
either side.”
“If
we
sincerely believe
might not want
to
do
it,”
it
creates too
said Brad.
blind spots,
FLASH BOYS
192
“If we bill
as a
it
nanny and
gonna look
like assholes?”
nanny
Just leave the kids
home
you can think of any other
“If
that
at all.
drunk on the couch,
she’s
added Don. “Better not
would
help,” said Schwall,
might disguise
“I’m
less
their actions.
bullish
be honest. Because
nanny
on
this
who
I
alone.”
clung to his hope that they
was before,”
secret cops.
said Brad. “I’ll
drunk nanny might not be
a
we
have a
possible use for this fucker,
That they might be
than
are
to
better than
no
at all.”
“How drunk
can
a
nanny get?” asked Ronan
idly.
Brad tossed the marker back into the whiteboard
can see
why
system
is
the client has been
left
bin.
“You
in the dust,” he said.
“The
designed to leave the client in the dust.”
Then he
turned to Don. “At Nasdaq did they talk about this?”
“No,”
For
a
said
Don, leaning back
moment, Brad looked
against the
at
Don, and
window.
at
view
the
only partly concealed. In that moment, he might
been, not on the inside of his
on the outside looking
people out
there ?
in.
as
new exchange looking
How did
Out there, where
that he
well have
out, but
they seem to others?
To
the
the twin symbols of American
capitalism once loomed, reduced in a few hours to a blizzard of
office
memos and
a ruse
or a species of stupidity, and where the people
a ruin.
Out
there,
needed them to succeed hadn’t the
tence.
But out there
a lot
where idealism was
faintest idea
who
either
badly
of their exis-
of things happened. People built
new
towers to replace the old ones. People found strength they didn’t
know
they had.
and bracing
And
people were already coming to their
for the war.
Out
there,
anything was possible.
aid,
CHAPTER SEVEN
AN ARMY OF ONE
O
n the morning of September
took the subway from his
as
he did every day. As usual, he wore headphones and
and pretended that the other people on the
listened to music,
train didn’t exist.
the others
was
The
that
difference
were harder than usual
other.
“Nobody
years old,
in
talks to
when you
tall
between
he was running
train
feeling,
feel
late,
to ignore.
that
morning and
something
They were
off.”
is
talking to each
“It
He was
was
a
weird
twenty-six
and broad, with hooded eyes that saw everything
one shade of gray or another. Born in Croatia, into long
the United States
when he was
Queens, and he worked on
cally
named Wall
ately next
him.
a
moved with
a small child.
He’d grown up
30 Broad
Street,
New York Stock Exchange.
precisely he did
lines
his parents to
tech help desk for the crypti-
Street Systems, at
door to the
What
all
and the people on the
each other,” said Zoran.
of fishermen and stonemasons, he’d
in
2001, Zoran Perkov
11,
home in Queens to Wall Street,
on Wall
immedi-
His job bored
Street Systems’ tech help
FLASH BOYS
194
desk didn’t matter.
He
wouldn’t be doing
much
it
longer. In
the next few hours, he’d discover a reason for doing something
else.
This discovery
with
it
— and
the clear sense of purpose that
would put him on
a course to
came
be of serious use to Brad
Katsuyama.
The subway
in
from the hole
morning
the
car
was
a silent
talking to each other
it
in the
all
ground
movie. Zoran watched the people
the
way
Wall
to
he noticed the necks
light,
tilted
gazing upward. He, too, looked up, just
the South Tower.
just
saw
He
“You
Street.
in front of Trinity
as the
second plane
couldn’t see the plane,” he said.
this explosion.”
Work
work.
isn
t
work
what
to find out
is
spotted the same pretty
on
his
way
in.
with
his friends,
who worked on
the
his
The
and went
to
got friends there.
I
going on.” Outside the front door, he
woman
with
also crying.
a cigarette
He went
he always saw
in the building.”)
checked
upstairs,
One
—which tower Zoran
couldn’t recall.
in the buildings
his friend
way
said. “I
and called some guys he’d grown up with
them and they agreed
When
me,” he
He saw peo-
or around Wall Street.
Twin Towers
more worked
for
street
(“You know, the one hot chick
She was smoking but
in
hit
“You
took off his headphones and heard the sounds. “All around
running up Broadway. He crossed the
went
into
back and the eyes
people crying, people screaming, people puking.”
ple
Ascending
Church and
of them worked in
around the towers.
to use his office as their
from the Twin Tower
A
He
couple
reached
meeting point.
arrived, he said that
on
out he’d heard the bodies hitting the ground.
small group of five friends set out to escape.
They
dis-
cussed strategy. Zoran argued for walking out, up Broadway;
the others voted to leave
Zoran, and back
down
on the subway. “Democracy won,”
said
into the Wall Street station they went.
It
AN ARMY OF ONE
turned out that
them
this
apart; three
was not an original
195
The crowds
idea.
of them squeezed into one
and another pushed into the next
forced
while Zoran
was such
“It
car.
car,
mixed
a
crowd,” said Zoran, “not your usual subway crowd.” There
were
these Wall Street people; guys
all
in their colored jackets; people
from the stock exchange
you just never saw
there.
The
car
lurched out of the station and into the dark tunnel, then stopped.
“That’s
when my
The
tunnel
popped,” said Zoran. “Like
ears
swimming under
when you go
water.”
with smoke. Zoran had no idea what had
tilled
tunnel was
had popped, why
—why
open window, and
of smoke —but he noticed guy trying
happened
the
his ears
to
a
he hollered
him
at
screamed back
it.
Die.
It’s
at
Who
to stop.
Zoran.
“It’s
gave you the authority? the
guy
Zoran shouted. “Breathe
smoke''
that fucking simple.”
full
a
The window
stayed shut, but
The
car holding his
the car remained fractious and unsettled.
other friends was tranquil. People bent over, praying.
The conductor came on and announced
to return to the
who
Wall Street
station.
To
that the train
needed
general concern, the guy
drove the tram walked from the front car to the back
car,
did whatever needed to be done to allow the train to go the
wrong way
inside a tunnel,
and jolted
it
back Irom whence
had come. But not completely: Only the front two
The people
access to the platform.
the train needed to
That’s
when Zoran
crowd trying
to
form
said Zoran. “He’s in
so
it
doesn’t
probably
him
file
make
fit
noticed the old
I
what was now the
rear of
man
—
exit.
his neighbor, in a
a line to exit the train. “He’s got a cane,”
him very
in front of me.
gained
out through the cars to reach the
an old
sure this
in
it
cars
—
suit
he’s
well.
I
gotten thinner and smaller,
remember thinking:
So
I should
kind of kept
guy
doesn’t get crushed.
felt
responsible for him.” Half-guiding the
I
just
196
old
FLASH BOYS
man, he nudged
his
way back up
tion and onto Wall Street.
“We
get to street level, and
And
Zoran.
said
I
the steps of the
Then everything went
I
had to
lost the old guy.
realize
From
it
that
subway
sta-
totally black.
was street level,”
moment was just
I
paying attention to everything around me.”
He now
“Over
couldn’t see, but he could hear people shouting.
Over
here!
the friend
here!” he heard
who’d been
someone scream. He and
subway car with him followed
in the
the sound of the voices, walking into
the
until they’d
pregnant
wall.
been inside
woman,
He went
sitting
to her,
began
on the
made
floor
’
still
he recalled.
You need
the building said,
some
left.
faceless
the projects,
of water and
They walked
with her back against
all
a
worked. The black
He
could
now see more
to stay in here.”
east
air
out-
some reason everything had
and north
A
or
less
cop inside
Zoran grabbed
his
until they arrived at
apartment buildings on the Lower East Side.
said
it
he noticed was the
where they were, and which direction was which.
triend and
to be
didn’t realize
sure she wasn’t about to give birth,
to acquire a color. “For
this beige-like tone,
What
for a minute.
then gave her his phone, which
side
what turned out
—though Zoran
American Express building
“It’s
Zoran, “and people are coming out with cups
of their cordless phones. To help. That’s
when
I
started to cry.”
Eventually they reached the
FDR
Drive and continued due
north. That might have been the oddest feeling of the entire
morning, that walk along
alone.
It
was
quiet.
a stretch
being they encountered was a half-dressed
them on
began
a
FDR. They were
human
cop who roared past
of the
For an amazingly long time, the only
motorbike toward the catastrophe. Then the papers
to flutter
down from
the address of the
above.
On
World Trade Center.
them Zoran could read
AN ARMY OF ONE
To
197
Zoran found the whole experience exhilarating
say that
well, that wouldn’t be quite right, though, as he told his story,
he said that “somehow
that there hadn’t
know what
feel guilty
I
been even
a
about telling
moment when
it.” It
he had
was more
felt
he should do next. He’d been jarred into a
he didn’t
new kind
of awareness, and interest in the people around him, and he liked
the feeling. His reactions
had surprised him into an observation
did not
about himself.
“I
was impressed
“I didn’t use
as
an excuse for anything.
it
that
wasn’t afraid of those situations.
I
like
being in
realized he
to be. “It
a
I
like
fall
What
apart,”
it
tells
said.
is
that
I
moment he
to a crisis than he expected himself
realized I’ve started to give a shit about
said.
days later he returned to work, but he’d been biffed from
an ill-defined career path onto another, clearer one.
him
to be in a job that required
to
perform in
worked on the technology end of Wall
for pressure,
that’s
he
me
being front and center.
could even pinpoint the
was better suited
was when
other people,” he
Two
He
drama.”
I
I
Street
—
at
you
and were looking
electronic stock market.
you ran an
what Zoran was doing
He wanted
a crisis. If
By
early 2006,
Nasdaq. “They just
sat
me
in
front of four machines with buttons that could, like, destroy
everything,” he said. “It was the best thing in the world. Every
day was the Super Bowl. The value of what you were doing
so high.”
who
it.
The
feeling of the job
was hard
to get across to
felt
anyone
wasn’t a technologist, but there was definitely a feeling to
“Put
it
this
way,” said Zoran. “If I fuck up, I’m going to be in
the news. I’m the only one
the only one
who
He’d learned
can fix
this the
who
can break
it,
and
if it
breaks I’m
it.”
hard way, of course. Not long
after
he
started at Nasdaq, he’d
broken one of the markets. (Nasdaq has
owned
—Nasdaq
several markets
OMX,
Nasdaq BX, INET,
198
FLASH BOYS
PSX.)
happened when he was making changes to the system
It
He
during trading hours.
people around
him
entered a
nect one event to the other.
the ensuing bedlam.
him
a
it
on
the stock market
few seconds
the
A former Nasdaq
colleague recalled
remember seeing people running around
I
and screaming while
at
command, then heard
panicking; but he failed to immediately con-
was happening,” he
his
computer
to realize that,
said.
screen:
Zoran looked up
was frozen.
It
It
took
even though the thing he’d
been working on should have had no connection to the market
in real time, he had somehow shut his entire market down.
It
took him another few seconds to see exactly
Then he
it.
fixed
it,
to finish the crisis
seconds, during
how
he had done
and the market resumed trading. From
had
which
lasted
all
trading had simply ceased. “I
ber sitting there and thinking: I’m done,” said Zoran.
[chief technology officer] saved
rid
of a guy
who makes
me.
He
a mistake, stops
the event shaped him. “I said,
Still,
again?
said
complex systems.
defined
something you cannot
as
‘How
said,
it,
and
fixes
‘How do
I
Zoran. “I started really jumping into
large-scale
stability in a
system that
is
became
I
by
start
twenty-two seconds. Twenty-two
its
a student
predict.
remem-
“The
CTO
can you get
”
it?’
never do that
how
to control
of complexity
How
do you have
nature unpredictable?”
He
read
everything he could find on the subject. One of his favorite
books was actually called Complexity, by M. Mitchell Waldrop.
His favorite paper to pass out was “How Complex Systems Fail,”
an eighteen-bullet-point
summary by Richard
I.
Cook, now
a
professor of health care systems safety in Sweden. (Bullet Point
#6: Catastrophe
complex
not.
A
is
car key
complex.”
is
always just around the
an advanced
is
simple.
state
A
corner.)
“People think that
of complicated,” said Zoran.
car
is
complicated.
A
“It’s
car in traffic
is
AN ARMY OF ONE
A
complex system was
break and there
whose job
of career
trol,
risk
Zoran continued
the
where,
as
Zoran put
make
to
a
“Shit will
it,
The person
it.”
two kinds
sure shit didn’t break ran
the risk of shit breaking that
risks:
and the
a place
nothing you can do about
is
was
it
199
complex system. One definition of
stock market was a
was within
con-
his
of shit breaking over which he had no control.
to
run one of the Nasdaq markets. Eventually,
company handed him bigger markets
to run;
and the
risk
of running them grew. By the end of 2011, he was overseeing
of Nasdaq’s market running. (Head of Global Operations,
all
he was
He had
called.)
spent the better part of six years add-
ing complexity to those markets, for reasons he did not always
understand.
The
business people
some change, which
was
it
Only order type was
the
his
would
just decide to
thing that got me,” said Zoran,
first
of the order designed to be executed only
a
kickback from the exchange.
a
Post-Only order?”
the
“What
the trader received
is
the point of
expected to cope with
demands made on Nasdaq’s markets by Nasdaq’s
customers (high-frequency traders) and,
asked to
strip
do whatever
down
else
that the driver
killed,
blame
This
state
they might to
at
would
die.
for his death
member of the
pit
It
was
at
the
as if a pit
crew had been
crew.
the
make
the car go faster than
it
same time reduce the likelihood
Only
in this case, if the driver
would be
assigned, arbitrarily, to
was
one
Him.
of affairs led to
a certain skittishness in the pit
wasn’t just that the high-frequency traders were
of changing the system increased the
risks to
crew.
demanding
changes to the market that would benefit only them:
act
biggest
same time, keep
the race car, rip out the seat harnesses, and
— and
ever had before
It
if
the fuck
He was somehow
those markets safe and stable.
make
job to implement. “The Post-
The mere
everyone
who
FLASH BOYS
200
depended on
was
Adding code and
it.
adding
like
features to a trading system
highway: You couldn’t predict the
traffic to a
consequences of what you had done;
had made the situation more
all
difficult to
you knew was
trying to control what they don’t know,” said Zoran.
they don’t
know
is
He
growing.”
that
you
“No one
understand.
is
“And what
thought of himself as good in
a crisis,
but he didn’t see the point of manufacturing crises so
that he
might demonstrate
managing
suited to
running
Every
was
a
day,
he liked his job
Don wanted Zoran
less
and
a
less
gift for
—
phone
from
for
you
know what
later.
’
ties,” said
that
more
Don. “Poise under
complex and
it
It
—
vast system.
accurately.
was
March 2012, he
IEX. “I’m not going
Zoran had been
pressure.
And be
But by the time
also
The
was maybe
the quali-
all
ability to
of an
understand
—imagine
it
geeks
who now
ran the
expected to have the nerves of a
Don
approached Zoran,
clear that the investing public
had
it
lost faith in the
May
had risen by 65 percent, and yet trading
first
has
may
I
foresee problems.”
market. Since the flash crash back in
percent: For the
“He
able to think into
To diagnose and
were
a casualty
to the point, that he
a little unsettling that the
financial markets
pilot.
to
Don Bohemian.
we’re going to do,” said Don. “But
Don knew
the best exchange runner he’d ever seen.
a
also far less
corporate politics.
until, in
call
run the market
to
office political battle, and,
into
He was
you just now, mainly because we have no money and we
don’t even
pitch
He had no
market himself.
whereupon he got
fired,
to pitch
his virtuosity.
bunch of market runners than he was
a
test
had grown
U.S. stock
S&P index
volume was down 50
2010, the
time in history, investors’ desire to trade
had not risen with market
prices.
percent of U.S. households
owned
Before the flash crash, 67
stocks;
by the end of 2013,
only 52 percent did: The fantastic post-crisis bull market was
AN ARMY OF ONE
noteworthy
in
wasn’t
It
it.
201
how many Americans elected not to participate
hard to see why their confidence in financial
for
markets had collapsed. As the U.S. stock market had grown
comprehensible,
It
it
had
also
become more
less
sensationally erratic.
wasn’t just market prices that were unpredictable but the mar-
— and the uncertainty
ket itself
sooner or
the
later, to
kets, options
it
created was
March 2012
New
to extend,
bond mar-
structure.
the
BATS
exchange had
to pull
public offering because of “technical errors.”
the
bound
foreign stock markets,
markets, and currency markets that had aped the
U.S stock market’s
In
many
York Stock Exchange canceled
a
its
own
initial
The next month,
bunch of
trades
by
mistake because of a “technical glitch.” In May, Nasdaq bungled
the initial public offering of shares in
some
essence,
changed
certain
investors
their
Facebook
Inc. because, in
who submitted orders to buy those shares
minds before the
price
was agreed upon
Nasdaq computers couldn’t deal with the
which other Nasdaq computers allowed the
their minds. In
— and
faster speeds at
investors to change
August 2012, the computers of the big
HFT firm
Knight Capital went berserk and made stock market trades
cost
In
Knight $440 million and triggered the company’s
November, the
NYSE
suffered
what was termed
a
that
fire sale.
“match-
ing engine outage” and was forced to halt trading in 216 stocks.
Three weeks
on
his
in a
later, a
company
called WhiteFlorse Finance. In early January 2013,
BATS announced
error,
Nasdaq employee clicked the wrong icon
computer screen and stopped the public offering of shares
it
that,
because of some unspecified computer
had, since 2008, inadvertently allowed trades to occur,
illegally, at prices
worse
(for
the investor) than the National Best
Bid and Offer.
That was just
a
sampling from
a single year
of what were usu-
FLASH BOYS
202
ally described as “technical glitches” in the
new, automated U.S.
stock markets: Collectively, they had experienced twice as
many
outages in the two years after the flash crash as in the previous
ten.
The
technical glitches
were accompanied by equally bewil-
dering irregularities in stock prices. In April 2013, the price of
Google’s shares
from $796
fell
$775 in three-quarters of
to
a
second, for instance, and then rebounded to $793 in the next
second. In
crash,
May
the U.S. utilities sector experienced a mini-flash
with stocks falling by 50 percent or more for
a
few seconds
before bouncing back to their previous prices. These mini-flash
now
crashes in individual stocks that
largely unnoticed
Zoran liked
occurred routinely went
and unremarked upon.*
to argue that there
were actually fewer, not more,
“technical glitches” in 2012 than there had been in
2006
was only the financial consequences of system breakdowns
had grown.
He
took
also
issue
worst word in the world.”)
and
a stock
market came under
no
ket usually had
fix
it:
He was
It
was
clue either
the
at
say something,
glitch.”
with the word “glitch.”
When some
mercy of
as if there
to
But he had
to
his technologists.
to explain
—without
to use his data to investigate
a
ended. “Almost every rock
he
said.
Hunsader has
pointed out
many
t
how the
stock market data company,
it
is
a fantastic
occurred to
what had gone wrong, and the search never
and
relentlessly described
micro-movements
high-frequency trading
is
mis Trading, deserves
prominent place in
a
financial
resorting to fuzzy
really
overturn, something nefarious crawls out from under
brilliantly
strange
“technical
a
exception to the general silence on this subject. After the flash crash,
him
the
head of that mar-
scrutiny, the
or didn’t
* Eric Hunsader, the founder of Nanex,
(“It’s
what had happened or how
was no way
—
it
that
machine malfunctioned
and so he said that there had been
market actually worked
—
in stock prices.
When
the last history of
written, Hunsader, like Joe Saluzzi and Sal
it.
it,”
market dysfunction and
Arnuk of The-
AN ARMY OF ONE
metaphors and meaningless words
related problems
were
*
203
If stock
market computer-
Zoran
to be reduced to a single phrase,
"
preferred
to be
it
When
would
1
an idea, and the
he wasn’t sure
skeptical;
it
summer of
late in the
glimmer of hope
first
money. That the idea was
find
market
accidents.”'
Bollerman called him again,
IEX had
2012,
“normal
also idealistic
was possible ever to make
—
could not control.
to limit the
He came
number of things
IEX
in to
to
Ronan
not so much.
shut the fuck up,” said
They’d
a
put
me
market
crisis,
feature they
To which Zoran would
on your definition of ‘harder.’
small change in the system
less stable
—
to
definition of
”
Or
they
would cause
which Zoran would
‘stable.’ ”
came when he was
also
seemed
to
would
depends
him
ask
the system to
if
some
become
depends on your
reply, “It
asked,
“Why
assume that
A rare excep-
do you always answer
his
new
to early rest.
book of that name by Charles Perrow.
a
said.
colleagues
as “liquidity” or, for that
frequency trading.” All terms used to obscure rather than to
a
nuts.
Every question he answered with an
* “Glitch” belongs in the same category
f From
liked
the system
reply, “It
question with another question?” “Clarity,” he
Zoran
Rob
had thought to
make
uneasy chuckle, followed by some other question.
tion
he
he proceeded to create a social one.
introduce into the system and ask, “Will this
harder to manage?”
it
Ronan.
him about some new
tell
mar-
off is that he wouldn’t
few months on the job, Zoran drove everyone
first
Lacking
“What
a
in
meet Brad and Rob
and John Schwall and Ronan. Brad and Schwab and
His
a financial
But he absolutely loved the idea of running
fair.
ket he helped to design
him,
that they
made Zoran
clarify,
would
matter, “high-
and
to
put minds
FLASH BOYS
204
to understand the difference
fail
between what he could control
and what he couldn’t. In one thirty-day span
after
he joined IEX,
he shot out fifteen emails on
—
hammer home
this
one subject
to
the mystery inherent in any stock market technological failure.
He
even invited
come
a speaker to
in to reinforce the point.
room wound
“It
was one the few times
up
at
all
agreeing with him, and the business people were saying,
that the people in the
each other’s throats,” said Brad.
how
something melts down,
came
Brad’s breaking point
Zoran circulated
Error.”
The
gist
was never the
could
“The
tech people were
not be someone’s
it
after the guest speaker
was
it
when complex
that
it
a
who just
number of causes
”
and
Human
it
of any one person. The post described some
fault
wasn’t just one
developer
left
systems broke,
computer catastrophe and then concluded,
that
had
blog post called “A Short Story on
a
of
‘If
fault?’
so
little
happened
that
.
thing that caused
to delete the
came together
.
you’ll notice
It
it.
wasn’t the
wrong table.
It
was
to strike hard, all of them
very likely to be bigger issues inside the organization rather than
a
problem with the individual.” At which point Brad
walked the ten yards from
finally
desk to Zoran’s desk and shouted,
his
“Stop sending these fucking emails!”
And
he did,
finally.
“I
know what
exploding around me,” he
later said.
to
do when things
are
“But when nothing
is
exploding, the overthinking comes into play.”
Initially
have such
also
went wrong? “He’s
game-time
How
Brad was mystified:
under pressure
so
situations.
a quarterback
who
six days explaining
is
good
Under
a fear
could
a
guy who thrived
of being blamed
in a crisis,” said
Brad
pressure. I’ve seen
it.
if
things
later.
But
it’s
“In
like
great in the game, then spends the other
how
it
isn’t his fault if
ception. ‘Dude, your passer rating
is
he throws an inter-
110. Stop
it
.”
’
Brad realized
AN ARMY OF ONE
something:
“It
comes from
when
things go
wrong
things go right.” Brad further realized that the prob-
lem was not peculiar
nologists.
205
of insecurity that comes from
more recognized when
the fact that he will be
than
a sense
Zoran but general
to
to
The markets were now run by
Wall Street tech-
technology, but the
Nobody bothered
to
explain the business to them, but they were forced to adapt to
its
technologists
were
demands and exposed
there had been so
tion
treated like tools.
still
to
failures
its
many more
—which
conspicuous
was the high-frequency trading
were kings. But then, the
gists
firms,
HFT
was, perhaps,
failures.
why
(The excep-
where the technolo-
firms didn’t have clients.)
Nasdaq’s famously talented engineers were an extreme Wall
Street case.
The
constant pressure on Nasdaq’s tech guys to adapt
the stock markets’ code to the needs of high-frequency trad-
had created
ers
guys and then,
all
when
these unreasonable
the
The
The Nasdaq
demands on the tech
demands busted
the tech guys for the failure.
this
workplace.
a miserable, politicized
business guys foisted
tech guys
blamed
the system,
all
wound up with
abused animal quality to them. “You just have to unabuse
them,” Brad explained, “and
let
them know they
be blamed just because something goes wrong.”
things will
go wrong and
it
isn’t necessarily
Rob and John Schwab seemed
aren’t
going to
We all know
that
anyone’s fault.
to agree that this
was the
correct approach to take with the people they hired from Nasdaq: to
tell
them over and over
that they weren’t to
blame
for
whatever had just happened, to include them in every business
discussion so that they could see
it,
why
and so on. Ronan had no patience
they came from
didn’t
even
a
for
any of
corporate American job,” he
come from Auschwitz.”
Ronan saw
they could be a part of
that
On
it.
“C’mon,
said.
“They
the other hand, in time,
Zoran possessed
useful qualities he hadn’t
FLASH BOYS
206
“Someone who
at first
perceived.
market
—you need
good
will be
at
most paranoid fuck in the world,”
most paranoid fuck in the world.
said
Ronan. “And
he’s the
He
thinks ten steps
down
On
really
good
his
home
him
if
goes
it
at it.”
morning of October
the
subway from
wrong
the road of what could go
because he’s thinking of what could happen to
wrong. He’s
running the
to be the
to
Wall
25, 2013,
Zoran Perkov took the
Street, as
he always did. As usual,
he read some book or white paper, and tried to pretend that the
people around
him
morning and the
a stock
The
didn’t exist.
others
was
— and
market to open
it
difference
between
that
he was running early and had
that
was unlike any market he’d ever
run. Spare, clean, single-minded, and built
from the ground up
by people he not only admired but
now
trusted.
morning, the system
said,
of exchange matching
engines generally.
is
he
stateless,”
“It doesn’t
know what
Ninety-nine percent of the time,
day before.”
On this
Zoran
down
sat
at his
down
my war
his screen.
—then noticed
mouse,” he
said.
died,
me
it
against the desk, realized that
and wondered,
because
I
can’t
market,” he
said.
and checked
his
it
briefly,
work
He
did the
true,
how
the
it
He
a
few
pulled out
was dead.
He
its
this
mouse.”
I
He
battery had probably
to replace
it.
“My
microwave oven but
wife mocks
I
can run a
switched out his war mouse for another,
computer
was approaching nine
stock market
it
been
“Every single market
have opened in the past ten years has been with
knocked
supposed to do.
desk in IEX’s office and punched
an old, battered computer mouse
“It’s
it’s
same thing
engine had never actually done anything.
buttons and watched code scroll
frowned.
the
day, that could not possibly have
IEX matching
as the
it’s
“Every single
screens.
The seconds
thirty in the
would open and, with
it,
ticked
down;
morning, when the U.S.
this
new market
inside of
AN ARMY OF ONE
it
aimed
that
thing to go wrong.
A
waited and watched for some-
thirty,
Brad walked over to Zoran’s
it.
didn’t.
minute before nine
desk:
first
It
By popular agreement, Brad was
He
day.
looked
“What do
I
207
He
to transform
down
to
open the market
that
the keyboard, perplexed.
at
do?” he asked.
“Just hit Enter,” said Zoran.
The
entire
room counted down
the final seconds before the
opening.
“Five
.
.
.
four
.
.
.
three
Six and a half hours
idea
whether the market
the day.
Ten minutes
.
.
two
.
.
.
one.”
after that
A half months
tives or the
smoking
later,
for
he could be found, alone, pacing
“This
a cigarette.
day of the battle against complacency,” he
TWO AND
Zoran had no
the market closed.
whole had finished up or down
as a
outside the 9/11 memorial,
first
.
later,
sixteen people
—
is
like the
said.
the chief execu-
head traders of some of the world’s biggest stock
market money managers— gathered in
a
conference
room on
top of a Manhattan skyscraper. They’d flown in from around the
country to hear Brad describe what he’d learned about the U.S.
stock market since
ing, he’d gotten
IEX had opened
new
information.
the truth even a glimpse of
tious.*
* In
“This
March 2013,
ended
its
is
the
it
was
for trading.
To
now
the perfect seat to figure
Commodity
From
that trad-
afford people interested in
considered faintly sediall this
out,” said Brad.
Futures Trading Commission, a derivatives regulator,
nascent program to give outside researchers access to market data after one of
those researchers,
Adam Clark-Joseph,
of Harvard University, used the data to study the
down
tactics
of high-frequency traders. The commission shut
for the
Chicago Mercantile Exchange wrote the regulators
the research after lawyers
a letter
arguing that the data
FLASH BOYS
208
“It’s
not like you can stand outside and watch.
game
the
The
to see
We
had to be in
it.”
sixteen investors controlled roughly $2.6 trillion in stock
market investments among them, or roughly 20 percent of the
entire U.S. market. Collectively, they paid to the big
banks roughly $2.2 billion of the $11 billion
a
Wall Street
year the Street
earned from stock market commissions.* They weren’t exactly
of one mind or
spirit.
IEX, but most were
grown-up view
have any
to
effect
remember
not.
that
A few of them were also investors in
A couple held the knowing, seemingly
was naive
it
on Wall
Street.
that technology
A
to think that idealism could
few thought
had lowered
from what they had been decades
earlier
it
was important
their trading costs
— and half-turned
a
half-blind eye to the stunts Wall Street intermediaries had pulled
to prevent technology
But whatever
angry, because they
bit
from lowering those
their predispositions, they
all
They now thought of him
them something than
second
said,
“This
less as a
guy trying
said one.
isn’t
to sell
quixotic attempt
had become deeply screwed up.
“You kind of know what’s going
it,”
workings of the U.S. stock
as a partner, in a possibly
to fix a financial system that
explanation for
even further.
all at least a little
had spent the past few years listening
to Brad’s descriptions of the inner
market.
costs
were
on, but you don’t have a
“He gave
about execution.
good
us the explanation.”
It’s
A
about a movement.
Clark-Joseph had collected belonged to the high-frequency traders, and that sharing
was
illegal.
were
Before he was booted out of the place, Clark-Joseph showed
able to predict price
how HFT
moves by using small loss-making stock market orders
information from other investors. They then used that information to place
orders, the gains
from which more than compensated
it
firms
to glean
much bigger
for the losses.
* Estimates of commission paid to Wall Street banks for stock market trades in 2013
range from $9.3 billion (Greenwich Associates) to $13 billion (the Tabb Group).
AN ARMY OF ONE
I
want
know
to
market
From
talking to them.
‘The sky
And
ing about?’
changed the definition of
all
The
first
time
I
than
if
worked
a
have
They
Brad suggested
it
all
at
talk-
that they have
you’re asking.
want
that
know
to
answer
me how
“Why
does
make money. But
he’ll
looked
different
suits,
as if
with deep creases
they’d been
place.
HFT
guys.
—
a lot
They were more
iso-
bounce from firm
one
made
from the people who
to firm
each other well and didn’t, until
have any reason to organize themselves into
force.
Many had just
landed in
New
York
few of them were obviously weary. Their tone was
They might not
were
all still
At some
old
a
from what
informal and familiar, with none of the usual jockeying for
tus.
it
RBC.
men. Most wore
a career in
any kind of fighting
a
They
you
hit the floor.”
works, he will
didn’t
it,
can’t get a
blue.’
are
a different situation
It’s
a lot less likely to
likely to
and
is
the big Wall Street banks, and from the
at
lated, too:
City,
comes out
question about Brad.
They were
bullwhip.
They were
more
‘What
You know what
he had stayed
sixteen were
a
it
must have
on the backs of their jackets
with
you’re like,
‘sky.’
my jaw
typically see. If
less”
you
‘The sky
say,
this stuff
up people and
just calling
talked to Brad and he was telling
Another investor had
The
It’s
an hour
person take the harder path?
make
sudden the
hard to figure
It’s
you’re asking. But they don’t
actually worked,
you
read.
And
after half
They know what
go into the market
the people at the banks
green.’
is
I
third added, “All of a
answer to any question. You
straight
it.
A
no book you can
out. There’s
say,
clean.”
it’s
about algos and routers.
is all
209
When
I’m sick and tired of getting fucked.
all
sta-
have been capable of outrage, but they
capable of curiosity.
level,
they
all
now
realized that this thirty-five -year-
Canadian guy somehow had put himself
in a position to
FLASH BOYS
210
understand the United States stock market in
a
system, possibly, had never been understood.
now
clear to
understand.”
me,” Brad
On
“There’s not
said.
by
a press release
was
said
Brad thought he understood
Nasdaq threw
that the
August 22, Nasdaq had experienced
hour outage caused by what they
in the SIP.
way
“The game
is
I
don’t
a
two-
technical glitch
a
why it had happened:
new technology used
vast resources into the cool
HFT to speed up its trading and little into the basic plumbing
of the market used by the ordinary investor.
HFT,” he
state-of-the-art facility for
“Nasdaq’s got
this
“Seventeen-kilowatt
said.
liquid-cooled cabinets and cross-connects everywhere and
and then they have
this shit,
market
—
servicing
the SIP
it.”
— and they
Four days
later,
and Direct Edge, revealed
industry, the point of a
identical functions
But,
as
this single
don’t care about
their intention to
The B team
merge. In
merger of two companies
would be
to consolidate
intended to remain open after the merger.
was obvious: The exchanges were both
by high-frequency trading
A
it.
is
two of the public exchanges, BATS
—
that
a
normal
performed
to reduce costs.
subsequent press release explained, both exchanges
a
view, the
all
choke point in the entire
more exchanges
few weeks
later,
firms, and,
To Brad
from the
HFT
owned
point of
the better.
both Nasdaq and the
New
York Stock
Exchange announced that they had widened the pipe
information between the
the reason
at least partially
HFT
that carried
computers and each exchange’s
matching engine. The price
for the
month, up from the $25,000
a
month
new
the
pipe was $40,000 a
HFT
firms had been
paying for the old, smaller pipe. The increase in speed was two
microseconds.
Brad understood
that the reason for this
was not
that
the market
was better off if HFT had information two microsec-
onds
than before, but that the high-frequency traders were
faster
AN ARMY OF ONE
all
terrified
of being slower than their peers, and the exchanges
had figured out
defined by
its
how
milk
to
one
in
woke up
some company
High-frequency traders had asked
to tack digits
on the
might jump the queue
The
to discover that they’d
for $30.0001.
penny
possible to pay ten-thousandths of a
them
now
market
reason for even the oddest events. For
a
day, investors
bought shares
it
this anxiety. In a stock
technology accidents, nothing actually happened
by accident: There was
instance,
211
Why? How was
for anything? Easy:
an order type that enabled
for
right side of the decimal, so that they
in front of people trying to pay $30.00.
reason for change was seldom explained; change just hap-
pened. “The fact that
alarming,” Brad
said.
is
it
such an opaque industry should be
“The
most money want the
fact that the
people
who make
the
—
that should
be
clarity possible
least
alarming, too.”
Everything he had done with
at
making
low.
The
it
transparent,
new exchange was aimed
his
and forcing Wall Street
open
as a private
exchange once
stock market and convert to a pub-
their trading
volume
justified incurring the
millions of dollars in regulatory fees they
Although technically
dark pool,
a
Investors could see, for the
first
allowed on the exchange, and
cial access.
IEX,
as a
would have
It
time,
had published
if any traders
example.
Or
own
rules,”
Brad
nothing to hide.
set a
new
others into fol-
perhaps not. “I would have thought one
come forward
now
rules.
had been given spe-
dark pool, would thus try to
— and perhaps shame
its
its
what order types were
standard of transparency
dark pool would have
to pay.
IEX had done something no
Wall Street dark pool had ever done:
lowing
to fol-
sixteen investors understood IEX’s basic commercial
strategy: to
lic
more
after us
and published
told the investors. “ Someone
their
must have
My prediction was six or seven out of the forty-
FLASH BOYS
212
four
would have done
On
markets.
Has
trade.
good
it
idea to
it.
None. Zero. There
forty-four of
dawned on anyone
not
tell
them no one
people
back on the financial
how
crisis
And now
it.
trillions
and
say,
no documentation. Does
is
Now
he explained just
remain in the shadows
heart of it
wanted IEX
from the big Wall
mine them. One
sentative of
they
might actually be
it
a
‘How
It’s
can you give a mort-
preposterous.’
But banks
idea of how
that
how
it
works, because
sound familiar?”
badly the market wanted to
—and
just
to
Even before IEX opened, brokers
fail.
Street banks
how
went
badly the people
work trying
to
the
at
to under-
investor called to inform Brad that a repre-
Bank of America had
owned by high-frequency
opened, a manager
a
that
of dollars of trades are being executed
on markets where no one has any
there
forty-five
how
the market works? People can look
gage loan with no documentation?
did
now
are
has any idea
at
just told
trading firms.
him
On
the
an investment firm called
mass email that looked
as if
it
that
IEX was
morning IEX
ING
sent out
had been written on her behalf
by someone inside one of the big Wall Street banks: “With the
pending launch of IEX, we request
that
all
ING
executions be excluded from executing on the
I
am
IEX
As
a result
I
.
.
request to opt out of trading with
risked their careers to attack the
of interest in the stock market. They had refused the
easy capital from the big Wall Street banks
—
to avoid conflicts
of interest. To avoid conflicts of interest, the investors
backed
.
venue.”
The employees of IEX had
conflicts
venue.
challenged by the conflict of interest inherent in their
still
business model.
the
Equity Trading
IEX
IEX had
selves did
who had
structured their investments so that they them-
not personally profit from sending trades onto the
exchange: Profits from their investment flowed through to the
AN ARMY OF ONE
people whose
insisted
to avoid
IEX
money
on having
they managed. These investors had further
a stake
of less than 5 percent in the exchange,
having even the appearance of control over
York Stock Exchange,
dollars
to
as
ICE), the
buy IEX
— and walked away from
used the exchange.
manager
at
ING
rumor
—
that
But then
trade conference
first
New
volumes rose
—
for
IEX planned
everyone
who
And on the day IEX opened for trading, this
who had earlier refused to meet with them
IEX had
all
of the
the chance to get rich quick.
sorts
a conflict
—was spreading
to her
of interest.’
of bizarre behavior had attended IEX’s
arrival in the U.S. stock market.
—no media,
Ronan had gone
lots of
Wall Street big
to a private
shots.
It
was
time he had been invited to the exclusive event, and he
intended to
the
Before
hundreds of millions of
might explain the exchange
so that they
the
new owners
for
align their interests with the broader market’s,
to lower their fees as their
a
it.
launched, Brad had rebuffed an overture from Interconti-
nentalExchange (known
To
213
lie
low.
He was
outside in the hallway
bathroom when someone
talking about IEX.”
said,
“You know,
Ronan returned to
on
his
way
to
they’re in there
the conference
room and
listened to the heads of several big public U.S. stock exchanges
on
a panel. All
agreed that
IEX would
only contribute to the
biggest problem in the U.S. stock market:
The market
its
fragmentation.
already had thirteen public exchanges and forty-
four private ones:
Who
audience participation,
needed another?
When
Ronan found
microphone. “Hi, I’m
a
it
came time
* ING, oddly enough, managed IEX’s then thirty-person 401(k) plan. Seeing
this,
for
John
Schwall returned to his side career in private investigation. After some digging, he
developed the opinion that any money manager
to markets
might have violated
who
arbitrarily
his fiduciary responsibility.
pulled the company’s 401(k) from
ING.
denied his clients access
On those
grounds, Schwall
FLASH BOYS
214
Ronan, and
he
think
I
I
went
and then gave
said,
he concluded. “Or anyone
He
of one.”
crowd, by
its
The
a piss at the
“Were
wrong
time,”
not like you guys,”
market. We’re an army
else in the
thought he was being calm and measured, but the
went wild
standards,
clapped. “Jesus,
some guy
go take
to
a little speech.
—which
is
to say they actually
thought you were about to throw
I
punch,”
a
said afterward.
stock exchanges didn’t like
big Wall Street banks for
less
IEX
for obvious reasons, the
obvious ones. But the more the
big banks sensed that Brad was being regarded by big inves-
an arbiter of Wall Street behavior, the more carefully
tors as
they confronted him. Instead of voicing their
to
him
directly, they
would voice
own
objections
objections they claimed to
have heard from other big banks. The guy from Deutsche Bank
would
guy from Citigroup was upset
say that the
of thing.
how to tell
“When visited,
made me
feel that the
telling investors
I
seeming to do
so.
the banks to route to
they were
all
that
IEX was
—
IEX
that sort
cordial,” said Brad. “It
plan was to starve us out.” But without
The day
before they’d opened for trading, a
guy from Bank of America
called
what’s going on? I’d appreciate
it
Bank of America had been
if
the
Brad and
said,
Hey, buddy,
you’d say we’re being supportive.
to receive the
first
documents
they needed to connect to the exchange and, on opening day,
were
still
dragging their
declined to help
huge
tactic
we
Nine weeks
that the
feet in establishing a
have to deploy,” he
after
IEX
is
a
said.
launched,
it
was already pretty
clear
banks were not following their customers’ instructions
to send their orders to the
in the
connection. Brad
Bank of America out of its jam. “Shame
room knew
them we wanted
this;
new
exchange.
the rest
to route to
now
A
few of the investors
learned.
IEX,” one
said,
“When we
“they
said,
told
Why
AN ARMY OF ONE
would you want
comes
pigs’
to
We
that?
can’t
mind.” After the
do
that!’
first six
215
The
phrase ‘squealing
weeks of IEX’s
life,
UBS,
the big Swiss bank, inadvertently disclosed to one big investor
that
it
hadn’t routed a single order onto
instructions
from the investor
manager estimated
A fourth
want
to
—
IEX
was
most ten percent of
by three
told,
IEX
pay the $300-a-month connection
Of all
banks to route to
told the big
to connect to
despite explicit
Another big mutual fund
so.
his instructions “at
investor
want
that they didn’t
do
when he
that,
IEX, they had followed
the time.”
to
different banks,
because they didn’t
fee.
the banks that dragged their feet after their customers
Goldman
asked them to send their stock market orders to IEX,
Sachs had offered the best excuse:
computer system
of millions of dollars
(until the public
ingly, to cancel them).
its
before. In
August
trading system generated a
of crazy and embarrassing trades that
instructions to
afraid to tell their
do anything it hadn’t done
to
Goldman automated
2013, the
They were
lost
bunch
Goldman hundreds
exchanges agreed, amaz-
Goldman wanted
to avoid giving
trading machines until
it
figured out
new
why
they had ceased to follow the old ones. There was something
way Goldman had
about the
offices
—
chain of
listening to
command
believe their excuse.
ously. After his first
instance,
treated
what he had
Brad when he
to say,
rather than out the door
He
visited their
bouncing him up the
—
that led
sensed that they were taking
meeting with
their stock
Goldman’s analysts had told the
him
him
to
seri-
market people, for
firm’s clients that they
should be more wary of investing in Nasdaq Inc.
The
—Morgan
—were mostly
other banks
the exceptions
occasions
when
Stanley and
J.P.
Morgan were
passive-aggressive, but there
were
they became simply aggressive. Employees of
Credit Suisse spread rumors that
IEX
wasn’t actually
mdepen-
FLASH BOYS
216
dent but
owned by
of a big bank.
bumped
night, in a
into a senior
come
fail,
One
me
to
Royal Bank of Canada
the
Manhattan
manager
and
I’ll
give
you
a job,”
I
he
“Wait, no,
said.
won’t.” In the middle of
day of trading, one of IEX’s employees got
executive of Bank of America,
a senior
so just a tool
IEX employee
an
Credit Suisse. “After you guys
at
everyone hates your fucking guts, so
their first
— and
bar,
who
said that
a call
colleagues had “ties to the Irish Mafia,” and “you don’t
piss
those guys off.”
of
said, “Tie’s full
followed the
IEX
call
The IEX employee went
employee: Should
I
Yes.
[Just kidding].
employee:
Good
thing
also
I
don’t
Well,
too slow.
own
a car.
maybe your
gf’s car.
them from sending
orders to
their trading algos, along
with the idea
that,
an investor, slower always meant worse. They seemed to have
persuaded themselves that the
ally
in
For years, the banks had been selling the speed
and aggression of
for
you get
heard what the big Wall Street banks were already
saying to investors to dissuade
It’s
careful next time
car.
Bank of America employee:
IEX:
and
employee: Haven’t noticed any Irish guys following me.
your
Brad
less sure,
employee: Are you serious?
Bank of America employee: Be
IEX
to
be concerned?
Bank of America employee: Jk
IEX
want
who just
a text.
Bank of America employee:
IEX
to Brad,
The IEX employee was
shit.”
with
from
one of his
helped their
sounding name
make
it
sound
clients.
for
new
speed of the markets actu-
They’d even dreamed up
an absence of speed: “duration
official,
people will believe that
it’s
a technical-
risk.” (“If you
something you
AN ARMY OF ONE
really
need
delay
IEX had
to care about,”
217
Brad explained.) The 350-microsecond
introduced to
foil
the stock market predator
was
roughly one-thousandth of the blink of an eye. But investors for
years had been led to believe that one-thousandth of the blink of
an eye might matter to them, and that
tant for their orders to
Guerrilla! Raider!
how
fast
move
as fast
it
was extremely impor-
and aggressively
as possible.
No
This emphasis on speed was absurd:
the investor
matter
moved, he would never outrun the high-
frequency traders. Speeding up his stock market order merely
reduced the time
it
took for him to arrive in HFT’s various
how do you
“But
traps.
prove that a millisecond
is
irrelevant?”
Brad asked.
He threw
expanded
The team had
the problem to the Puzzle Masters.
to include Larry
Yu,
whom
Brad thought of
guy with the box of Rubik’s cubes under
as the
(The standard
his desk.
3x3-inch cube he could solve in under thirty seconds, and so he
oiled with
WD-40
kept
it
held
more challenging
make
to
it
irregularly shaped one,
and so
on.)
Yu
which Brad projected onto the screen
To
see
it
first
it
with your eyes and instead attempt to imagine
might appear
chart
generated two charts,
for the investors.
anything in the stock market, you have to stop try-
ing to see
as
box
spin faster. His cube
ones: a 4x4-incher, a 5x5-incher, a giant
to a computer, if a
showed the
investors
how
computer had
trading
on
all
it
The
eyes.
public U.S.
stock exchanges in the most actively traded stock of a single
company (Bank of America Corp) appeared
over
a
activity appears constant,
something occurs:
order.
lic
to the
human
period of ten minutes, in one-second increments.
The second
even
a trade or,
frantic. In virtually
more commonly,
chart illustrated the
U.S. stock exchanges
as
it
same
appeared to
a
a
eye
The
every second,
new buy
activity
on
or
all
sell
pub-
computer, over the
FLASH BOYS
218
course of a single second, in millisecond increments. All the market activity within a single second
a
mere
1.78 milliseconds
obelisk rising
from
nothing
happened
at all
—
that
a desert. In
was so concentrated
on
the graph
98.22 percent of all milliseconds,
in the U.S. stock market.
the market in even the world’s
—within
resembled an
it
most
To
a
computer,
was an
actively traded stock
uneventful, almost sleepy place. “Yes, your eyeballs think the
markets are going
The
fast.”
fast,”
Brad
important in
a third
“They
said.
likelihood an investor
going that
of a millisecond was close to zero, even in
the world’s most actively traded stock. “I
worry about milliseconds,”
were
aren’t really
would miss out on something
said Brad,
relevant, every investor
knew
would be
in
was
it
“because
if
bullshit to
milliseconds
New Jersey.”
“What’s the spike represent?” asked one of the investors,
pointing to the obelisk.
“That’s one of your orders touching down,” said Brad.
A
few investors shifted in
them,
if
as
They were
happens
fifty
at
the exchange,
it
all
you’ll
the action! “Every time a trade
The
is
this
HFT
—
it
total silence.
massive reaction.
algos
on the other
do next based on what you
peaked roughly 350 microseconds
touched
what
is
Then
Then
there
is
a reaction to
side are predicting
just did.”
The
activity
after an investor’s order trig-
gered the feeding frenzy, or the time
orders
clear to
creates a signal,” said Brad. “In the
milliseconds running up to
that reaction.
its
was growing
the result of a delay of one-third of a millisecond.
the reason for
an event. Then there
what
It
were the punch bowl. They were unlikely to miss
party, they
any action
their seats.
wasn’t already so, that, if the stock market was the
it
it
took for
HFT
to send
from the stock exchange on which the investor had
down
really
to
all
of the others. “Your eye will never pick up
happening,” said Brad. “You don’t see
shit.
Even
AN ARMY OF ONE
219
fucking cyborg you don’t see
if you’re a
it.
But
if there
was no
why would anyone react at all?” The arrival
awakened the predator, who deployed his strategies
value to reacting,
the prey
of
rebate arbitrage, latency arbitrage, slow market arbitrage. Brad
to dwell
need
didn’t
on
these; he’d already
investors through his earlier discoveries.
that he
wanted them
—
first
week
could
human
see.
Even
It felt
eye to
make
its
findings
computers had been too
sense of it. Brad
that first
had spent the
week, he was trying to make sense of
down his computer screen at a rate
like
of fifty per sec-
speed-reading War and Peace in under a minute.
number of the
orders being
Wall Street banks to IEX came in small 100-share
sent by the
The
new
had traded just half a million
All he could see was that a shocking
lots.
his
or so glued to his terminal, trying to see whatever he
lines scrolling
ond.
it
the flow of orders through
rapid for the
walked each of the
was
to focus on.*
On IEX’s opening day—when
shares
It
HFT guys used 100-share lots as bait on the exchanges,
to tease information out of the
as possible.
But these weren’t
market while taking
HFT
orders; these
as little risk
were from the
big banks. At the end of one day, he asked for a count of one
bank’s orders: 87 percent of
lots.
them were
in these tiny 100-share
Why?
The week
Canada,
his
to virtually
Now,
after
Brad had quit
his
job
at
the
Royal Bank of
doctor noted that his blood pressure had collapsed
normal
levels,
in response to this
and he’d cut
new
his
medication in
situation he couldn’t
make
half.
sense
* Sixty percent of the time that this feeding frenzy occurs on a public stock exchange,
no trade
is
recorded.
The frenzy comes
in response to a trade that has occurred in
dark pool. The dark pools are not required to report their trades in real time; and
the official tape, the frenzy appears unprovoked.
It isn’t.
some
so,
on
FLASH BOYS
220
of,
Brad had migraines, and
blood pressure was again spik-
his
ing. “I’m straining to see patterns,”
my
being shown to me, but
One
he
“The
said.
eyes can’t pick
them
IEX employee named
afternoon, an
patterns are
up.”
Josh Blackburn
overheard Brad mention his problem. Josh was quiet
reserved, but intensely so
he thought he
knew how
— and
—not
didn’t say anything at
With
to solve the problem.
just
first.
But
pictures.
Josh, like Zoran, traced his career back to September 11,
2001. He’d just started college
when
a friend
turn on the TV, and he’d watched the
messaged him to
Twin Towers
collapse.
“When that happened it was kind of a what can
I
couple of months
air force recruit-
later,
he’d gone to the local
ing center and attempted to
until the
end of his freshman
he’d returned.
The
They’d
enlist.
year.
air force sent
do
told
moment?”
him
A
to wait
At the end of the school year
him
to Qatar,
where
a colonel
figured out that he had a special talent for writing computer
code; one thing led to another, and
Baghdad. There he created
all
remote
like
a
and another system
units,
of taking the data from
across
all battlefields
generals could use to
said.
years later he
was in
Google-
for creating a
map, before the existence of Google maps. From Baghdad
he’d gone to Afghanistan, where he
that
two
system for getting messages to
and turning
make
“You could
attacks
see trends.
You could
on
[U.S.
a
base]
You could
where and when the
in charge
into a single picture the
attacks
You could
Camp
see
them everything
twenty-foot wall map,” Josh
see patterns in
Army
afternoon prayer.
it
decisions. “It told
was going on, real-time, on
attacks.
wound up being
the branches of the U.S. military
all
when
see origins of rocket
they occurred
Victory would
—
come
the
after
what the projections were
[of
might occur] and how they com-
pared to where attacks actually happened.”
The
trick
was not
AN ARMY OF ONE
221
simply to write the code that turned information into pictures
but to find the best pictures to draw
led the
mind
to
and showed
it
— shapes and
meaning. “Once you got
way
in the best
all
colors that
that stuff together
you could find pat-
possible,
terns,” Josh said.
The job was hard
When
doing.
when
was
that tour ended, he
over, he
diminish.
turned out, harder to stop
it
of duty was up, Josh reenlisted, and
re-upped again.
saw the war winding
“You
Josh. “Because
I
to do, but, as
his first tour
find
you
it
very
difficult
see the impact of
I
that,
any meaning.”
did,
he looked for a place to deploy his
finance told
a friend in
his third tour
your work. After
couldn’t find any passion in anything
Coming home,
When
down and his usefulness
to come home from,” said
him about an opening
in a
skill
— and
new
high-
frequency trading firm. “In the war, you’re trying to use the
picture
you
create to take advantage of the enemy,” said Josh.
“In this case, you’re trying to take advantage of the market.”
worked
for the
HFT
firm for six weeks before
He
but he
failed,
it
found the job unsatisfying.
He’d come
him while
to
IEX
trolling
way: John Schwall had found
in the usual
on Linkedln and asked him
interview. At that point, Josh
from other high-frequency trading
‘we are
elite,’
”
he
didn’t care all that
work
to
said.
“They kept
much
mean something.
day. Saturday they
firms.
come
came
made me an
I
elite;
offers
Brad
of
a lot
He
he just wanted his
in for an interview
offer.
change the way things work. But
“There was
for an
hitting the elite thing.”
about being
“I
to
was being inundated with
said,
didn’t really
on
Fri-
we’re going to
know what Brad
was talking about.” Since joining, he’d been quiet and had put
himself where he liked to be, in the background.
take in
what people
are saying,
and
listen to
“I just try to
what everyone
is
FLASH BOYS
222
complaining about,” he
bring
it
Brad knew
done
said. “I wish this
or I wish
and then
that,
together and find the solution.”
of Josh’s past
little
couldn’t talk about. “All
— only
sounded
for the U.S. military
knew was
I
whatever Josh had
that
like the sort
Afghanistan, working with generals,” said Brad.
him my problem
—
that
I
couldn’t see the data
of thing he
was in
that he
a trailer in
“When
—he
tell
I
just says, ‘Hit
Refresh.’”
Quietly, Josh had gone off and created for Brad pictures of
the activity
on IEX. Brad
hit Refresh; the screen
nized in different shapes and colors.
The
now
was
orga-
strange 100-lot trades
were suddenly bunched together and highlighted in useful ways:
He
could see patterns.
And
he could see preda-
in the patterns
tory activity neither he nor the investors had yet imagined.
These new pictures showed him
how
the big Wall Street banks
typically handled investors’ stock
market orders. Here’s
worked: Say you are
—
a
big investor
— and you have decided
fund
&
make
mutual fund or
who
broker
say
100,000 shares of Procter
say,
the big Wall Street
From
— and
order
The
didn’t
seller.
bank you
that point on,
the information
first
buy 100
You
& Gamble.
tell
it
P&G’s
—
is
want
to reveal
What made
had
you had
a lot less sense
did after they discovered the
a seller.
a big
side.
it
some
You
up
to, say,
no
clue
buy
at,
tell
$82.97
how
your
Now
Brad
IEX with an
order
treated.
thing the broker did was to ping
shares, to see if IEX
call
like to
shares are trading
basically have
contains
You
them you’d
are willing to pay
you
how
pension
of ordinary Ameri-
82.95—82.97, with 1,000 shares listed on each
a share.
saw:
lot
have given you their savings to manage.
—Bank of America, —and
a
a big investment in Procter
Gamble. You are acting on behalf of a
cans
to
to
a
This made
total sense:
buyer until you found a
was what many of the brokers
seller.
They avoided him.
AN ARMY OF ONE
IEX
Say, for example, that
it
—
of 100,000 shares
a seller
and trying to buy
just kept pinging
a
much
buy 100,000 shares of P&G
purchased
the shares he
all
demand
tent, noisy
with only
a fraction
opened up
this
me,” Brad told
insis-
to see if IEX
Why
do
is
interests the
of the stock
his audience.
thought,
It
had
a
bank
didn’t all
behave
this
bank was meant
typically
activity that
as if the
to
wound up
“It
was crazy
to
big Wall Street banks
big seller to avoid trading with
would anyone do
increase the chances that an
They
its
customer wanted to buy.
its
was
the hell
revealing
the price of P&G’s stock, at the
whole new realm of
“1
him.
order to
would have
price.
to the injury, the
were looking
or the bank
IEX an
—by
expense of the investor whose
Adding
—
in
bank
wanted without driving up the
— goosed up
represent.
sent
coming
the big
$82.97, the investor
at
bank had pinged away and
Instead, the
P&G,
tiny 100-share orders
bank had simply
If the
waiting on
a seller
$82.96. Instead of
bigger chunk of
IEX with
vanished entirely.
at
223
had
actually
this? All
you
HFT will pick up your signal.”
way:
A
couple of the big banks
followed up their 100-share orders by forking over the meat of
the
buy
them
order,
and executed the trade
to execute.
their
best behaved.) But, in general, the big
—
had connected to IEX
excluded
a
It
was
as if
far the
Wall Street banks
group that in the
Bank of America and Goldman
ingenuously.
customer had asked
(The Royal Bank of Canada was by
first
Sachs
who
week of trading
— connected
dis-
they wished to appear to be interacting
with the entire stock market, while actually they were trying to
own dark pools.
who were of course pay-
prevent any trades from happening outside their
Brad
now
explained to the investors,
ing the price for this behavior, the reasons that the banks behaved
as
they did.
The most obvious was
to
maximize the chance of
executing the stock market orders given to them by investors in
FLASH BOYS
224
their
own
dark pools.
The
own
stock outside of its
less
less likely it
This evasiveness explained the banks’ incredible
was
A
bank
own
that controlled less than 10 percent of
stock market orders was
somehow
Collectively, the banks
this
is
how
had managed
now
market
entire U.S. stock
they had done
its
own
move 38
to
it.
dark
U.S.
all
more than
able to satisfy
of its customers’ orders without ever leaving
and
to find
ability to find,
eventually, the other side of any trade inside their
pools.
P&G
honestly a bank looked for
dark pool, the
half
dark pool.
percent of the
traded inside their dark pools
it.
“It’s a
facade that the market
is
interconnected,” said Brad.
The
big Wall Street banks wanted to trade in their
pools not only because they
commissions
—by
selling the right to
inside their dark pools.
They wanted
their dark pools to boost the
ances’ sake.
The
made more money
statistics
HFT
own
dark
— on top of
their
to exploit orders
to trade their orders inside
volumes in those pools,
for appear-
used to measure the performance of
the dark pools, as well as the performance of the public stock
exchanges, were
more than
a little
judged by the volume of trading
nature of that volume.
It
screwy.
A
was widely believed,
the bigger the average trade size
stock market was
that occurred
on
it,
and the
for example, that
on an exchange, the better the
market was for an investor. (By requiring fewer trades to complete his purchase or sale, the
exchange reduced the likelihood
of revealing an investor’s intentions to high-frequency
traders.)
Every dark pool and every stock exchange found ways
to
its
own
flattering statistics; the art
of torturing data
may
cook
never
have been so finely practiced. For example, to show that they
were capable of hosting big
number of “block”
itated.
The
New
trades, the
exchanges published the
trades of more than 10,000 shares they facil-
York Stock Exchange
sent
IEX
a
record of
AN ARMY OF ONE
26 small trades
it
had made
it
— and then published
15,000-share block.
IEX had
after
the result
The dark
225
on the
routed an order to
ticker tape as a single
pools were even worse, as no one
but the banks that ran them had a clear view of what happened
inside them.
on
stats
The banks
own
their
all
published their
own
self-generated
dark pools: Every bank ranked
itself
an entire industry that overglorifies data, because data
to
game, and the true data
their
own
is
“It’s
so easy
so hard to obtain,” said Brad.
statistics in
did not merely manipulate the relevant
The banks
#1.
is
dark pools; they often sought to undermine the
stats
of their competitors. That was another reason the banks were
sending
IEX
orders in tiny 100-share
to lower the average
lots:
trade size in a market that
competed with the banks’ dark
A lower average
made IEX’s
trade size
stats
were heavily populated by high-frequency
his broker
customer goes to
Why am
I
getting
easily say, ‘Well,
I
all
and
says,
look bad
traders.
‘What the
these hundred-share
fills?,’
—
IEX
“When the
happened?
hell
his
pools.
as if
broker could
put the order on IEX,’ ” said Brad.
The
strat-
egy cost their customers money, and the opportunity to buy and
sell
shares, but the customers
would
see
Soon
tistics
—
wouldn’t
was IEX’s average trade
after
it
opened
for trading,
IEX
to describe, in a general way,
market. “Since everyone
can’t see if
anyone
Now you could see.
is
is
know
about
it:
All they
size falling.
published
its
own
what was happening
behaving in
a particular
behaving particularly badly,”
sta-
in
its
way, you
said Brad.
Despite the best efforts of Wall Street banks,
the average size of IEX’s trades was by far the biggest of any
stock exchange, public or private.
that occurred
More
importantly, the trading
was more random, unlinked
to activity elsewhere
in the stock market: For instance, the percentage of trades
IEX
that followed the
change
in the price
on
of some stock was
FLASH BOYS
226
half that of the other exchanges. (Investors were being picked
—
off
as
West Chester, Pennsylvania, money manager Rich
— on exchanges
Gates had been picked off
their standing orders quickly
prices changed.) Trades
on IEX were
than those elsewhere to trade
rent market bid and offer
would agree was
fair.
Street banks to send
making
their
enough
at
is
up when stock
also four times
the midpoint
—which
move
that failed to
to keep
more
likely
between the cur-
to say, the price that
most
Despite the reluctance of the big Wall
them
orders, the
new exchange was
already
the dark pools and public exchanges look bad, even by
own
screwed-up standards.*
Brad’s biggest weakness, as a strategist, was his inability to
imagine
just
that the big
how
badly others might behave.
banks would
resist
imagined they would use
He
had expected
He
sending orders to IEX.
their customers’ stock
to actively try at their customers’ expense to sabotage an
created to help their customers.
where behaving
“And
correctly
“You want
hadn’t
market orders
exchange
to create a system
would be rewarded,” he concluded.
the system has been doing the opposite.
rational for a
It’s
broker to behave badly.”
The bad behavior
played right into the hands of high-
frequency traders in the most extraordinary ways.
One day while
watching the pictures Josh Blackburn had created
saw
a
bank machine-gun IEX with 100-share
a stock price 5 cents inside
one-third of a millisecond
*
The
first
him. Brad
and drive up
of 232 milliseconds. IEX’s delay
—was of
Financial Industry Regulatory Authority
little
(FINRA)
ing of the public and private stock markets, based on
law, presumably inadvertently,
for
lots
how
use in disguising an
publishes
its
own odd
two months of trading, IEX ranked #1 on FINRA’s
rank-
well they avoid breaking the
by trading outside the National Best Bid and
list.
Offer. In
its
AN ARMY OF ONE
market order
investor’s stock
if a
227
broker insisted on broadcasting
up the
signal
and was getting out in front of
the broker was spreading
it.
broker peppering the whole Street, or
of investors.
full
is it
in
sizes,”
for 131 shares of, say, Procter
some other market,
Procter
&
Gamble
different price.
that, in
It
the trades
Is
this
he told the
just us?”
a nearly identical trade
some other mar-
nearly the same time in
noticed the odd trade
ket. “I
IEX
at
if
“What we found blew our minds.”
For each trade on IEX, he’d spotted
had occurred
all
wondered:
that occurred in the U.S. stock market. “I just
room
picked
Wondering
news of his buy order elsewhere, Brad
turned his attention to the consolidated tape of
that
HFT
order he controlled over a far longer period:
a big
a
said.
He’d
& Gamble,
exactly the
—within
he
see a trade
and then he’d
same trade
—
on
see,
131 shares of
few milliseconds, but
at a slightly
He
also noticed
happened over and over again.
each case, on one side of the trade was
a
broker
who had
rented out his pipes to a high-frequency trader.
Up
that point,
till
occurred
when
most of the predation they had uncovered
stock prices moved.
A
stock
went up or down;
the high-frequency guys found out before everyone else and
took advantage of them. Roughly two-thirds of all stock market
moving
trades took place without
trade
happened
at
the
seller’s
the price of the
stock—the
offering price, or the buyer’s bid-
ding price, or in between; afterwards, the bid and offering price
remained the same
saw was
investors even
for Procter
was
as
they had been before.
how HFT, with
stable
&
—
when
What Brad now
the help of the banks, might exploit
the stock price was stable. Say the market
Gamble’s shares was 80.50-80.52, and the quote
the price wasn’t about to change.
The National
Best
Bid was $80.50, and the National Best Offer was $80.52, and the
stock was just sitting there.
A seller of 10,000 Procter &
Gamble
228
FLASH BOYS
on IEX. IEX
shares appeared
on
at
it
were being offered
come
into
chip away
where
tried to price the orders that rested
the midpoint (the fair price), and so the 10,000 shares
—
IEX
at
$80.51.
at
it
Some high-frequency
was always
a
trader
— and
the order: 131 shares here, 189 shares there.
was performing
seller.
the broker
who
else-
same
a useful function, building a bridge
buyer and
But
HFT was selling the shares — 131
there— at $80.52. On the surface, HFT
in the market, the
shares here, 189 shares
would
high-frequency trader
But the bridge was
controlled the
between
Why
itself absurd.
buy order simply come
to
didn’t
IEX on
behalf of his customer and buy, more cheaply, the shares offered?
Back when Rich Gates conducted
managed
to get himself
his experiments,
robbed inside Wall
Street’s
he had
dark pools,
but only after he had changed the price of the stock (because the
dark pools were so slow to
inside of them).
move
These trades
that
the price of his order resting
Brad was
now noticing had
He knew exactly
happened without the market moving
at all.
why
Street banks
they were happening:
The Wall
ing to send their customers’ orders to the
An
place.
to
rest
investor had given a Wall Street
buy 10,000
shares of
bank an
P&G. The bank had
were
fail-
of the market-
sent
order, say,
its dark
pool with instructions for the order to stay there, aggressively
priced, at $80.52.
and
also
The bank was boosting
charging some
another exchange
—but
HFT
it
was
happening in the market. In
tors
would simply have met
other
at a price
moved
a
penny.
a fee rather
its
to
dark pool
stats
than paying a fee to
also ignoring
a
it
whatever
else
was
functional market, the inves-
in the
middle and traded with each
of $80.51. The price of the stock needn’t have
The unnecessary
the screwed-up stock
price
market— also
— caused by
movement
played into HFT’s hands.
Because high-frequency traders were always the
first
to detect
any stock price movements, they were able to exploit, with other
AN ARMY OF ONE
strategies,
ordinary investors’ ignorance of the fact that the mar-
ket price had changed.
Wall Street bank
own
its
—the
IEX had
prey. In the first
original false note struck by the big
of avoiding making trades outside of
—
pool
arbitrage,’ ” said Brad.
when you
from being
to prevent investors
two months of its
from high-frequency
activity
symphony of scalp-
the prelude to a
this ‘dark
an exchange to eliminate the possibility of
built
predatory trading
ishing,
The
act
pool—became
dark
“We’re calling
ing.*
229
existence,
traders except this.
stopped to think about
financial
it,
treated as
IEX had
It
how
seen no
was astonaggressively
middleman, even when he was
capitalism protected
its
totally unnecessary.
Almost magically, the banks had generated
the need for financial intermediation
own
—
Brad opened the
floor for questions. For the first
the investors vied with each other to see
his
compensate
to
for their
unwillingness to do the job honestly.
who
few minutes,
could best control
anger and exhibit the sort of measured behavior investors are
famous
for.
“Do you
think of
HFT
you did before you
differently than
opened?” asked one.
That question might have been better answered by Ronan,
who had just returned from a tour of the big HFT firms, and
now leaned against a wall on the side of the room. Brad had asked
Ronan
*
The
ing.
to explain to the investors the technical
a
penny
the likely profits
here, a
penny there adds up
made annually by
HFT
just a single trading strategy.
in the
made
scalpin the
a
quick-and-dirty calculation of
from dark pool
instances over a fifteen-day period, then
from the U.S. stock market alone came
was
skimming as
most extraordinary ways
reader might question the characterization of such small-time
But
U.S. stock market. At IEX, the Puzzle Masters
its
end of things
to
came up with
more than
arbitrage.
a
They added up
number: The haul
a billion dollars a year.
for
all
HFT
And
this
“They’ve been in business for ten weeks and they’ve
now found
four of these strategies,” said one big investor of IEX.
many more
they’ll find?”
A billion
here, a billion there:
It
adds up.
“Who knows how
230
FLASH BOYS
how IEX had created its 350-microsecond delay,
box, and so on
— and
magic shoe-
the
to relate the details of his tour.
He’d done
But on the subject of HFT he held himself back. To speak his
mind, Ronan needed to feel like himself, which, imprisoned in
it.
a
gray suit and addressing
not. Put another way:
to say
him
what he
a
semiformal audience, he clearly did
was
It
extremely
just
string together sentences
ing someone try to
swim
his legs. Curiously,
he
without profanity was
some of them want
“When
he
said.
when
them
was because
say ‘fuck,’ they think I’m stealing the
fault.
ized that the market
just capitalizing
“It
be the alpha male cursing in the room,”
to
a lot less
not their
is
arms or
admitted, he wasn’t worried that the
later
I’m in front of a group
“I hate
“This
I
watch-
like
across a river without using his
audience would be offended by bad language.
so
Ronan
difficult for
without using the word “fuck.” Watching
felt
I
go
I
as straight as
we
than before
I
show
can.”
started,” said Brad.
think most of them have just rational-
creating the inefficiencies and they are
is
on them. Really,
it’s
what they have
brilliant
done within the bounds of the regulation. They are much
than
a villain
A
thought.
I
forgiving sentiment. But
the conference
shocking to
room
me
then
and they
how
it’s
at that
let
moment
in that
even worse. Even though
I
think I’d have gone bonkers.”
An
was
still
a
hand and motioned
whiteboard to
bank had enabled dark pool
“Who
is
that?” he asked,
of
“It’s still
arbitrage.
and not calmly.
bad
actor.
IEX
had heard some
I
to
illustrate
a
is
to route to
incensed. If that was the
investor raised his
Brad had scribbled on
mood.
shows everyone
of it before,
I
less
the investor.”
the investors in
you ask them
hearing
it,
down
the banks are colluding against us,”
later said. “It
when you add
refuse,
has
did not seem in a forgiving
to see
one of the investors
And
The system
first
time
I
was
some numbers
how
a particular
AN ARMY OF ONE
An
uneasy look crossed Brad’s
more and more.
question
tor listening to a dry
“Which bank
ask:
is
face.
Just that
231
He was now
hearing that
morning, an outraged inves-
run of his presentation had stopped him
the worst?” “I can’t
you,” he
tell
said,
to
and
explained that the agreements the big Wall Street banks signed
IEX
with
its
forbade
speaking about any bank without
IEX from
permission.
“Do you know how frustrating it is to sit here and hear
who that broker is?” said another investor.
this
and not know
It
wasn’t easy being Brad Katsuyama
practical
change without
question was,
when you
a great deal
got right
—
to try to effect
when
of fuss,
down
to
it,
a radical
of a social order. Brad was not by nature a radical.
some
the change in
overhaul
He was
simply
in possession of radical truths.
“What we want
Brad.
“We
to
do
good
highlight the
is
need the brokers
who
way around
rewarded.” That was the only
brokers,” said
are doing the right thing to get
the problem. Brad had
asked for the banks’ permission to highlight the virtue of the ones
that
behaved
relatively well,
and they had granted
it.
“Speaking
about someone in a positive light does not violate the terms of not
speaking about someone in a negative
The audience considered
“How many good
light,”
he
said.
this.
brokers are there?” asked an investor
at
length.
“Ten,” said Brad. (IEX had dealings with ninety-four.)
ten included the
a
bunch of even smaller
added.
Morgan
“Why would
made bad
outfits.
Stanley, J.P.
“Three
are meaningful,” he
Morgan, and Goldman Sachs.
any broker behave well?”
“The long-term
will quickly
The
Royal Bank of Canada, Sanford Bernstein, and
benefit
become
clear
that when the
who made good
is
decisions,” said Brad.
shit hits the fan,
decisions and
it
who
FLASH BOYS
232
He
wondered,
often,
what
rigged.
The
would look
it
The
the shit in question hit the fan:
like if
stock market at
icon of global capitalism was a fraud.
and when
bottom was
How
would
enterprising politicians and plaintiffs’ lawyers and state attorneys
The thought of it
general respond to that news?
give
him
that
all
the problem. At
Street banks
much
some
needed
“Is there a
he
level,
make
to
still
wanted
didn’t understand
to fix
why Wall
his task so difficult.
concern from you that the publicity will create
even more hostility?” asked another.
ing the world
actually didn’t
pleasure. Really, he just
who
He wanted
to
know
good brokers were would make
the
if tell-
the bad
ones worse.
“The bad brokers
“Some of these
what the
An
client
trage.
being bad,” said Brad.
wants them to do.”
wanted
investor
illustrated
can’t try harder at
brokers are doing everything they can not to do
how one
to return to the scribbled
“So what do these guys say when you show them
“Some of them
said Brad.
around
all
“
dark pools.’
jumbo
say,
‘You’re one
‘This shit happens.’
hundred percent
Some of them
We
that?
right,”’
One even said, ‘We used to sit
how to fuck up other people’s
say,
‘I
have no idea what you’re talk-
have heuristic data bullshit and other
to determine our routing.’
“That’s a technical
mumbo jumbo’?”
—
term
‘heuristic data bullshit
an investor asked.
But
it
had
as
it
also
mumbo
”
A few guys
Technology had collided with Wall Street
had been used,
ciency.
that
arbi-
the time talking about
ing about.
It
numbers
bank had enabled dark pool
particular
and other
laughed.
in a peculiar way.
should have been used, to increase
been used to introduce
of market inefficiency. This
inefficiencies that financial
new
inefficiency
effi-
a peculiar sort
was not
like the
markets can easily correct. After
a
AN ARMY OF ONE
233
big buyer enters the market and drives up the price of Brent
crude
jump
for
oil,
example,
it’s
good when
healthy and
good when
healthy and
price of crude oil
traders see the relationship
and the price of oil company
these stocks higher.
even healthy and good
It’s
high-frequency trader divines a necessary
between the share
when
it
speculators
and drive up the price of North Texas crude, too.
in
prices of
gets out of whack.
It
It’s
between the
stocks,
and drive
when some
clever
statistical relationship
Chevron and Exxon, and responds
was neither healthy nor good when
public stock exchanges introduced order types and speed advantages that high-frequency traders could use to exploit everyone
This sort of inefficiency didn’t vanish the
else.
spotted and acted upon.
It
was
like a
casino that pays off every time.
someone
said
something about
machine had any
slot
Some
large
It
broken
slot
moment
it
machine
in the
would keep paying
it;
but no one
who
interest in pointing out that
amount of what Wall
Street
it
was
off until
played the
was broken.
had done with tech-
nology had been done simply so that someone inside the financial
markets would
know something
The same system
alized debt obligations
stand
of
a
now
that the outside
no
investor could possibly truly under-
gave us stock market trades that occurred
penny
at
distinctive trait
—
Another
“It
seems
He
the
at its core:
is
why Brad
Katsuyama’s
his desire to explain things not so
would be understood but
so seditious.
at fractions
unsafe speeds using order types that no investor
could possibly truly understand. That
most
world did not.
once gave us subprime mortgage collater-
that
so that others
would understand
he
—was
attacked the newly automated financial system
money
it
made from
investor, silent
till
like there’s a first
the right way,” he said.
its
incomprehensibility.
that point,
mover
He was
now
risk for
right:
raised his hand.
someone
Even the banks
to
behave
that
were
FLASH BOYS
234
behaving
relatively well weren’t
Wall Street bank
that gave
customers’ orders
would
ing,
and in
its
profits.
bank and argue
others,
it
behaving
suffer a collapse in
Would any
its
down
the road, and
slide.
YOU COULD NEVER say
On
summon
top
it
bank
as a
good
the
all
the
place. That,
first
his biggest concern.
the nerve to go
for sure exactly
coherent entity.
first?
Then
read: December 19, 2013.
one of the big Wall Street banks, but
what was going on
was
it
They were
inside
mistake to think of
a
fractious,
and intensely
Most everyone might be thinking mainly about
political.
its
dark pool trad-
dark pool was worse than
had been maybe
investors,
big
big Wall Street bank have the ability to see a few
he clicked on a
a
its
The bad banks would pounce on
because
A
that well.
all
an honest shot to execute
shouldn’t be given the orders in the
Brad told the
years
that,
IEX
his
year-end bonus, but that didn’t mean there wasn’t one person
who
big
wasn’t,
and
it
was, in
some
incentives.
places, a dollar out
guys in the prop group
ers in the
who
—
person
why
if for
actually
everyone inside
a
one guy’s pocket
of another’s. For instance, the
traded against the firm’s customfeel a different
whose job
no other reason than
when you
that
A dollar in
dark pool would naturally
those customers than the guy
would
mean
certainly didn’t
bank shared the same
was to
it
that
it is
on
would
stuff
It
a
face. That’s
different floors
salespeople, often in entirely different buildings.
to please the regulators; all involved
them
harder to rip off
need to see him, face to
the banks kept the prop traders
concern for
sell
from the
wasn’t simply
prefer that there be
no conversation between the two groups. The customer guy was
better at his job
— and had
deniability
ous to whatever the prop guy was up
—
if
to.
he remained oblivi-
The
frantic stupidity
AN ARMY OF ONE
of Wall
Street’s stock
235
order routers and algorithms was simply
an extension into the computer of the willful ignorance of
its
salespeople.
Brad’s job, as he saw
was
it,
with
a really great
to
who were
succeeded and,
less
the
first
tell
start,
the salespeople
to them,
and go
war
to
wake
against the
no idea
if he
had
suspected he had not.
view from
the
Goldman was
inside
view from
Goldman
Sachs had
inside the other big
Wall
unlike the other banks; for instance,
thing the people he met
him of the
arm
In most cases, he had
it.
cluttered than the
Street banks.
was
doing
as a result,
Right from the
been
to
the stock market were about to
what was being done
people
— and
argument, which included the distinct pos-
sibility that investors in
up
argument between
to force the
the salespeople and the prop people
at
the other banks usually did
hostility all the other
banks
felt
toward IEX,
and of the nefariousness of the other banks’ dark pools. Goldman
was
aloof,
and didn’t appear to care what
its
competitors were
saying or thinking about IEX. In their stock market trading and
perhaps in other departments
some kind of transition.
trading,
Greg Tusar, had
frequency trading firm.
as well,
Goldman was undergoing
In February 2013,
left to
The two
work
its
head of electronic
for Getco, the big high-
partners then assigned to figure
out Goldman’s role in the global stock markets
and Brian Levine
They
—were
—Ron Morgan
not high-frequency trading types.
didn’t bear a great deal of responsibility for
whatever the
high-frequency trading types had done before they took over.
Morgan worked in
New York and was in charge of sales; Levine,
responsible for trading,
worked in London. Both were apparently
when they
stepped into their
this because, oddly,
Ron Morgan had
worried about what they had found
new
positions.
called him.
Brad knew
“He found
us
by talking
to clients about
what they
236
FLASH BOYS
A week after they first met, Morgan invited
wanted,” said Brad.
Brad back
“That
was
to
didn’t
meet with
Brad
answering
man
rival
Why
Sachs:
s
left,
tasked with
who
posed by the people
was Morgan Stanley growing
ran Gold-
so fast? Their
and Morgan did what everyone on Wall Street
they wanted to find out what was going on inside
bank:
They
was
some of its employees
invited
The Morgan
the firm
now
Stanley employees explained to
them
that
—30 percent
New York Stock Exchange — through what
Speedway was
called “Speedway.”
a service
Morgan
Stanley
provided to high-frequency traders. Morgan Stanley built
high-frequency trading infrastructure
exchanges, the
bank
s
fastest routes
— co-location
between them,
dark pool and so on
HFT
HFT
for,
a
various
road into
which couldn’t
own
systems.
Mor-
and commissions from, everything
guys did inside Morgan Stanley’s pipes. The Morgan
Stanley employees angling for jobs
Goldman
a straight
firms,
afford the up-front cost of building their
gan Stanley got credit
at
— and then turned around and
leased their facilities to the smaller
the
a
in for job inter-
trading 300 million shares a day
of the volume of the
the
he
market share was booming, while Goldman’s was stag-
when
views.
Morgan and Levine had been
a big question
nant. Levine
rival
After he
said.
had reached “the highest
of the firm.”
In taking over,
it
else,”
told that the ensuing discussion
levels
did
group of even more senior executives.
a
happen anywhere
executives that
at
Stanley $500 million a year, and that
the obvious question for
own Speedway?
Should
Goldman
Sachs told the
Speedway was now making Morgan
Goldman
we
it
was growing. This
Sachs:
Should
we
raised
create our
further embrace high-frequency
trading?
One
of Goldman’s
clients
handed Ronnie Morgan
a list
of
AN ARMY OF ONE
thirty-three big investors to
making
Morgan had spoken
know
if
Morgan had
but he confirmed for him-
to each of the thirty-three people
some obvious questions about Goldman
to
mar-
Sachs’s stock
Could Goldman ever be
as fast
or as smart as
more nimble high-frequency trading
firms?
Why,
ket businesses.
the
list,
At the same time, Morgan and Levine began
individually.
ask
this
237
he should speak before
This client didn’t
this decision.
spoken to people beyond
self that
whom
man
if
Gold-
only controlled 8 percent of all stock market orders, was
more than
able to trade
pool? Given
how
little
a third
of those orders in
of the flow
Goldman
own
its
it
dark
what was the
saw,
likelihood that the best price for an investor’s order
came from
How did Wall Street dark pools
with the exchanges? How stable
some other Goldman customer?
interact
was
with each other and
this increasingly
complex
financial market?
Was
it
good
a
thing that the U.S. stock market model had been exported to
other countries and other financial markets?
They
already
the questions
knew
still
or could guess most of the answers; for
hanging, the investors pointed them toward
an unusually forthright and knowledgeable guy they
knew and
who was starting a new stock exchange: Brad Katsuyama.
What struck Brad about his visit to Goldman Sachs was not
trusted
only that Levine and
Morgan were
willing to spend time with
him, but that they took the ideas from their conversations to
their superiors.
Levine seemed particularly concerned about the
stock market’s instability. “Unless there are
going to be
a massive crash,”
he
some changes,
said, “a flash crash
there’s
times ten.” In
conversation and in presentations, he impressed the point
Goldman’s top executives, and
also asked,
“Do you
really
upon
need
the only differentiator in the market to be speed? Because that’s
what
it
seems to be.”
It
wasn’t
all
that hard for the people
who
FLASH BOYS
238
ran
Goldman
why no one
upside in
“And
it
Sachs to see the source of the problem, or to see
inside the system cared to point
—
why no one
that’s
everyone’s got career
They
ahead.
out. “There’s
it
ever steps out on
And no one
risk.
is
no
said Levine.
it,”
thinking that
far
are looking at the next paycheck.”
A long string of myopic decisions had created new risks in the
U.S. stock market.
some future
complexity was just one manifestation of
Its
the problem, but in
calamity.
Goldman
the
it,
The
And
anomalies but symptoms.
But
it
old guys.
Street banks,
Goldman earned $7
equity business; that business
was more than
respectively,
would be put
that.
and
at risk
Morgan had been made
historical
a choice, at
moment. An
from
by any
its
crisis.
At forty-eight and forty-three,
Morgan and Levine were, by Wall
them with
Ron
specifically
billion a year
a
Goldman
Street standards,
partner back in
2004, Levine in 2006. Both confided to friends that
sented
sure, lay
would end up being
thought,
blamed generally on the big Wall
Sachs.
felt
market calamity,
a stock
Morgan and Brian Levine both
on Goldman
partners both
sensational technical glitches weren’t
what might be
investor
IEX
pre-
a pivotal financial
who knew Ron Morgan
said,
“Ronnie’s saying to himself, ‘You work for twenty-five years in
the business,
how
often do you have a chance to
ence?’ ” Brian Levine himself said, “I think
sion.
have.
I
also think
And
have to
I
it’s
a
moral decision.
think Brad
fix the
is
I
it’s
It’s
a differ-
the shot
we
the best odds
we
think this
the right guy.
make
a business deciis
problem.”
BEFORE THEY OPENED their market, on October 25, 2013, the
thirty-two employees of
many
IEX made
shares they’d trade their
first
private guesses as to
day and in their
first
how
week.
AN ARMY OF ONE
The median of the
estimates
came
day and 2.5 million shares the
new
in at 159,500 shares the
first
first
week. The lowest estimate
the only one of
came from Matt Trudeau,
built a
239
them who had ever
stock market from scratch: 2,500 shares for the
Of the
day and 100,000 for the week.
first
ninety-four stock broker-
age firms in various stages of agreeing to connect to IEX, most
of them small
outfits,
only about fifteen were ready on the
first
day. “Brokers are telling their clients they’re connected, but
haven’t even gotten their paperwork,” said Brad.
how
big the exchange might be
at
the end of the
guessed, or perhaps hoped, that
it
would
trade
When
first
we
asked
year,
Brad
between 40 and
50 million shares a day.
To cover
their
running
costs,
they needed to trade about 50
million shares a day. If they failed to cover their running costs,
was
there
Don
said
we
a
how
question of
long they could
we
Bollerman. “Either
are a complete flop.
twelve months
I
We’re done in
know whether
I
last. “It’s
six to
need
twelve months. In
to look for a job.”
thought that their bid to create an example of
market
— and maybe change Wall
longer and prove messier.
more
like
He
binary,”
are a resounding success or
Street’s culture
expected their
Brad
a fair financial
— could
first
take
year to feel
nineteenth-century trench warfare than a twenty-
first-century drone strike. “We’re just collecting data,” he said.
“You cannot make
unless
you have
without data.
a case
trades.”
And you
Even Brad agreed:
“It’s
don’t have data
over
when we
run out of money.”
On
the
first
day, they traded 568,524 shares.
ume came from
that
had no dark pools
ford Bernstein. Their
shares.
Most of the
vol-
regional brokerage firms and Wall Street brokers
Each week
—
first
the
Royal Bank of Canada and San-
week, they traded
after that, they
grew
a bit over 12 million
slightly, until, in the third
FLASH BOYS
240
week of December,
each week.
By
shares.
orders
ing
they were trading roughly 50 million shares
On Wednesday, December
then
Goldman
they traded 11,827,232
its
were arriving on the new exchange in the same untrust-
spirit as
those from the other big Wall Street banks: in tiny lot
sizes, resting for just a
The
man
18,
Sachs had connected to IEX, but
to
few milliseconds, then leaving.
different-looking stock market order sent by Gold-
first
IEX
landed on December
19,
2013,
at
3:09:42 p.m. 662
milliseconds, 361 microseconds, and 406 nanoseconds.
Anyone
who had been in IEX’s one-room office when it arrived would
have known that something unusual was happening. The computer screens jitterbugged as the information flowed into the
market in an entirely new way.
from
Perkov were on their
“Were
at fifteen
One by
one, the employees arose
few minutes into the surge,
their chairs; a
feet.
Then they began
million!”
someone
all
but Zoran
to shout.
yelled, ten
minutes into
the surge. In the previous 331 minutes they had traded roughly
5 million shares.
“Twenty million!”
“Fucking Goldman Sachs!”
“Thirty million!”
The enthusiasm was
if
an
oil
unpracticed, almost unnatural.
It
was
as
well had gushed up through the floor during a meeting
of the chess club.
“We just
the
passed
AMEX,”
shouted John Schwall, referring to
American Stock Exchange. “We’re ahead of AMEX
in
mar-
ket share.”
“And we gave them
start,” said
a
one-hundred-and-twenty-year head
Ronan, playing
one had given Ronan
Schwall that
it
had
a
a little loose
$300
bottle of
with
history.
Some-
Champagne. He’d
told
cost only forty bucks, because Schwall didn’t
AN ARMY OF ONE
want anyone
inside
IEX
accepting
from anyone outside of
from under
else
of more than forty bucks
fished the contraband
and found some paper cups.
his desk
Someone
gifts
Now Ronan
it.
241
down
put
a
phone and
“That was J.R
said,
Morgan, asking, ‘What just happened?’ They
say they
may have
do something.”
to
Don put down his phone. “That was Goldman. They say they
aren’t
even
They’re coming big tomorrow.”
big.
“Forty million!”
At
desk Zoran
his
sat
anyone, but we’re
tell
calmly, watching traffic patterns. “Don’t
still
Fifty-one minutes after
first
honest shot
bored,” he said. “This
Goldman
is
nothing.”
Sachs had given them their
Wall Street customers’ stock market orders,
at
the U.S. stock market closed. Brad walked off the floor and into
a
small office, enclosed by glass.
just
“We
happened.
right,’ ”
He
thought through what had
needed one person
to
buy
in
and
‘You’re
say,
Goldman
Sachs agrees with us.”
Then he thought some more. Goldman
Sachs wasn’t a single
entity;
he
said. “It
was
it
each other.
means
bunch of people who
a
Two
it
Now
is
all
Ronnie,”
it.
Goldman
needed
“This
said Brad.
They
is
These
of.
is
Brian
because of them.
can’t marginalize
it.”
a
glimpse of the future
—he
felt
certain
Sachs was insisting that the U.S. stock market
to change,
Goldman
this
Sachs was capable
blinked. “I could fucking cry now,” he said.
He’d just been given
of
Goldman
the difference. “I got lucky Brian
the others can’t ignore this.
Then he
new authority,
to take a different, longer-term approach
than anyone imagined
two people made
with
didn’t always agree
of these people had been given a
and they had used
and Ronnie
that
and that IEX was the place to change
it.
If
Sachs was willing to acknowledge to investors that
new market was
the best chance for fairness and stability,
FLASH BOYS
242
the other banks
would be pressured
and the harder
it
to follow.
The more
IEX, the better the experience
that flowed onto
would be
market. At that moment,
the stock market
for the
banks to evade
like a river that
wanted
banks. All that had been needed was for one
to dig a trench in
this
new,
fair
Goldman’s orders flowed onto IEX,
as
felt a bit
orders
for investors,
man
jump
to
with
its
a shovel
an existing levee, and the pressure from the
water would finish the job
—which was why men caught
dig-
ging into the banks on certain stretches of the Mississippi River
were once shot on
Brad Katsuyama was the
sight.
shovel, positioned at the river’s
had
arrived,
the
with explosives, to help him.
Three weeks
if
man with
most vulnerable bend. Goldman
later,
he stood before
a
group of investors who,
they acted together, might force change upon Wall Street.
To show them
that
change was
on
possible, he flashed
a big
screen the data from what had happened, for fifty-one minutes,
on December
19.
The
data showed,
power of trust. Goldman had
the day before,
December
on December
19 because,
Goldman had
on
entrusted
among
actually sent
18.
other things, the
more
92 percent of those orders traded
price
Wall
— compared
Street’s
was even
IEX
that day, for just fifty-one minutes,
them with most of
its
seconds or more. That trust had been rewarded:
fair;
orders to
So much more had traded on
at
orders for ten
The market
felt
— the
fan-
the midpoint
to 17 percent that traded at the
midpoint in
dark pools. (The number on the public exchanges
lower.) Their average trade size
was twice the market
average, despite the efforts of other Wall Street banks to under-
mine them.
IEX
represented a choice.
IEX
also
made
a point: that this
market which had become intentionally and overly complicated
might be understood. That,
to function properly, a free finan-
AN ARMY OF ONE
cial
need in some
flow,
sick
way
the kickbacks, and
and co-location, and
all sorts
to a small handful of traders. All
the
room and
other investors like
understanding
of the market
When
it
243
market didn’t need to be rigged in someone’s
it,
is
and then
investors
it
payment
It
didn’t
for order
of unfair advantages handed
needed was
them
to seize
favor.
its
for the
men
in
to take responsibility for
controls.
coming together
“The backbone
to trade,” said Brad.
he was finished, an investor raised his hand. “They did
on December nineteenth,” he
asked.
“And then what?”
CHAPTER EIGHT
THE SPIDER AND THE FLY
he
T
trial
of Sergey Aleynikov ran for ten days in
ber of 2010 and was notable for
outsiders.
the people
who
its
High-frequency trading was
did
it,
knew anything
or
Decem-
paucity of informed
a small
at all
world, and
about
it,
appar-
ently had far less interest in testifying at trials than in
ing their personal fortunes.
the subject called by the
of finance
min Van
at Illinois
Vliet.
journalists’
Van
need
The one
government was an
Institute
Vliet had
for one.
mak-
outside expert witness on
assistant professor
of Technology named Benja-
become an expert
While teaching
a
in response to
computer coding
course, he’d cast around for something sexy for the students
to
program, and landed on high-frequency trading platforms.
In mid-2010, Forbes magazine called
ask
him what he thought about
him
out of the blue to
a fiber-optic cable that
Networks had strung from Chicago
to
New Jersey.
Spread
Van
Vliet
had never heard of Spread Networks, and knew nothing about
the cable, but
course, led to
wound up with
more
calls
his
name
in print
—which,
from journalists, who needed
a
of
high-
THE SPIDER AND THE FLY
Then came
frequency trading expert.
Vliet’s
phone rang
of a former
Van
Vliet
Van
off the hook. Eventually, federal prosecutors
found him and asked him
trial
245
the flash crash, and
to serve as their expert witness in the
Goldman
Sachs high-frequency programmer.
had never actually done any high-frequency
still
trading himself, and had
little
to
add on the value or the
what Serge Aleynikov had taken from Goldman
Sachs.
gist
of
About
the market itself he was badly misinformed. (He described
Goldman
trading.)
Sachs
He
“the
as
New York Yankees”
turned out to have
testified as
of high-frequency
an expert witness
in an earlier trial involving the theft of high-frequency trading
which the judge
code, after
in the case said that the idea that a
high-frequency trading program was some kind of science was
“utter baloney.”
The jury
in Sergey Aleynikov’s trial consisted
school graduates;
all
mainly of high
of the jurors lacked experience program-
ming computers. “They would bring my computer
into the court-
room,” recalled Serge incredulously. “They would pull out the
hard drive and show
it
to the jury.
As evidence!” Save
Malyshev, Serge’s onetime employer, the people
stand had
how
able,
that
the
no credible knowledge of high-frequency
money
and so on. Malyshev
testified as a witness for the prosecution
— Goldman’s code was written
programming language,
been designed
for a firm that
it
was slow and clunky,
was trading with
its
own
it
in a
had
custom-
and Teza, Malyshev’s firm, didn’t have customers, and so
—but when he looked
to be sleeping. “If
said Serge, “it
I
trading:
Goldman’s code was of no use whatsoever in the system
different
on
Misha
took the
got made, what sort of computer code was valu-
he’d hired Serge to build
ers,
for
who
did what
I
I
over, he
were
a juror,
would be very
did.”
saw that half the jury appeared
and
I
difficult for
wasn’t a programmer,”
me
to understand
why
FLASH BOYS
246
Goldman
standing even
more
behaved more
of the
was
Sachs’s role in the trial
like
to
salesmen for the prosecution than citizens
not that they lied,” said Serge. “But they told
state. “It’s
things that were not in their expertise.”
Adam
thing
Schlesinger,
at
make genuine under-
employees, on the witness stand,
difficult. Its
Goldman was
was talking about
When
his
was asked about the code, he
former boss,
said that every-
proprietary. “I wouldn’t say he lied, but he
stuff that
he did not understand, and so he was
misunderstood,” said Serge.
Our system of justice is a poor tool for digging out a rich
What was really needed, it seemed to me, was for Serge
truth.
Aleynikov to be forced to explain what he had done, and why,
to people able to understand the explanation
Goldman
the
Sachs had never asked
him
at all
ing business.
actually
it.
and
knew
about computers or the high-frequency trad-
And
so over
Wall Street restaurant,
I
two
nights, in a private
convened
serve as both jury and prosecution,
intimately familiar with
ing,
who
FBI had not sought help from anyone
anything
and judge
to explain himself,
Goldman
I
a
room of
kind of second
trial.
a
To
invited half a dozen people
Sachs, high-frequency trad-
and computer programming. All were authorities on our
abstruse
new
stock market; several had written high-frequency
code; one had actually developed software for Goldman’s high-
frequency traders. All were men. They’d grown up in four
ferent countries
between them, but
all
now
lived in the
States. All
of them worked on Wall Street, and
themselves
freely,
so, to
they needed to remain anonymous.
dif-
United
express
Among
them were employees of IEX.
All
were naturally
Serge Aleynikov.
skeptical
— of both
They assumed
to eight years in jail
Goldman
that if Serge
Sachs and
had been sentenced
he must have done something wrong. They
THE SPIDER AND THE
FLY
what
just hadn’t bothered to figure out
247
that was. All of
them
had followed the case in the newspapers and noted the shiver
had sent through the spines of Wall
Until Serge was sent to
for
jail for
doing
it, it
it
software developers.
was
common
practice
Wall Street programmers to take code they had worked on
when
they
left
for
new jobs. “A guy
something no one understood,”
it.
Street’s
as
got put in
jail for
taking
new jurors
one of Serge’s
put
“Every tech programmer out there got the message: Take
code and you could go to jail.
Aleynikov had
It
was huge.” The
arrest
of people, for the
also caused a lot
of Serge
time, to
first
new
who in 2009 had worked for a big Wall Street bank, said,
“When he was arrested, we had a meeting for all the electronic
begin to use the phrase “high-frequency trading.” Another
juror,
trading personnel, to talk about a one-pager they’d drafted to be
new
discussed with their clients around this
frequency trading.’
The
was one of those old-school Wall Street places
restaurant
you
that charge
more or
less
a
thousand bucks for
a private
crab, steaks the size
cooked decades ago,
now
who
who
out of business.
of food, like
a
It
was the
who
They
sort
of meal
spent their days trusting
it;
a collection
but this monstrous feast
of weedy technologists,
controlled the machines that
the markets, and
into the
for traders
being served to
the people
Food
of desktop computer screens, smok-
and their nights rewarding
their gut
to even.
in massive quantities: vast platters of lobster
ing mountains of potatoes and spinach.
was
room and then
way back
challenge you to eat your
and drink arrived
and
topic called ‘high-
”
now
controlled
had, in the bargain, put the old school
sat
around the
table staring at the piles
conquering army of eunuchs
harem of their enemy. At any
dent. Serge, for his part, ate so
little,
rate,
who had
they
stumbled
made
and with such
hardly a
disinterest,
FLASH BOYS
248
that
half expected
I
him
to
lift
and
off his chair
float
up
to the
ceiling.
new jurors
His
began, interestingly, by asking
They wanted
sonal questions.
was.
They took an
tory,
and noted that
a
geek
work
interest, for
—
know
work than
in the
established fairly quickly
was not
that he
of per-
was pretty consistently
interest in his
They
generated.
lots
example, in his job-market his-
his behavior
who had more
him
what kind of guy he
to figure out
that of
money
—how,
just smart but seriously gifted.
“These
guys are usually smart in one small area,” one of them
explained to me. “For
many
in so
areas
is
is
to say
had “super-user
he was one of
ees)
who
cheap
could log onto the system
USB
plug
it
They
handful of people
a
an administrator. Such
as
would have enabled him,
flash drive,
Sachs.
status” inside
more than 31,000 employ-
(roughly 35, in a firm that then had
privileged access
Goldman
to probe his career at
to learn that he
Goldman, which
later
technologist to be so totally dominant
just really, really unusual.”
They then began
were surprised
a
the
do not
I
at
any time, to buy
into his terminal, and take
all
a
of
Goldman’s computer code without anyone having any idea that
he had done
it.
That
fact alone didn’t
one pointed out to Serge
careless; just
was not
manner
in
of thieves are sloppy and
because he was sloppy and careless didn’t
a thief.
anything the
prove anything to them. As
directly, lots
On the
other hand, they
least bit suspicious,
much
mean he
all
agreed, there wasn’t
less
nefarious, about the
which he had taken what he had
taken.
Using
a
sub-
version repository to store code and deleting one’s bash history
were
common
practices.
The
latter
made
a great deal
you typed your passwords into command
had not behaved
new jurors
like a
man
of sense
lines. In short,
trying to cover his tracks.
One
if
Serge
of his
stated the obvious: “If deleting the bash history
was
THE SPIDER AND THE FLY
why had Goldman
and devious,
so clever
249
ever found out he’d
taken anything?”
To
these
—
vincing
he might
within
new jurors,
that Serge
of sense. As
a lot
Goldman
uncon-
hadn’t permitted
debugged or improved code back
to release his
so
because he thought
files
open source code contained
later like to parse the
—made
FBI found
the story that the
had taken the
him
to the public
even though the original free license often stated that improve-
ments must be publicly shared
hands on these
also taken
was
files
some code
same
to be in the
one. Grabbing a
—
the only
to take the
that wasn’t
files as
bunch of files
efficient
if the
the only code that interested him.
him
to
code he wanted,
as
it
was scattered
them
open source code, because
have been of
for
him
to col-
open source code was
would have made
that
later.
specifically for
little
all
over cyberspace.
that Serge’s interest
code that might be repurposed
code was written
It
both open source
way
far less
hunt around the Internet for the open source
also entirely plausible to
to the
to get his
open source, which happened
that contained
open source code, even
sense for
him
for
code. That he had
open source code, surprised no
the
and non-open source code was an
lect the
way
Goldman
was
was the general-purpose
The Goldman
proprietary
Goldman’s platform;
new
use in any
It
was confined
it
would
system he wished to build.
(The two small pieces of code Serge had sent into Teza’s computers before his arrest both
“Even
been
if he
faster
self,” said
came with open source
had taken Goldman’s whole platform,
and better
for
him
to write the
new
it
licenses.)
would have
platform him-
one juror.
Several times Serge surprised the jurors with his answers.
They were
first
all
arrived at
shocked, for instance, that from the day Serge
Goldman, he had been
able to send
Goldman’s
FLASH BOYS
250
source code to himself weekly, without anyone
ing
a
word
into your
him about
to
work
it.
“At Citadel,
someone
station,
is
at
Goldman
if you stick a
USB
say-
drive
standing next to you within
minutes, asking you what the hell you are doing,” said
five
juror
who had worked
Most were
there.
how
surprised by
a
little
Serge had taken in relation to the whole: eight megabytes, in a
platform that consisted of nearly fifteen hundred megabytes of
code.
The most
what he had
cynical
“Did you take the
strats?”
high-frequency trading
“No,”
accused
“But
among them were
surprised mostly by
not taken.
That was one thing the prosecutors hadn’t
said Serge.
him
asked one, referring to Goldman’s
strategies.
of.
the secret sauce, if there
that’s
one,” said the juror. “If
is
you’re going to take something, take the strats.”
“I wasn’t interested in the strats,” said Serge.
“But
that’s like stealing the
jewelry box without the jewels,”
said another juror.
“You had super-user
have taken the
“To me,
strats,” said
strats.
the technology really
interested in
how
of dollars?” asked someone
“Not
“You could
easily
is
more
interesting than the
Serge.
“You weren’t
lions
status!” said the first.
Why didn’t you?”
they
made hundreds of mil-
else.
really,” said Serge. “It’s all
one big gamble, one way or
another.”
Because they had seen
it
before in other
programmer
types,
they were not totally shocked by his indifference to Goldman’s
trading, or
by
Talking to
a
how
far
Goldman had
kept
programmer type about
bit like talking to the
house plumber
him from
the action.
the trading business
at
work
in the
was
a
basement
THE SPIDER AND THE FLY
game
knew
so little
251
upstairs.
“He
about the business context,” one of the jurors
said,
about the card
after attending
don was running
the Mafia
both dinners. “You’d have to try to
as
he did.” Another
said,
“He knew
to
know about how
they
made money, which was
ing.
He
wasn’t there for very long.
And he spent all of his
as
much
as
He came
know
as little
they wanted
him
virtually noth-
in with
no context.
time troubleshooting.” Another said he had
found Serge to be the epitome of the programmer whose value
the big Wall Street banks tried to
without
resumes from the banks,” he
and say maybe
one guy
is
minimize
—by using
their skills
admitting them into the business. “You see two
fully
said.
“You
them up on paper
line
between them. But
there’s a ten percent difference
getting paid three hundred grand and the other
The
ting one point five million.
difference
is
get-
one guy has been
is
given the big picture, and the other hasn’t.” Serge had never been
shown
if
it
the big picture.
wasn’t to Serge
With
Still, it
was obvious
—why Goldman had
the introduction of
Reg
NMS
financial intermediary’s trading system
attribute: the
speed with which
speed with which
it
it
to the jurors
— even
him when
hired
it
had.
in 2007, the speed of any
became
its
most important
took in market data and the
responded to that
data.
“Whether he knew
it
or not,” said one juror, “he was hired to build Goldman’s view of
the market.
At
least
nature of
No Reg NMS,
some
Goldman
big role,” said a juror
writing code. “The
his eyes
lit
up.”
remained oblivious
Sachs’s trading business, all
noticed, was that his heart
a
no Serge in finance.”
part of the reason he
was elsewhere.
who
moment he
shit
something about the guy.”
think passion plays
himself had spent his entire career
started talking about coding,
Another added, “The
work on open source
“I
to the
of the jurors
fact that
even while he was
he kept trying to
at
Goldman
says
FLASH BOYS
252
They
didn’t
either to
him
in creating a
“I
agree that what Serge had taken had no value,
all
Goldman. But what value
or to
new
system would have been
can guarantee you
this:
some other system,” one
For
my
part,
He
might have had
and
indirect.
did not steal code to use
on
it
and none of the others disagreed.
said,
didn’t fully understand
I
it
trivial
why some
parts of
Gold-
man’s system might not be useful in some other system. “Goldman’s code base
it still
buying
like
is
jurors explained.
“And you
a really old house,”
new
to build a
on new
house,
land.
be used;
that they couldn’t
involved in making
way
Why
it
useful
from
easier to start
even stronger
the
at
it
create
when
is
it’s
that the
was
to
Goldman
—
that the
be written in
my new
third added,
—
new
Goldman grew
Serge failed to
later, as
computer language than
a different
question, at least to me,
A full month
was
after he’d left
why
it
was next
to useless outside
his jurors didn’t find this
If the
it
Sachs, he
code was so
up and study
A
A
riding a bike to school, and Person
better off at the expense of Person B.
view of theft.
—why
take
One
it?
put
it
bike from Person B, then Person
way: “If Person
steals a
Goldman
hard to understand.
this
people’s
Serge had
Goldman
of it was either so clunky or so peculiar to Goldman’s
system that
is
men-
system Serge planned to
unimportant to him that he didn’t bother to open
Oddly,
“It’s
Their conviction that Gold-
had not touched the code he had taken.
if most
house?
code.
The perplexing
it;
But
amount of trouble
A
ridiculous.”
scratch.”
they learned
the dinners
taken anything.
still
up.
would you take one-
man’s code was not terribly useful outside of
tion
it
has the problems of a really old house. Teza was going
hundred-year-old copper pipes and put them in
It isn’t
one of the
take the trouble to soup
B
is
That
walking. Person
is
clear-cut,
A
is
and most
THE SPIDER AND THE FLY
“In Serge’s case, think of being
and you carry
a spiral
it’s
all
down
written
people do.
The
You may never look
at
related to
there are
draw on. But
your prior job, and you will
start a
your new job which will make the old one
For programmers, their code
is
relevance to what they will build next.
To
had very
that
little
some
.
.
irrelevant.
.
—but
He
it
had done.
[It
has very
took
.
.
.
enables
a spiral
little
note-
relevance outside of Goldman Sachs.”
had done what he had done.
it
new
ideas,
notebook
that
the well-informed jury, the real mystery wasn’t
done what
most
new notebook
their spiral notebook.
them] to remember what they worked on
book
leave
as
relevance to your
little
Maybe
again.
it
or templates, or thoughts you can
at
You
—
contents of your notebook relate to your history
company but have very
the prior
job.
is
ideas, products, sales, cli-
in that notebook.
your new job and take the notebook with you
for
at
—
for three years,
notebook and write everything down.
Everything about your meetings, your
ent meetings
253
company
at a
It
why
Serge
was why Goldman Sachs had
Why on earth call the FBI? Why exploit
the ignorance of both the general public and the legal system
about complex financial matters to punish
Why
must the spider always
The
financial insiders
was an accident;
that
guy?
little
FBI
this: that it
in the business.
The
of the legal process; that
hair-trigger alert to personnel
how
and thought they could
it,
jurors
all
had ideas about
what had happened had happened. One of the
intriguing than the others.
It
and
in haste
high-frequency trading, because they could see
much money would be made from
compete
called the
lost control
2009 Goldman had been on
losses in
one
had many theories about
Goldman had
then realized the truth, but
in
this
eat the fly?
theories
why
was more
had to do with the nature of a big
Wall Street bank, and the way people
who worked
for
it,
at
the
FLASH BOYS
254
intersection of technology and trading, got ahead.
put
As one juror
“Every manager of a Wall Street tech group
it,
have
likes to
people believe that his guys are geniuses. Russians, whatever.
His whole persona
do
among
percent of their code
What
guy
the
thing,
what
they’ll create
come
to
big
him and
And
deal.’
To put
it
Aleynikov
on
tell
when he
say,
another way:
it
‘I
is
don’t
The
it’s
fire
know what
about
it
facilities that
may
housed dan-
have started with
his bonus.
alarm before they smell the
who had advanced this last theory.
who are politically motivated.” As he
some more. “I’m
‘No
”
process that ended with Serge
with Serge Aleynikov and walked
me
say,
he took.’
asked the juror
the people
some-
worse than
So when the security people
two holding
going to pull the
team
perception.
kills that
some Goldman Sachs manager with
the concern of
his
the downloads, he can’t
gerous offenders and then a federal prison
“Who
what he and
gets told Serge has taken
their own.’
sitting inside
that
what he took because
him about
he can’t
is
people find out that ninety-five
open source,
is
can’t say,
doesn’t matter
is ‘it
his peers
When
be replicated.
can’t
down Wall
Street,
fire?”
“It’s
always
left
dinner
he thought
actually nauseous,” he said. “It
makes
sick.”
THE MYSTERY THE jury of Sergey Aleynikov’s peers had more trouble solving
was Serge himself.
was, completely
people
at
those
at
two Wall
public to vote for the
home,
appeared, and perhaps even
Street dinners
last.
and
Had you
lined
up the
and asked the American
man who had just
his job, his life savings,
have come dead
He
peace with the world.
lost his
his reputation,
marriage, his
Serge would
At one point, one of the people
at
the table
stopped the conversation about computer code and asked,
“Why
THE SPIDER AND THE FLY
you angry?” Serge
aren’t
said the juror.
“How
do you
said.
“What
Your
life
255
him. “No,
I’d
happened
are in trouble
go in
to
know
and
this
that
as a
that particular route. If
But
it.
is
how
at
it’s
the
person?
my
strengthened
At the end of his
you know
same time you know
going to be.” To which he
understanding of what living
trial,
when
said,
But
I
“You know,
have to
say,
it
it
was
is all
think
I
about.”
the original jury returned with
way we had hoped.
did not turn out the
a pretty
good experience.”
were standing outside himself and taking in the
observer. “I’ve never seen anything like
it,”
said
It
was
as if he
situation as an
Marino.
In the comfort of the Wall Street cornucopia, that notion
—
the hellish experience he’d been through had actually been
him
for
—was too weird
to pursue,
its
Kevin Marino,
guilty verdict, Serge had turned to his lawyer,
and
It
something happened.
added, “To some extent I’m glad this happened to me.
it
really,”
be fucking going
does negative demeanor give you
that you’re innocent,
you
calm?
stay so
you anything. You know
doesn’t give
at
“But what does craziness give you?”
crazy.” Serge smiled again.
he
back
just smiled
that
good
and the jurors had quickly
returned to discussing computer code and high-frequency trading.
But Serge actually believed what he had
life
Before his
said.
—before he much of what he thought important
—he went through days and
arrest
lost
mind:
a bit
self-absorbed, prone to anxiety
status in the world.
said.
“When
I
saw
the fear of losing
panic.
Or have
the time he
their three
one
“When
I
was
articles in the
my
reputation.
arrested,
and worry about
I
newspaper,
Now
I
first
I
would tremble
just smile.
sent to jail, his wife
young daughters with
“He
her.
his
couldn’t sleep,” he
1
had
left
at
no longer
panic ideas that something could go wrong.”
was
to turn to.
in his
nights in a certain state of
his
By
him, taking
He had no money and no
didn’t have very close friends,” his fellow
FLASH BOYS
256
Russian emigre Masha Leder recalled.
He
people person.
ney.”
Out of a
took the job
didn’t
jail,
I
would
“Every time
I
things, frequent trips
would come
by him,” she
leave energized
much energy and
so
did. He’s not a
sense of Russian solidarity, and out of pity, she
—which meant, among other
to visit Serge in prison.
in
“He never
even have anyone to be power of attor-
positive emotions that
said.
it
was
him
to visit
“He
radiated
like therapy
me to visit him. His eyes opened to how the world really is.
And he started talking to people. For the first time! He would
say: People in jail have the best stories. He could have considered
himself a tragedy. And he didn’t.”
for
By
most
far the
of his experience was explain-
difficult part
When
ing what had happened to his children.
his daughters
it
in the
were
“But the bottom
line
month on
the
was
jail
phone
was apologizing
I
violent,
and
for a long
and enjoy talking
minimum-security prison
he
in a
really
and
He
to.
at
first
four
months
he didn’t find
When
moved him
they
Fort Dix, in
He remained
space to work.
bad times there,”
He was
fine,
said
New Jersey,
down one
though, and
in
eat meat.
some
it
hard
to the
he was
him
lived
on beans
these yogurts and
after another.”
a lifetime
but
physical dis-
“His body, he had
Masha Leder. “He
always hungry. I’d buy
he would gulp them
worked
spent his
even found people he could
mainly because he refused to
rice.
when he
room crammed with hundreds of other roommates,
now had
tress,
for the fact that this
time the kids,
essentially nonverbal, but
to stay out of trouble there.
still
put
said Serge.
up on the other end.
The holding facility in which Serge
talk to,
“I tried to
he was allowed three hundred minutes
— and
called them, didn’t pick
was
he was arrested,
and almost one.
most simple terms they would understand,”
had happened.” In
a
five, three,
His mind
still
of programming in cube
THE SPIDER AND THE FLY
farms had
A
him with
left
few months into Serge’s
from him.
thick envelope
257
the ability to focus in prison conditions.
It
jail
Masha Leder received
term,
contained roughly
a
covered on both sides in Serge’s meticulous eight-point
was computer code
—
a solution to
problem. Serge feared that
wouldn’t understand
fiscate
it,
if
a
hundred pages
script. It
some high-frequency trading
the prison guards found
decide that
it
was
suspicious,
it,
they
and con-
it.
A year after he’d been sent away, the appeal of Serge Aleynikov
was
finally heard,
judgment was
had seen in
client
by the Second Circuit Court of Appeals. The
anything his lawyer, Kevin Marino,
swift, unlike
his career.
who was
Marino was by then working
dead broke. The very day he made
the judges ordered Serge released,
gratis for a
his
on the grounds
argument,
that the laws
he stood accused of breaking did not actually apply to his
At
six in the
morning on February
17,
case.
2012, Serge received an
email from Kevin Marino saying that he was to be freed.
A few months later,
Marino noticed
failed to return Serge’s passport.
it
back.
The
Once
but
this
picked
and asked
didn’t
bail, as
now
know
was arrested again and taken
might have something
I
got the
to
New Jersey
cops
to
for,
who
the charges, only that he should be
he was deemed
“When
for
stay-
had no idea what he was being arrested
time neither did the police. The
him up
just as perplexed.
it
New Jersey,
again, he
held without
government had
called
passport never arrived; instead Serge,
ing with friends in
jail.
that the
Marino
a flight risk.
call,” said
do with
His lawyer was
Marino,
“I
thought
Serge’s child support.”
It
A few days later, Manhattan district attorney Cyrus Vance
out a press release to announce that the State of New York
didn’t.
sent
was charging Serge Aleynikov with “accessing and duplicating
a
complex proprietary and highly confidential computer source
FLASH BOYS
258
code owned by Goldman Sachs.” The press release went on to
say that “ [t]his code
is
so highly confidential that
known
it is
the industry as the firm’s ‘secret sauce,’ ” and thanked
Sachs for
Joanne
its
cooperation.
immediately
re -jailed
The
prosecutor assigned to the case,
claimed that Serge was
Li,
in
Goldman
and needed
a flight risk
—which was
to
be
strange, because Serge
had
gone to and returned from Russia between the time of his
first
arrest
a
job
and
his first jailing.
(It
was
fled the
the phrase “secret sauce.”
from “the industry” but from
first trial,
were some
sense to him.
office
for the
his
case— to
for treating
Otherwise
“secret sauce.”
To
actions.
crimes meant
that,
Goldman’s
Serge’s re-arrest
to charge Serge
But the sentencing guidelines
even
come
Serge’s
avoid double jeopardy, the Manhattan
had found new crimes with which
same
hadn’t
It
opening statement in
when he mocked the prosecutors
as if it
made no
DA’s
who soon
at Citigroup.)
Marino recognized
code
Li
if
he was convicted,
he wouldn’t have to return to
jail.
it
new
for the
was very
likely
He’d already served time,
for
crimes the court ultimately determined he had not committed.
Marino
called Vance’s office.
“They
told
me
that they didn’t
need him to be punished anymore, but they need him to be held
accountable,” said Marino.
let
him go on time
sible that
served.
“They want him
I
told
them
they can go fuck themselves.
Oddly enough, they
to plead guilty
and
in the politest terms pos-
They ruined
hadn’t. “Inside of
me
I
his life.”
was completely
witnessing,” said Serge, about the night of his re-arrest. “There
was no
no panic, no
fear,
His children had reat-
negativity.”
new world of people
tached themselves to him, and he had a
to
whom he felt close. He thought he was living his life as well as it
had ever been
had happened
lived.
to
He’d even
anyone
started a
who might
memoir,
to explain
be interested.
He
what
began:
THE SPIDER AND THE FLY
changes you in
realize that
that
it
259
incarceration experience doesn’t break your
If the
your
a
way
that
on the
lose
many
fears.
it
You begin
to
not ruled by your ego and ambition and
life is
can end any day
that just like
you
spirit,
at
any time. So
why worry? You
street, there is life in prison,
people get there based on the jeopardy of the system.
ons are
by people
filled
who were
efit,
else’s
crossed the law, as well
The
as
pris-
by those
and circumstantially picked and crushed
incidentally
by somebody
who
learn
and random
agenda.
On
the other hand, as a vivid ben-
you become very much independent of material property
and learn
to appreciate
sunlight and
morning
very simple pleasures in
breeze.
life
such
as
the
EPILOGUE
RIDING THE
WALL STREET TRAIL
or
F
at least a
few members of the Women’s Adventure Club
of Centre County, Pennsylvania, the weather was never
much of an
issue.
The Women’s Adventure Club had been
created by Lisa Wandel, an administrator at
versity, after she realized that
alone in the woods.
members, and
a
its
The
club
now had more
sense of adventure had
State
Uni-
afraid to hike
than seven hundred
expanded
walk in the woods. Between them the four
me on
Penn
many women were
far
beyond
women who met
their bicycles beside the Pennsylvania road had: learned
the flying trapeze,
swum
the Chesapeake Bay, and
won
silver at
the downhill mountain biking world championships; they had
finished a road bike race called the
Metric,” a footrace called the
Gran Fondo “Masochistic
Tough Mudder, and
twenty-four-hour-long mountain bike
ated
from race
car driving school
races;
three separate
they had gradu-
and made thirteen Polar Bear
Plunges in some local river in the dead of winter. After studying
the
Women’s Adventure
Club’s website,
Ronan had
said, “It’s a
FLASH BOYS
262
women who
my wife into it.”
bunch of lunatic
got to get
In the bleak January light
meet up and do dangerous
we
shit;
pedaled onto Route 45 out of
Boalsburg, Pennsylvania, heading
east,
along what was once the
route for the stagecoach that ran from Philadelphia to Erie.
was nine in the morning, and
still
below
fields,
It
freezing, with a stiff
breeze lowering the windchill to eleven degrees.
were of farms and fallow brown
I
The views
and the road was empty
except for the occasional pickup truck, roaring past us with real
anger.
“They
turers mildly.
hate bikers,” explained one of the
“They
The women rode
noticed
when
in 2010.
try to see
how
women
adven-
close they can get.”
of road every so often, and had
this stretch
the fiber-optic line was being laid beside
From time
to time
it,
back
one of the road’s two lanes was
closed by the line’s construction crews. You’d see these motley
queues of bikes,
cars,
pickup trucks, Amish horse-drawn
and farm equipment waiting
traffic.
The crews trenched
and the farms, making
to get back to their
it
for the tail
the ground
between the paved road
difficult for the
homes
Amish
— sometimes you’d
kids, the girls in their pretty purple dresses,
wagon and
en’s
leaping over the trench.
that the fiber-optic line
was
a
in their
wagons
see these
Amish
hopping off the
The members of the
Adventure Club had been told by
carts,
end of the oncoming
a local
government
government project
Womofficial
to provide
high-speed Internet access to local colleges. Hearing that
it
was
actually a private project to provide a 3-millisecond edge to
high-frequency traders, they had some
new
“How
a public
does a private line get access to
asked one. “I’m really curious to
know
that.”
questions about
it.
right-of-way?”
RIDING THE WALL STREET TRAIL
WE’RE
IN
ple said
A
That’s
transition here.
when you
263
what the Goldman Sachs peo-
many
asked them, in so
words,
how
they
could have gone from bringing the wrath of U.S. prosecutors
down upon
Serge Aleynikov for emailing their high-frequency
trading computer code to himself, to helping Brad Katsuyama
change the U.S. stock market in ways that would render Goldman’s high-frequency trading computer code worthless.
There was
a
connection between Serge Aleynikov and
Goldman’s behavior on December
publicity that attended
it
caused a
rigorously about the value of
2013.
19,
The
and the
trial
of people to think more
lot
Goldman
Sachs’s high-frequency
trading code. High-frequency trading had a winner-take-all
aspect:
The
fastest
predator took
home
the fattest prey.
By 2013
the people charged with determining Goldman’s stock market
had concluded that Goldman wasn’t very good at this
new game, and that Goldman was unlikely ever to be very good
at it. The high-frequency traders would always be faster than
strategy
Goldman
who
ran
Sachs
— or any other
Goldman
big Wall Street bank.
Sachs’s stock
The people
market department had come to
understand that what Serge had taken wasn’t worth stealing
least
—
at
not by anyone whose chief need was speed.
The
trouble for any big Wall Street
bank wasn’t simply
that a
big bureaucracy was ill-suited to keeping pace with rapid technological change, but that the usual competitive advantages of a
big Wall Street bank were of
ing.
A
vast
amounts of cheap
survive the ups and
when
little
use in high-frequency trad-
big Wall Street bank’s biggest advantage was
risk capital and,
downs of a
with
risky business.
that,
its
its
access to
ability to
That meant
the business wasn’t risky and didn’t require
much
little
capital.
High-frequency traders went home every night with no position in the stock market.
They
traded in the market the
way
card
FLASH BOYS
264
counters in
a
They
casino played blackjack:
why
money on
when
played only
they had an edge. That’s
they were able to trade for five
years without losing
a single day.
A
big Wall Street bank really had only one advantage in an
ever-faster financial market:
market
trades.
So long
as
first
shot at
its
own customers’
pool, and in the dark, the
bank might
profit at their expense.
But even here the bank would never do the job
or thoroughly as a really
pressure to
good HFT.
hand the prey over
ensure that the
kill
stock
the customers remained inside the dark
to the
It
more
was done quickly and
after the kill, to join in the feast as a
as efficiently
was hard
to resist the
skilled predator, to
discreetly,
and then,
kind of junior partner
though more junior than partner. In the dark pool arbitrage IEX
had witnessed,
for instance,
the gains, leaving the
HFT
The new structure of the U.S.
Wall
Street
banks from their
At the same time
that the
it
captured about 85 percent of
bank with just 15
percent.
stock market had
removed the big
historic, lucrative role as intermediary.
created, for
any big bank, some unpleasant
risks:
customer would somehow figure out what was happening
to his stock
market orders.
how go wrong.
And
that the technology
might some-
If the markets collapsed, or if another flash crash
occurred, the high-frequency traders
would not
take 85 percent of
the blame, or bear 85 percent of the costs of the inevitable lawsuits.
The banks would
The
bear the
relationship of the big
traders,
lion’s
share of the blame and the costs.
Wall Street banks to the high-frequency
when you thought
about
it,
was
a bit like the relationship
of the entire society to the big Wall Street banks.
When
things
HFT guys took most of the gains; when things went
the HFT guys vanished and the banks took the losses.
went well, the
badly,
Goldman had
figured
all
of
this
out
—probably
other big Wall Street banks, to judge from
its
before the
treatment of IEX.
RIDING THE WALL STREET TRAIL
By December
Goldman
265
2013, the people newly installed on top of
19,
Ron Morgan
market operations,
Sachs’s stock
and
Brian Levine, wanted to change the way the market worked.
They were obviously
They
sincere.
economy had grown too
complex, and was likely to experience some catastrophic
But they
also
never win
lots
—
were trying
to put an
And
or control.
mar-
truly believed that the
ket at the heart of the world’s largest
end
to a
failure.
game they could
so they’d flipped a switch,
of their customers’ stock market orders to IEX.
and sent
When
they
did this they started a process that, if allowed to play out,
would
take billions from Wall Street and return
would
to investors.
it
It
also create fairness.
A
big Wall Street bank was a complex environment. There
were people
Goldman
inside
Levine and Morgan had done.
had retreated, just
suyama
it
to
Sachs
a little bit. It
know why. Was
it
after
Goldman
to ask
changing
its
for
collective
first
19 the firm
Brad Kat-
mind? Had
mover? Was
it
down the road? It was possible that even
know the answers to those questions.
Sachs did not
Whatever
the answers, something Brian Levine had said
made
of sense. “There will be a
a lot
“There will be
structure has
It’s
ysis
too
Sachs to look up from short-term profit
and study the landscape
Goldman
December
was hard even
underestimated the cost of being the
much
than pleased by what
less
And
a
lot
been
lot
of resistance,” he’d
still
said.
of resistance. Because a tremendous infra-
built
worth performing
up around
a
this.”
Goldman Sachs-like
cost-benefit anal-
of this infrastructure, from the point of view of the economy
it is
new
meant
to serve.
The
benefit: Stock
information a few milliseconds
might.
The
instability
costs
make
for a longer
market prices adjust to
faster
list.
introduced into the system
than they otherwise
One
when
obvious cost
its
is
the
primary goal
is
FLASH BOYS
266
no longer
stability
collected
by
but speed. Another
financial intermediaries.
is
the incalculable billions
That money
more
investment, paid for by the economy; and the
tive enterprise
there will be.
must pay
Another
money
all this
money
ple
to
on
harder to measure, was the influence
exerted, not just
what
to
on the
political process
do with
their lives.
but on
The more
be made gaming the financial markets, the more peo-
would decide they were put on
markets
a tax
for capital, the less productive enterprise
cost,
people’s decisions about
is
that produc-
— and
earth to
game
the financial
create romantic narratives to explain to themselves
why a life spent gaming the financial markets is a purposeful life.
And then there is maybe the greatest cost of all: Once very smart
people are paid huge sums of money to exploit the flaws in the
financial system, they have the spectacularly destructive incen-
screw the system up further, or to remain
tive to
watch
it
The
gling
cost, in the end,
it
silent as
they
being screwed up by others.
is
a
tangled-up financial system. Untan-
requires acts of commercial heroism
— and even
then
the fix
might not work. There was simply too much more easy
money
to
it
worked
be made by
well.
know how
elites if
The whole
to cure this,” as
whether the patient wants
the system
culture had to
Brad had put
to
worked badly than
want
it.
“It’s
for a rider to stop.
and the cornfields beside
signs.
killed
Apart from the
it
plastic
The
just a matter of
line, there
was no
road’s shoulder
was narrow,
No
Trespassing
were planted with
soda bottle and the carcasses of deer
by the speeding pickup trucks, and
landscape looked
if
“We
be treated.”
FOR A LONG stretch along the Spread Networks
happy place
to change.
a lot like it
a
shop or two, the
once did from the Philadelphia-
RIDING THE WALL STREET TRAIL
The most
Erie stagecoach.
267
of modernity were the
insistent signs
white poles with their bright orange domes, every few hundred
yards, installed three
we found
or so
and
an open
half years earlier. After ten miles
a
field
without
beside a white-and-orange pole.
distance in both directions.
follow
them
all
exchange, in
way
the
An
The
a sign
and pulled over
poles stretched into the
ambitious hiker or cyclist could
to a building beside the
New Jersey;
or, if
Nasdaq stock
he turned and headed west, to
the Chicago Mercantile Exchange.
Across the road was
One
of the
women
landmark: the
a local
Red Round
Barn.
repeated a rural legend, saying that the red
barn had been built in the round so that mice had no corners in
which
is
to hide. “People don’t
transparent,”
ably
no
know how
Brad Katsuyama had
better at
Beyond
it.
the barn
was
of the mountain was a microwave tower
fact,
line
It
world that
and mice were proba
—
mountain.
a string
On
top
of them, in
perched on the mountains above the valley in which the
was buried.
takes roughly 8 milliseconds to send a signal
cago to
New York
milliseconds
less
and back by microwave
than to send
Spread Networks was laying
was
to live in a
said,
that
it
its
from Chi-
signal, or
about 4.5
When
inside an optical fiber.
line, the
microwave could never replace
but whatever was going on between
conventional
fiber. It
New
wisdom
might be
faster,
York and Chicago
required huge amounts of complicated data to be sent back and
forth,
and
microwave
a
signal couldn’t transmit nearly as
data as a signal in a fiber-optic cable.
Microwave
signals
much
needed
of sight to get to wherever they were going, with
a direct line
nothing in between.
And microwave
signals didn’t travel well in
bad weather.
But what
if microwave
technology improved?
And what if the
FLASH BOYS
268
some high-frequency
data essential for
trader to gain an edge
over investors in the market wasn’t actually
And what
between
The
if the tops
of sight
taken by high-frequency traders were not the
risks
markets, buying from
buying
a
informed
purport to
and
sit
in the
middle of
They
selling to buyers.
didn’t
shares in a falling stock, or selling a
They were too
in a rising one.
skittish
and well
—with one obvious exception. They were
for that
exposed to the
a lot.
who
sellers
bunch of
bunch of shares
by
that complicated?
a direct line
distant financial markets?
usual risks taken by people
risk
all
of mountains afforded
A
big high-frequency trader might
in several thousand individual stocks in
purpose of these buy and
“make markets”
New
As the
Jersey.
orders was not to
sell
all
market would move,
risk that the entire stock
buy and
sell
stock but to tease out market information from others, the
orders
would
typically be tiny in each stock: 100 shares bid,
100 shares offered. There was
hit the market,
all
If,
say,
some piece of bad news
and the entire stock market
the individual stocks with
who
in any individual case
little risk
but great risk in the aggregate.
it.
Any
fell, it
would take
high-frequency traders
did not receive advance warning would be
owning
left
100 shares each of several thousand different stocks they did
not want to own, with big losses in each.
But the U.S. stock market had an accidental beauty
the point of view of a trader
who wished
had some edge. The big moves occurred
to
to trade only
first
it,
from
when he
in the futures
mar-
ket in Chicago, before sweeping into the markets for individual
stocks. If
you were
computers in
able to detect these moves,
New Jersey
and warn your
of price movements in Chicago, you
could simply withdraw your bids for individual stocks before
the market fully realized that
it
had
fallen. That’s
why
it
was so
RIDING THE WALL STREET TRAIL
important for high-frequency traders to
than everyone
else
stock markets in
269
move information faster
from the futures exchange in Chicago
New Jersey:
to the
market before others.
to flee the
This race was run not just against ordinary investors, or even
Wall Street banks, but
The
first
also against other
high-frequency
New Jersey
high-frequency trader to reach
news could
sell
traders.
with the
100 shares each in thousands of different stocks
to the others.
After some obligatory staring
jumped back on our
the road,
we
medal
a
tower on top of it. The
at
the downhill
pionships sighed. “I like going
said,
I
A
Barn,
we
few miles down
turned onto the road leading to the summit of a
mountain with
the silver
Red Round
at the
bikes and continued.
woman who had won
mountain biking world cham-
down more
than going up,” she
then took off at speed, leaving everyone
was watching the backs of female
could have been worse:
riders,
else
behind. Soon
climbing rapidly.
The Appalachians
It
are mercifully old
and worn. This particular mountain, once the
size
of
a
Swiss
Alp, had been shrunken by half a billion years of bad weather.
It
was
now
almost beneath the dignity of the Women’s Adven-
ture Club.
It
took maybe twenty minutes to puff to the top of the road,
where the
women
adventurers stood waiting.
From
there
we
turned onto a smaller road leading into the woods, headed in the
direction of the mountaintop.
a
few hundred yards
ricaded by a
new
We
rode through the woods for
until the road
metal gate. There
ended
we
—
or, rather,
was bar-
ditched our bikes, leapt
over the signs warning of various dangers, and hiked onto a gravel
path that continued to the mountaintop.
twice about any of this:
few minutes
later the
To them
it
The women
didn’t think
was just another adventure.
microwave tower came into view.
A
FLASH BOYS
270
women
climbed up one of these towers once,” one of the
“I
said a bit wistfully.
The tower was 180
with
electrical
was pregnant and
“I
with no ladder, and festooned
feet high,
equipment.
“Why
was
it
did you do that?”
I
asked.
of work,” she replied,
a lot
as if that
answered the question.
“And
other
that’s
why your baby had seven
women, and
one of the
If
they
all
women
hooted one of the
toes!”
laughed.
had hopped over the fence around the
tower and climbed to the top, she would have had an unobstructed
view of the next tower and, from
beyond. This was just one in
carried
to
a
tower
there, the
chain of thirty-eight towers that
news of the direction of the stock market from Chicago
New Jersey:
around the
up or down; buy or
sell;
The tower showed some
site.
in or out.
We
signs of age.
walked
could
It
have been erected some time ago, for some other purpose. But
the ancillary
hold
equipment— the
God knows what
—was
generator, a concrete
that amplify financial signals resembled kettle
puters
on
either
were
longer are responsible for
make
market, because computers
I
God
difficult to
still as
signals
comprehend
as the
once had been. Anything said about them could
be believed. People no
ning
The speed
and with which the com-
end of the chain of towers turned the
into financial actions,
forces of nature
signals,
to
repeaters
drums, bolted
onto the side of the tower: These were also new.
with which they transmitted
bunker
The
shiny and new.
all
all
the decisions.
what happens
And
in the
in the begin-
created the heaven and the earth.
noticed, before
around the tower.
we
On
left,
it
was
a
metal plate attached to the fence
a Federal
mission license number: 1215095.
Internet connection,
was enough
Communications
Com-
The number, along with an
to lead an inquisitive person to
RIDING THE WALL STREET TRAIL
the story behind the tower.
The
271
application to use the tower to
send a microwave signal had been filed in July 2012, and
been
filed
anymore.
wished
story,
to
by
A
.
.
.
well,
it isn’t
day’s journey in cyberspace
know
it
it
had
possible to keep any of this secret
would
lead anyone
who
into another incredible but true Wall Street
of hypocrisy and secrecy and the endless quest by
human
beings to gain a certain edge in an uncertain world. All that one
needed to discover the truth about the tower was the desire
know
it.
to
ACKNOWLEDGMENTS
he U.S. financial system has experienced
T
since
first
entered
any writer
to
inside of
them
I
it.
the late 1980s with
To judge only from
are
and one of them
more
greatly
—not
just the big
what some journalist might
their behavior, they
story told about them.
many changes
in
its
relationship
banks but
all
more concerned than they were
likely than they
in these firms have
is
attempts to figure out what’s going on
Wall Street firms
—have grown
They
who
it,
have
of
in
say about them.
a lot
more
to fear.
once were to seek to shape any
At the same time, the people
grown more
who work
cynical about them, and
more
willing to reveal their inner workings, so long as their
name
is
not attached to these revelations. As a result,
thank
many of the
ing firms and stock exchanges
and helped
Some
me
to
I
am
unable to
people inside banks and high-frequency trad-
who
spoke openly about them,
comprehend the seemingly incomprehensible.
other people not mentioned in this
book were impor-
ACKNOWLEDGMENTS
274
tant to
Weisberg read an early draft and had
creation. Jacob
its
shrewd things to say about
it.
At
different times
ways, Dacher Keltner, Tabitha Soren, and
me
to
drone on
at
length about what
I
and
in different
Doug Stumpf listened
was working on, and
responded with thoughts that never would have occurred to me.
Jaime Lalinde helped me, invaluably, in researching the case of
Serge Aleynikov.
I
apologize to
Ryan Harrington,
Norton, for sending him chasing around for
I
at
thought might be useful but which turned out to be
idea.
He
did
it
a
dumb
very well, though.
my
Lawrence has edited
Starling
W. W.
illustrations that
books since
first
I
started
writing them, with his peculiar combination of encouragement
and detachment.
efited so
He
edited this one, too, and I’ve never ben-
much from
even the briefest
his unwillingness to
of our team, Janet Byrne,
is
me
allow
moment of self-satisfaction. The
to enjoy
third
the finest copy editor
I
member
have ever
worked with. Many mornings her enthusiasm got me out of my
bed, and
many
ting back into
evenings her diligence prevented
and
list
know
them by name,
them. They
are:
Aisen, Joshua Blackburn,
cis
get-
thank the employees of IEX but
Finally, I’d like not only to
also to
me from
it.
Chung, Adrian
so
one day people can look back
Lana Amer, Benjamin Aisen, Daniel
Donald Bohemian, James Cape, Fran-
Facini, Stan
Feldman, Brian Foley,
Ramon
Gonzalez, Bradley Katsuyama, Craig Katsuyama, Joe Kondel,
Gerald Lam, Frank Lennox, Tara McKee, Rick Molakala,
Tom
O’Brien, Robert Park, Stefan Parker, Zoran Perkov, Eric Quinlan,
Ronan Ryan, Rob Salman,
John Schwall, Constantine
Prerak Sanghvi, Eric Schmid,
Sokoloff,
Beau Tateyama, Matt
Trudeau, Larry Yu, Allen Zhang, and Billy Zhao.
(continued from front flap)
good
for
your blood pressure, because
if
you have any contact with the market, even
a retirement account, this story
to you.
is
happening
But in the end, Flash Boys
uplifting read.
somehow preserved
have
injustice
an
a moral sense in an envi-
ronment where you don’t get paid
they
is
Here are people who have
an
perceived
and are
willing to
for that;
institutionalized
go
MICHAEL LEWIS
is
to
war
to fix
it.
the best-selling
author of Liar’s Poker, Moneyball The Blind
,
Side,
and The Big
He
Short.
lives in Berkeley,
and three
California, with his wife
children.
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praise for
“I
MICHAEL LE W
read Michael Lewis for the same reason
that.
But
it’s
good
to
be reminded every
I
watch Tiger Woods.
now and
I'll
I
S
never play
again what genius looks
like
like.”
— MALCOLM GLADWELL, New York Times Book Review
fro,n
“By
the
the
summer of
number of
at the
FLASH BOYS
2013, the world’s financial markets were designed to
collisions
expense of ordinary investors and for the benefit of high-frequency traders,
exchanges, Wall Street banks, and online brokerage firms.
an
maximize
between ordinary investors and high-frequency traders
entire ecosystem
had
arisen.”
Around
those collisions