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He returned with a single question: “Can you double the price?”
a “no-asshole rule”; if someone came in the door looking for a job and sounding like a typical Wall Street asshole, they wouldn’t hire him, no matter how much money he said he could make the firm.
The market on his screens was no longer the market. His friend would hit a button to buy or sell a stock and the market would move away from him.
Someone out there was using the fact that stock market orders arrived at different times at different exchanges to front-run orders from one market to another.
Brad knew that he was being front-run—that some other trader was, in effect, noticing his demand for stock on one exchange and buying it on others in anticipation of selling it to him at a higher price. He’d identified a suspect: high-frequency traders.
He then clicked the Buy button on his online brokerage account screen, and the price on the Bloomberg screen jumped.
Ronan, for his part, couldn’t quite believe how ordinary the people on Wall Street were. “It’s a whole industry of bullshit,”
He was also surprised to find how wedded they were to the big Wall Street banks, even when those banks failed them. “In HFT there was no loyalty whatsoever,”
Brad soon realized that the most sophisticated investors didn’t know what was going on in their own market.
“You know, I thought I knew what I did for a living but apparently not, because I had no idea this was going on.”
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 exchanges might report their activity in increments as big as a second. There were one million microseconds in a second.
A sleepy stock exchange called the CBSX, which traded just a tiny fraction of total stock market volume, announced that it was going to invert the usual system of fees and kickbacks. It was now going to pay people to “take” liquidity and charge people to “make” it. Once again, this struck Brad as bizarre: Who would make markets on exchanges if they had to pay to do it? But then the CBSX exploded with activity.
The information that high-frequency traders gleaned from trading with investors in Chicago they could use back in the markets in New Jersey.
They knew something was very wrong, but they didn’t know what, and now that they knew they were outraged.
These dark pools contained the murkiest financial incentives in the new stock market. Goldman Sachs and Credit Suisse ran the most prominent dark pools.
Even a giant investor like T. Rowe Price simply had to take it on faith that Goldman Sachs or Merrill Lynch had acted in its interest, despite the obvious financial incentives not to do so.
In 2009, RBC had—at number 19—been far down Greenwich Associates’ electronic trading rankings. At the end of 2010, after only six months of Thor, RBC was ranked number 1. Greenwich Associates called RBC to ask what on earth was going on within the bank. In the history of their rankings, they said, they had never seen a firm jump more than three spots.
The deep problem with the system was a kind of moral inertia. So long as it served the narrow self-interests of everyone inside it, no one on the inside would ever seek to change it, no matter how corrupt or sinister it became—
“It’s not that they wouldn’t tell me. It’s that they didn’t know how their own electronic systems worked.”
“Wall Street is corrupt, I decided,” said Schwall afterwards. “There is no corporate loyalty to employees.”
He noticed that the guy who had built the Merrill Lynch electronic trading platform was one of the highest-paid people in all of Merrill Lynch—
A product manager, to 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 computer geeks and that computer geeks did not respond rationally to big, hairy traders hollering at them.
he was certain that the market at the heart of capitalism was rigged.
The analyst told him that he had found that the dark pool was actually costing the customers (while profiting Merrill Lynch), but that management did not want to hear it.
How was it legal for a handful of insiders to operate at faster speeds than the rest of the market and, in effect, steal from investors?
The infinitesimal period of time between the moment the order was submitted and the moment it was executed was gold to the traders with faster connections.
“That they are ripping off the retirement savings of the entire country through systematic fraud and people don’t even realize it. That just drives me up the fucking wall.”
First, there was nothing new about the behavior they were at war with: The U.S. financial markets had always been either corrupt or about to 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 make money at the expense of investors.
“It was bigger than that. The goal had to be to eliminate any unnecessary intermediation.”
I know what you’re doing. It’s genius. And there’s nothing we can do about it. But you are only two percent of the market.
The SEC, like the public stock exchanges, had a kind of equity stake in the future revenues of high-frequency traders.
“Liquidity” was one of those words Wall Street people threw around when they wanted the conversation to end, and for brains to go dead, and for all questioning to cease. A lot of people used it as a synonym for “activity” or “volume of trading,”
“HFT firms go home flat every night,” said Brad. “They don’t take positions. They are bridging an amount of time between buyers and sellers that’s so small that no one even knows it exists.”
For instance, to find out that, say, T. Rowe Price wanted to buy 5 million shares of Google Inc., you needed to sell some Google to T. Rowe Price. That initial market contact between any investor and Scalpers Inc. was like the bait in a trap—a loss leader.
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.
A front-runner sells you a hundred shares of some stock to discover that you are a buyer and then turns around and buys everything else in sight, causing the stock to pop higher (or the opposite, if you happen to be a seller).
It was what investors most noticed: They were less and less able to buy and sell big chunks of stock in a gulp.
The line between Wall Street brokers and exchanges had blurred.
Here Schwall stumbled upon the predator’s weakness: The employees of the big Wall Street banks felt no more loyalty toward the banks than the banks felt toward them.
“You could front-run an order in a dark pool on a bicycle.”
All of them, one way or another, were probably using the unequal speeds in the market to claim their share of the prey.
Russians had a reputation for being the best programmers on Wall Street, and Serge thought he knew why: They had been forced to learn to program computers without the luxury of endless computer time.
most infamously by helping the Greek government to rig its books and disguise its debt,
Essentially, the more places there were to trade stocks, the greater the opportunity there was for high-frequency traders to interpose themselves between buyers on one exchange and sellers on another.
He decentralized Goldman’s system. Rather than have signals travel from the various exchanges back to the Goldman hub, he set up separate mini–Goldman hubs inside each of the exchanges.
As he worked, he became aware of a gulf in understanding between himself and his employer. The people at Goldman with whom he dealt understood the effects of what he did but not their deep causes.
The only advantage a big bank enjoyed was its special relationship to the prey: its customers.
They took huge amounts of free software off the Web, but they did not return it after he had modified it, even when his modifications were very slight and of general, rather than financial, use.
It made no sense to him the way people were paid individually for achievements that were essentially collective achievements.
