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Where is the backup if your line goes down? (Sorry, there isn’t one.) When can you supply us with the five years of audited financial statements that we require before we do business with any firm? (Um, in five years.)
traders. The RBC trading floor had what the staff liked to refer to as 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.
nice. The best way to manage people, he thought, was to convince them that you were good for their careers. He further believed that the only way to get people to believe that you were good for their careers was actually to be good for their careers. These thoughts came naturally to him:
He wasn’t naïve. 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 now challenged. When he began to grasp, along with the rest of the world, what big American firms had done—rigged credit ratings to make bad loans seem like good loans, created subprime bonds designed to fail, sold them to their customers and then bet against them, and so on—his mind hit some kind of wall.
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 trade they executed, but they did so with sufficient delay that it was impossible to know exactly what was happening in the broader market at the moment the trade occurred.
For a fee, the exchange will ‘flash’ information about buy and sell orders for just a few fractions of a second before the information is made publicly available.” That was the first time that Brad had heard the term “flash orders.” To the growing list of mental questions, he added another: Why would stock exchanges have allowed flash trading in the first place?
Once he had a team in place, Brad persuaded his superiors at the Royal Bank of Canada to conduct what amounted to a series 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 test theories—to try to answer his original question: Why was there a difference between the stock market displayed on his trading screens and the actual market? Why, when he went to buy 20,000 shares of IBM offered on his trading screens, did the market only sell him 2,000? To search for an answer, RBC agreed to let his team lose up to
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That was another thing Ronan learned: A lot of people in and around the telecom industry were more knowing than knowledgeable.
it, “I’m making thirty-five and they’re making a buck twenty and they’re fucking idiots.”
Ronan watched them meet with one of the most senior guys at a big Wall Street bank that hoped to employ them—and the Wall Street big shot sucked up to them. “He walks into the meeting and says, ‘I’m always the most important man in the room, but in this case Vladimir is.’ ” Ronan knew that these roving bands of geeks felt nothing but condescension toward the less technical guys who ran the big Wall Street firms.
traders.) The orders resting on BATS were typically just the 100-share minimum required for an order to be at the front of any price queue, as their only purpose was to tease information out of investors.
“In HFT there was no loyalty whatsoever,”
By the end of 2010, Brad and Ronan between them met with roughly five hundred professional stock market investors who controlled, among them, many trillions of dollars in assets. They never created a PowerPoint; they never did anything more formal than sit down and tell people everything they knew in plain English.
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.
1929. The first thing Brad noticed as he read the SEC report on the flash crash was its old-fashioned sense of time. “I did a search of the report for the word ‘minute,’ ” said Brad. “I got eighty-seven hits. I then searched for ‘second’ and got sixty-three hits. I then searched for ‘millisecond’ and got four hits—none of them actually relevant. Finally, I searched for ‘microsecond’ and got zero hits.” He read the report once and then never looked at it again.
Schwall. He should have seen it before, simply from Schwall’s chosen role on Wall Street: product manager. A product manager, to be any good, had to be obsessive.
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.
Scalpers Inc. trades for the sole purpose of interfering with trading that would have happened without it. In buying from every seller and selling to every buyer, it winds up: a) doubling the trades in the marketplace and b) being exactly 50 percent of that booming volume. It adds nothing to the market but at the same time
might be mistaken for the central player in that market.
Another incentive of Scalpers Inc. is to fragment the marketplace: The more sites at which the same stocks changed hands, the more opportunities to front-run investors from one site to another.
protected? “I’m immediately skeptical of people saying they are looking out for my interests,” Gates said. “Especially on Wall Street.”
He also needed to find out if the nine big Wall Street banks that controlled nearly 70 percent of all stock market orders** would be willing to send those orders to a truly safe exchange.
The new players in the financial markets, the kingpins of the future who had the capacity to reshape those markets, were a different breed: the Chinese guy who had spent the previous ten years in American universities; the French particle physicist from Fermilab; the Russian aerospace engineer; the Indian PhD in electrical engineering. “There were just thousands of these people,” said Schwall. “Basically all of them with advanced degrees. I remember thinking to myself how unfortunate it was that so many engineers were joining these firms to exploit investors rather than solving public
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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.
The LinkedIn searches became a new obsession.
obvious thing he did to make Goldman’s robots faster was exactly what he had done at IDT to enable millions of phone calls to find their cheapest route: 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.
That is how he spent the vast majority of his two years at Goldman, patching the elephant. For their patching material he and the other Goldman programmers resorted, every day, to open source software—software developed by collectives of programmers and made freely available on the Internet.
plumbing. He discovered, to his surprise, that Goldman had a one-way relationship with open source. 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
was “How Complex Systems Fail,” an eighteen-bullet-point summary by Richard I. Cook,
Brad’s biggest weakness, as a strategist, was his inability to imagine just how badly others might behave.
Some large amount of what Wall Street had done with technology had been done simply so that someone inside the financial markets would know something that the outside world did not.
“There will be a lot of resistance,” he’d said. “There will be a lot of resistance. Because a tremendous infrastructure has been built up around this.”
There was simply too much more easy money to be made by elites if the system worked badly than if it worked well.
Anyone in an established industry who stands up and says, “The way things are being done here is totally insane; here is why it is insane; and here is a better way to do them” is bound to incur the wrath of established insiders, who now stand accused of creating the insanity.
