Flash Boys

by Michael Lewis

Sergey Aleynikov, the Russian computer programmer

The system was called the “maker-taker model” and,

Say you wanted to buy shares in Apple, 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 trader who crossed the spread was classified as the “taker.” If you instead rested your order to buy Apple at $400, and someone came along and sold the shares to you at $400, you were designated a “maker.”

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

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.

The tool was always just Thor.

“payment for order flow.” As of 2010, every American stockbroker and all the online brokers effectively auctioned their customers’ stock market orders. The online broker TD Ameritrade, for example, was paid hundreds of millions of dollars each year to send orders to high-frequency trading firms, including one called Citadel, which executed a large number of orders on TD Ameritrade’s behalf. Why were these companies willing to pay so much to see the flow? No one could say with certainty.

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. “I

sell proximity to Wall Street as a service. Call it “proximity services.”

Inside BATS, high-frequency trading firms were waiting for news that they could use to trade on the other exchanges. They obtained that news by placing very small bids and offers, typically for 100 shares, for every listed stock.

Having gleaned that there was a buyer or seller of Company X’s shares, they would race ahead to the other exchanges and buy or sell accordingly.

The router determines where the order is sent. For instance, a router might instruct the order to go first to a Wall Street firm’s dark pool before going to the exchanges. Or it might instruct the order to go first to any exchange that will pay the broker to trade, and only then to exchanges on which the broker will be compelled to pay to trade. (This is a so-called sequential cost-effective router.)

the manner in which HFT firms front-ran ordinary investors; the conflict of interest that brokers had when they were being paid by the exchanges to route orders; the conflict of interest the exchanges had when they were being paid a billion dollars a year by HFT firms for faster access to market data; the implications of an exchange paying brokers to “take” liquidity; that Wall Street had found a way to bill investors without showing them the bill.

Financial intermediation is a tax on capital; it’s the toll paid by both the people who have it and the people who put it to productive use.

“There used to be this guy called Vinny who worked on the floor of the stock exchange,” said one big investor who had observed the market for a long time. “After the markets closed Vinny would get into his Cadillac and drive out to his big house in Long Island. Now there is the guy

called Vladimir who gets into his jet and flies to his estate in Aspen for the weekend. I used to worry a little about Vinny. Now I worry a lot about Vladimir.”

“We are long-term greedy.

The old Soviet educational system channeled people away from the humanities and into math and science.

Soviet-controlled economy was horrible and complicated but riddled with loopholes. Everything was scarce; everything was also gettable, if you knew how to get

Broadly speaking, it appeared as if there were three activities that led to a vast amount of grotesquely unfair trading. The first they called “electronic front-running”—seeing an investor trying to do something in one place and racing him to the next.

The second they called “rebate arbitrage”—using the new complexity to game 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.

Complexity, by M. Mitchell Waldrop. His favorite paper to pass out was “How Complex Systems Fail,” an eighteen-bullet-point summary by Richard I.

They say, ‘The sky is green.’ And you’re like, ‘What are you talking about?’ And after half an hour it comes out that they have changed the definition of ‘sky.’

People no longer are responsible for what happens in the market, because computers make all the decisions.

story has a soul, it is in the decisions made by its principal characters to resist the temptation of easy money and to pay special attention to the spirit in which they live their working lives.