Flash Boys

by Michael Lewis

In America, even the homeless were profligate.

The best way to manage people, he thought, was to convince them that you were good for their careers.

the only way to get people to believe that you were good for their careers was actually to be good for their careers.

He understood how he might move the price of an infrequently traded stock simply by satisfying the demand for the highest bidder.

“We would hear how they had this roomful of Indians and Chinese guys. Rarely would you see them on the trading floor. They were called “the Golden Goose.”

The moment he attempted to react to the market on his screens, the market moved.

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.”

As they increased the number of exchanges, the percentage of the order that was filled decreased; the more places they tried to buy stock from, the less stock they actually bought.

the average daily volume in the U.S. stock market was $225 billion.

People are getting screwed because they can’t imagine a microsecond.”

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.

There was a vividly clear class distinction between tech guys and finance guys. The finance guys saw the tech guys as faceless help and were unable to think of them as anything else. “They always said the same thing to me: ‘You’re a boxes and lines guy,’

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 race they needed to win was not a race against the ordinary investor, who had no clue what was happening to him, but...

The HFT firms posted these tiny orders on BATS—orders to buy or sell 100 shares of basically every stock traded in the U.S. market—not because they actually wanted to buy and sell the stocks but because they wanted to find out what investors wanted to buy and sell before they did it.

If you knew which broker had just 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 a part of a much larger order. You might also guess how the broker might distribute the order among the various exchanges and how much above the current market price for IBM shares the broker might be willing to pay.

The HFT guys didn’t need perfect information to make riskless profits; they only needed to skew the odds systematically in their favor.

“There’s a difference between choosing a crusade and having it thrust on you.”

“as soon as you realize that you are not able to execute your orders because someone else is able to identify what you are trying to do and race ahead of you to the other exchanges, it’s over,”

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?

National Best Bid and Offer—by compiling all the bids and offers for all U.S. stocks in one place. That place, inside some computer, was called the Securities Information Processor,

The thirteen stock markets piped their prices into the SIP, and the SIP calculated the NBBO.

There was no rule against high-frequency traders setting up computers inside the exchanges and building their own, much faster,

the gap between the high-frequency traders’ view of the market and that of ordinary investors could be twenty-five milliseconds, or twice the time it now took to travel from New York to Chicago and back again.

A small class of insiders with the resources to create speed were now allowed to preview the market and trade on what they had seen.

“If I can fix something and fuck these people who are fucking the rest of this country, I’m going to do it,”

The buyers and sellers of any given stock don’t show up in the market at the same time, so they needed an intermediary to bridge the gap, to buy from the seller and to sell to the buyer. The fully computerized market moved too fast for a human to intercede in it, and so the high-frequency traders had stepped in to do the job.

“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.”

high-frequency traders being allowed by the exchanges to see other people’s orders before anyone else, without any obligation to trade against them.

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. This was perverse.

One of his favorite books was actually called Complexity, by M. Mitchell Waldrop.

“People think that complex is an advanced state of complicated,” said Zoran. “It’s not. A car key is simple. A car is complicated. A car in traffic is complex.”

The big Wall Street banks wanted to trade in their own dark pools not only because they made more money—on top of their commissions—by selling the right to HFT to exploit orders inside their dark pools.

A stock market was judged by the volume of trading that occurred on it, and the nature of that volume.

that a big bureaucracy was ill-suited to keeping pace with rapid technological change, but that the usual competitive advantages

“People don’t know how to live in a world that is transparent,”

U.S. stock market had an accidental beauty to it, from the point of view of a trader who wished to trade only when he had some edge. The big moves occurred first in the futures market in Chicago, before sweeping into the markets for individual stocks.