In the spring of 2007,
Brad Katsuyama,
a rising New York banker at the
Royal Bank of Canada
realized something was funny with the markets. He was trying to buy 10,000 shares of Intel offered at $22. But the moment he pushed the buy button, the
offers vanished. It was as if the market were reading his mind and
adjusting the prices just before he made his trade. He wasn't far off.
Wall
Street has always attracted more than its share of scammers and
bandits. Today's prime exemplars, argues
Michael Lewis
in "Flash Boys," are high-frequency traders—or HFTs—who
nickel-and-dime investors by exploiting a technological arsenal of
servers, fiber-optic cable and microwave transmission towers to trade
milliseconds ahead of everyone else in the markets. They have turned the
exchanges into a computerized monster churning up unprecedented market
volatility. All this has happened since the 2008 financial crisis, a
period in which the markets were supposed to have been under closer
scrutiny than ever.
Back in the day, if
an investor wanted to buy or sell a stock, he would call a broker, who
would find a way to execute the trade as efficiently as possible by
talking to other human beings. The arrival of computerized exchanges
slowly eliminated people from the process. Instead, bids and offers were
matched by servers. The shouting men in colorful jackets on the
exchange floors became irrelevant. In theory, this meant that the cost
of trading fell and that the markets became more efficient. But the
effects of technology are rarely so simple.
In 2002, 85% of all U.S. stock-market trading happened on the New York Stock Exchange and the rest mostly on the Nasdaq. NDAQ +0.60% By early 2008, there were 13 different public exchanges, most just stacks of computer servers in heavily guarded buildings in northern New Jersey. Now, if you place an order for 1,000 shares of Microsoft, MSFT +1.71% it pings from exchange to exchange claiming a few shares at each stop, seeking the best price until the order is completed. But the moment that it hits the first exchange, the HFTs see it, and they race ahead to the other exchanges, buy the stock you want, and sell it back to you for fractionally more than you hoped to pay. All in a matter of milliseconds, millions of times a day to millions of investors—your grandmother and hedge-fund titans alike. These tiny but profitable trades, Mr. Lewis writes, add up to big profits for firms like Getco and Citadel. He cannot put a hard number on the size of the industry, suggesting only that many billions are involved.
(Click link below to read more) In 2002, 85% of all U.S. stock-market trading happened on the New York Stock Exchange and the rest mostly on the Nasdaq. NDAQ +0.60% By early 2008, there were 13 different public exchanges, most just stacks of computer servers in heavily guarded buildings in northern New Jersey. Now, if you place an order for 1,000 shares of Microsoft, MSFT +1.71% it pings from exchange to exchange claiming a few shares at each stop, seeking the best price until the order is completed. But the moment that it hits the first exchange, the HFTs see it, and they race ahead to the other exchanges, buy the stock you want, and sell it back to you for fractionally more than you hoped to pay. All in a matter of milliseconds, millions of times a day to millions of investors—your grandmother and hedge-fund titans alike. These tiny but profitable trades, Mr. Lewis writes, add up to big profits for firms like Getco and Citadel. He cannot put a hard number on the size of the industry, suggesting only that many billions are involved.
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