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This site is the inspiration of a former reporter/photographer for one of New England's largest daily newspapers and for various magazines. The intent is to direct readers to interesting political articles, and we urge you to visit the source sites. Any comments may be noted on site or directed to KarisChaf at gmail.

Tuesday, April 1, 2014

Book Review: 'Flash Boys' by Michael Lewis -- By Philip Delves Broughton, The Wall Street Journal

High-frequency traders use dedicated data cables and specialized algorithms to trade milliseconds ahead of the rest of the market. 

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.
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