View the Bloomberg TV interview with Michael Lewis and Brad Katsuyama
Michael Lewis's new book, Flash Boys, is about the chasm between stock market traders in the business world and the programmers--many from Russia--in the new environment of high-frequency trading.
Brad Katsuyama was a trader new to Wall Street who worked for the Royal Bank of Canada (RBC). He had an outsider's view of the trading system, based on norms from his Canadian work experience. He expected to understand trading transactions. When his employer, RBC, bought Carlin Financial there was a bit of a culture shock. Carlin's CEO, Jeremy Frommer, was not the same kind of grounded trader that was the RBC norm. In addition, Frommer headed a company that championed super-fast computer trading. But this trading did not work as it was supposed to work, according to logical norms.
Here is what started happening:
"Before RBC acquired this supposed state-of-the-art electronic-trading firm, Katsuyama’s computers worked as he expected them to. Suddenly they didn’t. It used to be that when his trading screens showed 10,000 shares of Intel offered at $22 a share, it meant that he could buy 10,000 shares of Intel for $22 a share. He had only to push a button. By the spring of 2007, however, when he pushed the button to complete a trade, the offers would vanish. In his seven years as a trader, he had always been able to look at the screens on his desk and see the stock market. Now the market as it appeared on his screens was an illusion."
This meant that Katsuyama could not do his job the way he had always done it. He needed accurate information to be able to buy and sell stock for his clients. But his electronic screens showed him trades that would vanish whenever he took any action. At first, he thought it was an Information Technology problem, but the IT folks thought it was "user error." Then the IT folks blamed the distance between markets, and the number of people on the system.
But these were never factors before. Finally Katsuyama hired Rob Park, a technology guy, to work with him in a two-way conversation that would shed some light on these transactions. RBC gave them a budget to conduct trading experiments...which led them to discover that if they approached only ONE trading exchange with a possible transaction, the screen data would be accurate. But if they approached multiple exchanges, transactions would disappear the moment the trader tried to act on information. They got a programmer, Allen Zhang, involved. Acting counter-intuitively but effectively, Zhang designed a program that would delay transactions a couple of milliseconds so that all the buy or sell orders would arrive at the exchanges at the same time. For some reason, this eliminated the problem of the disappearing transactions.
The article goes on to explain further complications and elucidations involving this trading, explained fairly straightforwardly for someone interested in Wall Street finance. The earnest approach of Katsuyama and his colleagues--to fixing and understanding the trading system--almost makes high finance seem like a regular business.
For the whole story, read the book, Flash Boys: A Wall Street Revolt by Michael Lewis.
Sources: "The Wolf Hunters of Wall Street," by Michael Lewis, New York Times Magazine, March 31, 2014.
...and the Bloomberg video linked above.
Do you think that these risks described are blown out of proportion? Can these high speed trades be controlled and understood by the average investor after all?
is the role of regulation in this environment? Do you think it is best undertaken privately, as was done by the Royal Bank of Canada? What are the pros and cons of private regulation?
- What does "RBC nice" mean? How would that compare to the "Wolf of Wall Street" mentality?