Flash Boys: A Wall Street Revolt by Michael Lewis.
The day after Spread Networks acquired lifetime rights to a ten-foot-wide path under the wire rope factory’s parking lot, it sent out its first press release: “Round-trip travel time from Chicago to New Jersey has been cut to 13 milliseconds.” They’d set a goal of coming in at under 840 miles and beaten it; the line was 827 miles long. “It was the biggest what-the-fuck moment the industry had had in some time,” said Spivey.
The U.S. stock market was now a class system, rooted in speed, of haves and have-nots. The haves paid for nanoseconds; the have-nots had no idea that a nanosecond had value. The haves enjoyed a perfect view of the market; the have-nots never saw the market at all. What had once been the world’s most public, most democratic, financial market had become, in spirit, something more like a private viewing of a stolen work of art.
In a stock market now defined by its technology accidents, nothing actually happened by accident: There was a reason for even the oddest events. For instance, one day, investors woke up to discover that they’d bought shares in some company for $ 30.0001. Why? How was it possible to pay ten-thousandths of a penny for anything? Easy: High-frequency traders had asked for an order type that enabled them to tack digits on the right side of the decimal, so that they might jump the queue in front of people trying to pay $ 30.00. The reason for change was seldom explained; change just happened. “The fact that it is such an opaque industry should be alarming,” Brad said. “The fact that the people who make the most money want the least clarity possible— that should be alarming, too.”
How HFT Operate:
In spirit Scalpers Inc. was less a market enabler than a weird sort of market burden. 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. Reduce the tax and the rest of the economy benefits. Technology should have led to a reduction in this tax; the ability of investors to find each other without the help of some human broker might have eliminated the tax altogether. Instead this new beast rose up in the middle of the market and the tax increased— by billions of dollars. Or had it? To measure the cost to the economy of Scalpers Inc., you needed to know how much money it made. That was not possible. The new intermediaries were too good at keeping their profits secret. Secrecy might have been the signature trait of the entities who now sat at the middle of the stock market: You had to guess what they were making from what they spent to make it. Investors who eyeballed the situation did not find reason for hope. “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.”
Apart from taking some large sum of money out of the market, and without taking risk or adding anything of use to that market, Scalpers Inc. had other, less intended consequences. Scalpers Inc. inserted itself into the middle of the stock market not just as an unnecessary middleman but as a middleman with incentives to introduce dysfunction into the stock market. Scalpers Inc. was incentivized, for instance, to make the market as volatile as possible. The value of its ability to buy Microsoft from you at $ 30 a share and to hold the shares for a few microseconds— knowing that, even if the Microsoft share price began to fall, it could turn around and sell the shares at $ 30.01— was determined by how likely it was that Microsoft’s share price, in those magical microseconds, would rise in price. The more volatile Microsoft’s share price, the higher Microsoft’s stock price might move during those microseconds, and the more Scalpers Inc. would be able to scalp. One might argue that intermediaries have always profited from market volatility, but that is not really true. The old specialists on the New York Stock exchange, for instance, because they were somewhat obliged to buy in a falling market and to sell in a rising one, often found that their worst days were the most volatile days. They thrived in times of relative stability.
The omnipresent lack of knowledge:
Goldman Sachs’s role in the trial was to make genuine understanding even more difficult. Its employees, on the witness stand, behaved more like salesmen for the prosecution than citizens of the state. “It’s not that they lied,” said Serge. “But they told things that were not in their expertise.”
Our system of justice is a poor tool for digging out a rich truth. What was really needed, it seemed to me, was for Serge Aleynikov to be forced to explain what he had done, and why, to people able to understand the explanation and judge it. Goldman Sachs had never asked him to explain himself, and the FBI had not sought help from anyone who actually knew anything at all about computers or the high-frequency trading business.
“A guy got put in jail for taking something no one understood,” as one of Serge’s new jurors put it.
- Story of HFT: It's not new and many who don't even own a stock know it. But Lewis's hilarious and entertaining prose makes it special.
- Robin-hoods saving "us" from HFT: I never heard this story until I read it here. Lewis gives us a glimpse of that better angles of our nature.
- Happy-endings: I don't believe that even for a second. HFT is just the beginning of what advances in AI will unleash this century.
The day after Spread Networks acquired lifetime rights to a ten-foot-wide path under the wire rope factory’s parking lot, it sent out its first press release: “Round-trip travel time from Chicago to New Jersey has been cut to 13 milliseconds.” They’d set a goal of coming in at under 840 miles and beaten it; the line was 827 miles long. “It was the biggest what-the-fuck moment the industry had had in some time,” said Spivey.
The U.S. stock market was now a class system, rooted in speed, of haves and have-nots. The haves paid for nanoseconds; the have-nots had no idea that a nanosecond had value. The haves enjoyed a perfect view of the market; the have-nots never saw the market at all. What had once been the world’s most public, most democratic, financial market had become, in spirit, something more like a private viewing of a stolen work of art.
In a stock market now defined by its technology accidents, nothing actually happened by accident: There was a reason for even the oddest events. For instance, one day, investors woke up to discover that they’d bought shares in some company for $ 30.0001. Why? How was it possible to pay ten-thousandths of a penny for anything? Easy: High-frequency traders had asked for an order type that enabled them to tack digits on the right side of the decimal, so that they might jump the queue in front of people trying to pay $ 30.00. The reason for change was seldom explained; change just happened. “The fact that it is such an opaque industry should be alarming,” Brad said. “The fact that the people who make the most money want the least clarity possible— that should be alarming, too.”
How HFT Operate:
In spirit Scalpers Inc. was less a market enabler than a weird sort of market burden. 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. Reduce the tax and the rest of the economy benefits. Technology should have led to a reduction in this tax; the ability of investors to find each other without the help of some human broker might have eliminated the tax altogether. Instead this new beast rose up in the middle of the market and the tax increased— by billions of dollars. Or had it? To measure the cost to the economy of Scalpers Inc., you needed to know how much money it made. That was not possible. The new intermediaries were too good at keeping their profits secret. Secrecy might have been the signature trait of the entities who now sat at the middle of the stock market: You had to guess what they were making from what they spent to make it. Investors who eyeballed the situation did not find reason for hope. “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.”
Apart from taking some large sum of money out of the market, and without taking risk or adding anything of use to that market, Scalpers Inc. had other, less intended consequences. Scalpers Inc. inserted itself into the middle of the stock market not just as an unnecessary middleman but as a middleman with incentives to introduce dysfunction into the stock market. Scalpers Inc. was incentivized, for instance, to make the market as volatile as possible. The value of its ability to buy Microsoft from you at $ 30 a share and to hold the shares for a few microseconds— knowing that, even if the Microsoft share price began to fall, it could turn around and sell the shares at $ 30.01— was determined by how likely it was that Microsoft’s share price, in those magical microseconds, would rise in price. The more volatile Microsoft’s share price, the higher Microsoft’s stock price might move during those microseconds, and the more Scalpers Inc. would be able to scalp. One might argue that intermediaries have always profited from market volatility, but that is not really true. The old specialists on the New York Stock exchange, for instance, because they were somewhat obliged to buy in a falling market and to sell in a rising one, often found that their worst days were the most volatile days. They thrived in times of relative stability.
The omnipresent lack of knowledge:
Goldman Sachs’s role in the trial was to make genuine understanding even more difficult. Its employees, on the witness stand, behaved more like salesmen for the prosecution than citizens of the state. “It’s not that they lied,” said Serge. “But they told things that were not in their expertise.”
Our system of justice is a poor tool for digging out a rich truth. What was really needed, it seemed to me, was for Serge Aleynikov to be forced to explain what he had done, and why, to people able to understand the explanation and judge it. Goldman Sachs had never asked him to explain himself, and the FBI had not sought help from anyone who actually knew anything at all about computers or the high-frequency trading business.
“A guy got put in jail for taking something no one understood,” as one of Serge’s new jurors put it.
No comments:
Post a Comment