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60 minutes rewind
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this month marks the fifth anniversary
of the current bull market on wall street
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making it one of the longest and strongest in
history yet u.s stock ownership is at a record
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low and less than half of americans trust banks
and financial services in the last two weeks the
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new york attorney general and the commodities
futures trading commission in washington
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have both launched investigations into high
frequency computerized stock trading that now
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controls more than half the market the probes were
announced just ahead of a much anticipated book on
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the subject by best-selling author michael lewis
called flash boys in it lewis argues that the
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stock market is now rigged to benefit a group
of insiders that have made tens of billions of
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dollars exploiting computerized trading the story
is told through an unlikely cast of characters
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who figured out what was going on and devised a
plan to correct it it could have a huge impact
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on wall street tonight michael lewis talks about
it for the first time what's the headline here
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stock market's rigged the united states stock
market the most iconic market in global capitalism
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is rigged by whom by a combination of the stock
exchanges uh the big wall street banks and high
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frequency traders who are the victims everybody
who has an investment in the stock market
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michael lewis isn't talking about the stock
market that you see on television every day that
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ceased to be the center of u.s financial activity
years ago and exists today mostly as a photo op
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this is the stock market that lewis is talking
about the one where most of the trades take
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place now inside hundreds of thousands of
these black boxes located at more than 60
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public and private exchanges where billions
of dollars in stock change hands every day
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with little or no public documentation trades
are being made by thousands of robot computers
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programmed to buy and sell every stock on the
market at speeds a hundred times faster than you
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could blink an eye a system so complex it's all
but invisible if it wasn't complicated it wouldn't
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be allowed to happen the complexity disguises
what is happening if it's so complicated you
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can't understand it then you can't question and
this is all being done by computers all being done
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by computers it's too fast to be done by humans
humans have been completely removed from the
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marketplace fast is the operative word machines
with secret programs are now trading stocks in
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tiny fractions of a second way too fast to be seen
or recorded on a stock ticker or computer screen
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faster than the market itself high frequency
traders big wall street firms and stock exchanges
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have spent billions to gain an advantage of a
millisecond for themselves and their customers
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just to get a peek at stock market prices and
orders a flash before everyone else along with
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the opportunity to act on it the insiders are able
to move faster than you they're able to see your
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order and and play it against other orders
in ways you don't understand they're able to
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front run your order what do you mean front run
means they're able to identify your desire to
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to buy shares in microsoft and buy them in front
of you and sell them back to you at a higher price
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it all happens in infinitesimally small periods of
time their speed advantage that the faster traders
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have is milliseconds sometimes fractions of
milliseconds but it's enough for them to identify
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what you're going to do and do it before you do it
at your expense so it drives the price out so it
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drives the price up and in turn you pay a higher
price michael lewis is not the first person to
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allege the stock market is rigged or that high
frequency traders are front running the market
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but he was the first to find brad katsuyama who
was the first to figure out how it was being done
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a very unlikely character a traitor at the
royal bank of canada a young canadian man named
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brad katsuyama realized that the market that he
thought he knew had changed the market seemed to
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be willing to sell stock but the minute he went to
buy it uh someone else bought it the stock went up
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it was this someone knew what he was doing before
he did it back in 2008 katsuyama was 30 years old
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and running the royal bank of canada's
stock desk in new york with 25 traders
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working for him every time one of them tried
to buy a large block of stock for a client
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their order would only be partially filled
and the price of the stock would go up
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it kept happening over and over again the best
analogy i think is that your family wants to
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go to a concert you own a stubhub there's four
tickets all next to each other for 20 bucks each
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you put an order by four tickets 20 bucks each and
it says you bought two tickets at 20 bucks each
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and you go back and those same two seats that are
sitting there have now gone up to 25 what did you
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think the problem was i had no idea i couldn't i
couldn't get answers at first katsuyama thought it
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must be that the technology at rbc was slow until
he went to stanford connecticut and paid a visit
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to one of the largest hedge funds in the world the
same things that i was experiencing as a trader
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one of the most sophisticated hedge funds
in the world was also having the same
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problem then the light bulb goes off you say
holy cow this is this is a huge problem you
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were determined to get to the bottom of it yeah
why because because it just didn't feel right
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it didn't feel right that people
who are investing on behalf of
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pension funds and retirement funds are getting
bait and switched every single day in the market
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katsuyama suspected that the problem had something
to do with plumbing the way the trades were routed
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through fiber optic cables from his trading desk
in lower manhattan to the 13 public exchanges in
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northern new jersey but no one would tell him
exactly what happened to his orders once he hit
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the buy or sell button so he put together a team
of technical experts traders and most importantly
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an irish telecom guy named ronan ryan who was
an expert on high-speed fiber optic networks
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i knew nothing about trading until my first
day at rbc when i sat in a three-hour meeting
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on algorithms i called my wife afterwards and i'm
like holy crap i have no idea what they just said
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ryan had done work for the high frequency
traders he knew what they were building
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and he knew about the colossal amounts
of money they were prepared to spend
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he told brad about a company called spread
networks that had laid a high speed fiber
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optic cable from the futures market in chicago
to the exchanges in new jersey they spent 300
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million dollars just to shave three milliseconds
off the fastest route and releasing access to
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high frequency traders and 10 million dollars
a pot from brad katsuyama's point of view when
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you heard they were willing to spend that kind
of money for milliseconds it told him that the
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sums involved are vast that was one of the first
questions he said he had he says all right i'm
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getting ripped off everybody's getting ripped off
but what does it add up to i think when he heard
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the story of spread networks he realized this is
tens of billions of dollars we're talking about
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roon and ryan also knew where all the cable was
buried and had detailed maps of the fastest routes
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from the financial district in lower manhattan
to the various stock exchanges in new jersey all
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calculated down to the millisecond so i would sit
there roll out maps and draw this data center as
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a box and a line going through it and they had no
idea what i was on about and then i'd be like hey
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are you guys aware of where these data centers
are located of course you're arriving there at
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different time intervals for brad the map's turn
would have been an abstract idea into something he
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could actually see the first place his orders were
landing was the bats exchange across the river in
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weehawken new jersey and high frequency traders
were lying there in wait brad realizes oh my god
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that's how i'm being front run i'm being front run
because my signal gets to the bats exchange first
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and they can beat me to all the other exchanges
it only took a tiny fraction of a second for
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brad's trade to reach the next exchanges on
the network but the high-speed traders were
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able to jump in front of him buy the same stock
and drive the price up before his order arrived
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producing a small profit of just one or two
pennies but it was happening to everyone's trades
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millions of times a day that adds up you make
it sound like a skim what else would you call it
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one hedge fund manager said i was running a hedge
fund that was nine billion dollars and that we
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figured that the just our inability to to make the
trades the market said we should be able to make
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was costing us 300 million dollars a year that
was 300 million dollars a year in someone else's
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pocket is this illegal no that's the thing that's
so shocking about all this well you shouldn't use
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the word front running front running is illegal
this form of front running is legal it's legalized
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front running it is crazy that it's legal for
some people to get advanced news on prices and
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of other of what investors are doing it's just
nuts shouldn't happen ronan knew the only way
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to beat the high frequency traders was to take
away their milliseconds advantage that allowed
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them to sniff out slower trades and beat them
to the exchange he had an idea how to do it and
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he said you're probably better off trying to go
slower which means send the order to the exchange
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located the farthest away first and send the order
to the one that's located closest to you last
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so stagger when you send them out with the goal
of arriving at all places as close to the same
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time as possible katsuyama and his team developed
software that did just that allowing the orders of
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royal bank of canada's customers to reach all
of the exchanges at the same time cutting the
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high frequency traders out of the equation
and essentially our fill rates went to 100
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we couldn't believe it when we actually figured
it out um so you beat speed by slowing it down
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yeah as crazy as that sounds the story will
continue after this katsuyama and his team
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went out and began selling and explaining what
they had discovered to the big mutual funds
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pension funds and institutional investors people
who had suspicions that they were being front run
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but didn't know how and nobody had really bothered
or tried to figure this out until brad katsuyama
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came along it was in nobody's interest too
correct i spoke to dozens of investors big
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investors famous investors who who said that when
brad katoyama came into my office and laid out
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to me how the market was rigged my jaw hit the
floor i mean i knew something was wrong i knew
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i didn't know just didn't know what it was and no
one had told us part of those meetings led us to
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believe holy cow this is this is really something
because some of the most sophisticated largest
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asset managers in the world this is the
first time they were hearing this story
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and some of the most famous names in the american
stock market heard the pitch the capital group t
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rowe price fidelity vanguard i mean it one
after another he was in their offices they
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said this man walked in why is he gonna know how
the stock market operates and and at the end of
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an hour they said oh my god he understands hedge
fund titan david einhorn of green light capital
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is one of the believers was he able to show you
how your orders were being front run oh yeah they
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had a um they got the marker and the white board
and started drawing maps and boxes and wires and
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locations and yeah we went through it in some
detail did you find it interesting it was it was
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clients like einhorn encouraged brad and his team
to do something bigger that's when katsuyama a
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conformist even by canadian standards decided
to do something radical in 2012 he quit his
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high paying job as head trader at rbc and went
off with some of his team to start their own
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exchange you were making good money at uh royal
bank of canada right millions of dollars right
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i guess i guess everyone knows that now right
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right yeah why did you want to go off and walk
away from that job and start a stock exchange
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yeah wasn't an easy conversation having my wife
that's for sure it almost felt like a sense of
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obligation to say we found a problem it's it's
affecting millions and millions and millions
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of people people are blindly losing money they
didn't you know they don't even know they're
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entitled to it's just it's a hole in the bottom
of the bucket they set out to build an exchange
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funded exclusively by large traditional investors
they called it iex the investors exchange and
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quietly launched it in october with the support
of some of the biggest players on wall street
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and it comes with built-in speed bumps to
eliminate the advantage of high-speed predators
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and the way they did it was they coiled 60
kilometers of fiber optic cable between themselves
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and the high frequency traders computers so it's
called the magic shoe box it's a box and it looks
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like it's got fishing line in it but essentially
a high frequency trader uh if he tries to react
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on the iax exchange his trade goes for 60
kilometers until so he's he's an east jesus
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so it gets there at the same time everybody
else's do you think that they can game you
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i think that they'll try to game us i think
the fact though that we've gone and met with
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the majority of the biggest high frequency firms
to explain what the magic shoe box is doing
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and that people haven't said oh that's rubbish
that won't work we've had many ask us for a back
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door to be honest so that says something
that it'll work we're up to 38 and a half
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million shares the exchange is off to a
strong start although it is still very
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small with lots of powerful enemies that like
the status quo and are trying to starve iex by
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discouraging customers from using them green light
capital's david einhorn is one of the investors
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do you think iex will survive i think it's going
to succeed i think it's going to succeed in a
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very big way just last week iex received
a strong endorsement from goldman sachs
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whose top executives cited it as a model for a
more stable and less complicated stock market
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selling trust we're selling transparency and
and to think to think that trust is actually
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a differentiator in a service business is
kind of a crazy thought right why is this kid
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why is he able to all of a sudden sit at the
center of the american stock market the answer
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is when someone walks in the door who is
actually trustworthy he has enormous power
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and this is the story story of trying to
restore trust to the financial markets
