The Wolf Hunters of Wall Street

How a band of outsiders discovered that the stock market was rigged — and set out to change it.

Comments: 174

  1. Will the RepubliCons and their athletic talk radio supporters now, finally, stop with the Wonders of the 'Free' Market spiel and man-up? A sampling of fair and honest-minded people -- call them regulators -- MUST watch over our nation's various chicken coops. These people must NOT be Fox related.

  2. I subscribe to NYT to keep this kind of quality journalism alive.

  3. I love Michael Lewis' work. But I have to say this is a pretty one-sided excerpt. And per the Times review, he didn't let folks at KCG and its ilk have a say.

  4. Even to me, a small but nerdy private investor (who reads a lot) this high speed automated trading is not news. I have come across many articles about it in the last few years and felt uneasy about it. So how come all the government and other agencies who are supposed to be policing - didn't do anything? And the bigger and more relevant question is "This has not yet stopped and as far as I can tell I am still being XXXXed, right?"

  5. It's becoming apparent that the most efficient stock trade would be 'routed' through the NSA network. Do GS traders have that high of national security clearance..?

  6. I am beginning to suspect that Michael Lewis exists in this world to bring lucidity to it. Thank you for another elegant, though somewhat disturbing, explanation of the world we live in.

  7. Thanks for the great article. We all know the game is rigged, no news there, but the details and the alternatives are very useful. Maybe there IS hope. (I doubt it, since I'm sure the oligarchs will have their way in the end because they write the rules.)

  8. Orders can be locally time-stamped (perhaps to the picosecond) at the instant they are placed. Execution can then be required to be in order of the time-stamps on each order. Then all that is needed is a very short delay to allow pending orders to be properly queued up. Even world-wide trading could then proceed in the actual order it occurred.

    This could prevent front-running and other microsecond scams.

  9. It is clear from this story that so-called "regulators" of Wall Street need to be at least capable as any one on Wall Street in dreaming up and putting into operation systems designed to steal Other Peoples Money, a movie that' a variation on this theme. The same is true for any business built on computer technology. As the old saying goes, Why do they rob banks? Because that's where the money is.

  10. Here is my take on it. A new technology was developed that allows for finer adjustment of stock price vs, demand in real time. People had to adjust. Person making $125000/year was inconvenienced. Instead of typing the same price for all stock exchanges he had to use different price for each order. So much work for so little money! NY times decided that this is a topic of major public concern.

  11. Electronic ultra- fast and high-frequency trading by a few bad apples screws the rest of us, a corrupt system that, legal though it may be, is unethical, corrupt and totally unfair; a stampede out of the stock market and wall street crooks will occur unless it is tightly regulated. Many thanks to Mr. Kusuyama for exposing this fraud (as explained by him on 60').

  12. It's only as legal as the incompetent SEC and corrupt politicians want it to be.

  13. Saw this on 60 Minutes last night and wondered why no one has gone to jail. I'm not a stock broker or a lawyer, but it sure sounds like insider information to me.

  14. One obvious question, Does Mary Jo White, chair of the Securities and Exchange Commission, and the other four SEC commissioners know and understand any of this?

    Either, they understand it and do nothing about it — and are therefore complicit with the corrupt gaming system of Wall Street.

    Or, they don't understand because their thinking is too old fashioned for the sophisticated cyber [r]evolution carried out by the geeks and the nerds — and are therefore obsolete and need to be replaced by more evolved and efficient brains.

    Either way, something’s needs to change. Brad Katsuyama and his team at IEX are a single but gigantic step towards that end game.

    Remember the original movie Tron (1982): there are a few 'programmers' at the top who control, run the game and get the profits; and there are millions or billions of 'users' at the bottom who are simply pawns and fodder for the circus.

  15. She certainly know and understands this. This is the subject of current debate in Washington and in the industry. Whether we get meaningful reform is another question entirely. But Mary Jo White not only understands the issue, she is surely intimately familiar it from front to back.

  16. In theory, this information ought to prompt outrage across the political spectrum. It will be extraordinarily revealing to see what actually happens.

  17. This may be an "expose," but the controversy is not new. It is currently being debated within the industry and in Washington. There is no "wait and see." The discussion is happening NOW.

  18. The average retail investor trading little odd lots is probably experiences a net benefit due to HFT because bid-ask spreads are now so small.

    Back in the day, market makers at the big banks would rake in millions of dollars a year off gigantic bid-ask spreads. HFT leveled the playing field. Now anyone with a few million bucks and a couple of computer geeks could make the profits that used to be easy money for the big banks. No wonder the traders Lewis interviews are upset.

    I thought the story Lewis tells towards tje beginning of the story is telling: a trader submits an order for hundreds of thousands of dollars of stock and is outraged when the price goes up. Isn't that how it's supposed to work?

  19. In old days, the huge bid offer spreads were eaten by Art History majors (Michael Lewis). What Michael is complaining is how science graduates took over their jobs. The story of Katsuyama and his colleagues is exactly how better algorithms are able to help investors from regular HFT traders. This competition is at least is based on who can code better (or has math or logic background). Better than old boys network of "Oh! I studied Art History at Princeton" and hence deserve better at my uncle's brokerage charging huge bid-offer spreads. This is pure creative destruction at work. Someone beating HFTs. Pure capitalism at work!

  20. Captain Renault: I'm shocked, shocked to find that gambling is going on in here! Great piece l by the NY Times. Now if you did an expose on the corrupt IRS scandal targeting political opponents I think I'd FAINT.

  21. Thank you gentlemen for your hard work and dedication to fairness. I say forget Batman I would rather buy a Katsuyama Action Figure for my kids - a real American Hero from the north.

  22. Terrific work by Lewis, as usual. Thankfully he's here to explain the darker side of Wall Street's magical mystery juice in a way that we can understand and also act upon, as consumers, and hopefully as regulators and politicians as well. What he describes is just a super-fast form of front-running, and isn't that illegal? If it's not, it should be?

  23. Some FX exchange will only allow HFT firm to update orders 4 times per second (per FX pair). At this pace, everybody has a fair change to react to the price change and news event, not to worry about being ripped off by front-running HFT traders. There is no drain of liquidity due to limit on the trading frequency as HFT often complain. In fact, FX is the most liquid market on earth. The equity market don't need HFT to prosper either. If we allow everyone the fair chance to buy/sell, everybody will be better off, instead of the few HFT trader.

  24. One more thing that jumps out to me as I read this is Pension and Retirement Funds and how they can fair in this fixed world unless they turn to IEX.

    The idea of Pensions and Retirement Funds was based on good faith in the American Investment system and that continual investment of participants' (they do pay money into it), and fair investment practices would lead to continued earnings growth and the ability to pay out benefits. These "dark pool" investment practices and the rape of the public by the Medical industry, have both served to besmirch and cripple these good faith strategies to help John Q public.

    The sooner we start recognizing that Greed trumps all and only elect representatives who see this and are willing to act against it, the better off we will be as a nation and people.

  25. You are stressing the greed for money. How about our government, with its greed for power, greed to control the lives of the citizens? Which is worse?

  26. Before 1980 we operated based on th efact you mention after the mantra became 'Greed is GOOD'
    Greed has nothing to do with problems in the markets or at least that is what the architects of this fraudulent system want you to believe
    "Regulation -- which is based on force and fear -- undermines the moral base of business dealings. It becomes cheaper to bribe a building inspector than to meet his standards of construction. A fly-by-night securities operator can quickly meet all the S.E.C. requirements, gain the inference of respectability, and proceed to fleece the public. In an unregulated economy, the operator would have had to spend a number of years in reputable dealings before he could earn a position of trust sufficient to induce a number of investors to place funds with him. Protection of the consumer by regulation is thus illusory."
    Alan Greenspan.

  27. How can Lewis describe Ronan Ryan - born in 1974 - as having "the uneasy caution of a man who has survived one potato famine" when the Irish "potato famine" took place in the mid-1800s?

  28. Figure ... of ... speech ...

    "a phrase with a specialized meaning not based on the literal meaning of the words in it."

  29. See metaphor or literary allusion. Pretty simple. Ryan looks wary, or worn, or haunted. Or thin.

  30. He's not saying he did survive the famine, he's saying his look and demeanor are that of someone who had.

  31. If this is what Capitalism breeds, how can it be better than government?

  32. Well, this article points out how government is actually worse.

    The bad practices are the result of humans acting badly and not the fault of Capitalism. After all, Brad and his team are devoted capitalists, and worked to correct the wrongs they didn't even promise to correct. The government did promise; who is worse?

  33. I'm inclined to think that until there are substantial criminal penalties (i.e. jail time) for those in the financial community who violate the law, all that one can accomplish is providing the incentive to more creative crooks to displace the stand-pat crooks.

    Anything less than jail time is factored in under "costs of doing business", little different from hurricanes, strikes, and product recalls.

    The second part of the equation that needs to be balanced requires a law abolishing the revolving door of regulators, Congressmen, executives of regulated firms, lobbyists, and lawyers.

    Band-Aids do not work on a severed artery.

    None of what I am saying, however, is meant to comment one way or the other on the motives, integrity, or efforts of these three individuals.

  34. Steve:
    You're missing the point. No laws were being violated here. The system is unfair, extremely vulnerable to exploitation--and 100% legal.

  35. T - that's not completely true. While no laws were being violated by using distance timing to leap their trades ahead of the competitors, the banks are absolutely betraying their fiduciary duty to their investors to be trading in dark pools where they rig the price so they are deliberately NOT getting the best price for their investors. The problem is that in so many areas, the legal system hasn't caught up with the technology. As this story points out, the people within the system who should understand how the technology works didn't even have a clue what was going on, so how can we expect someone on the outside, like a lawyer for a class of plaintiffs whose investments have been devaluated by their bank in those pools, to have a clue? I'm pretty confident that, if (a) a law firm understood it, and (b) they felt they could explain it to a judge/jury, you would find that what they did was, indeed, illegal.

  36. For any that wish to know the facts, contact me.

    I am easy to reach. Michael Lewis is partially correct. However, his work and that of the latest so-called exchange is essentially auction market sophistry... and structurally unable to correct what ails markets.

    The missing term is internalization, first printed in The New York Times by Leonard Sloane. I helped Leonard.

    Latin root ex means out. Computers cannot replicate what's needed. Inherently flawed.

    Market structure is the subject. SEC Chairman Bill Casey tried.

    The evil doers were led by Don Regan and Chicago.

    The NYSE Specialist firms were mostly corrupt.

  37. This part of the article was amusing:

    "One compliment that made him happiest was when a big investor said, 'Thank God, finally there’s someone who knows something about high-frequency trading who isn’t an Area 51 guy.'"

    And SBLewis's comment puts it into perspective.

  38. I heard Obama clearly promise to weed out the evil doers. Yet this story clearly tells us that for the last five years or so they have been thriving and making a lot of money.

  39. "He hired Rob Park, a gifted technologist, to explain to him what actually happened inside all these new Wall Street black boxes,"

    The first recorded instance of someone being hired as a 'technologist".

  40. another example of what "investing" looks like when contrasted to the rank gaming of today's stock market.

    if you want transparency, a level playing field and the rule of law go to a casino

  41. from 'The Wit and Wisdom of Charles Munger' 2005

    “Big time, short term trading is legalized front running. It’s just done electronically with code breaking skills and I don’t see any social contribution.”

    “Why should we want to encourage our brightest minds to do what amounts to code breaking in electronic trading?”

    “I don’t think the rest of us have anything to gain in having massive trading between computers who try to outwit one another with their algorithms. To the extent that one succeeds, the rest of us are all paying.”

    “The whole system is stark, raving mad.”

  42. Another example of "American Exceptionalism?" Thank you Mr. Katsuyama!

  43. wow, thank you for this article. It is very eye-opening. My deepest gratitude to the author of this article - Michael, the person who cracked it - Mr. Katsuyama and those brokerage/banks who believed in him.
    I hope FBI, NY State AG goes after those crooks and make them pay dearly.

  44. Yes, and criminal charges, not some civil fine so the government and Wall Street can declare that justice has been served while Rome continues to be torched.

  45. As always an excellent piece of writing from Michael Lewis. Waiting for the release of the book.

    CBS' 60 minutes (yesterday, March 30) had a segment on the same - with interviews from Lewis and Katsuyama among others. Fascinating.

  46. What an astonishing "story"! And, like others have said, what kind of regulators have we got that let this go on? It's one more example of how the world is rigged against the so-called little guy. Why hadn't we heard anything about this abuse of technology before?

  47. I love Canada. I would live there if the winters were not so harsh there.

    Too much info in tins article - I stop day trading (no milliseconds but sometimes minutes counted in 2000) fourteen years ago and, as a matter of fact, I stopped 'investing' altogether.

    Maybe during the day I'll finish the article. I actually benefited from the real estate boom - selling my Florida condo and making more than $200,000 on -it I could buy a house here and enjoy California. I understand that the buyer made only some $25,000 on re-selling the same unit.

    But that is all ancient history. Time flies really fast and milliseconds count.

    In 2020 microseconds may.

  48. Vlad is the smartest guy on the street, Katsuyama is the Mountie singing to Janette in the sunset, irish Ryan singing the Bells of Saint Mary'sand billions of trades are moving serendipitously on fiber through tunnels exposed to the Jersey folks who gave us Christiegate. The only thing made in USA are the folks front running the markets, our brightest and best are pitching vapor trades to manipulate the numbers. Latency isn't the issue, it it?

  49. I can see this being bad for day traders, but investors who buy to hold or for the income aren't getting screwed. That said, can't wait to read the book.

  50. Still think you can beat the market ? :)

  51. Sure! If one just listens to the communications transmitted by the aliens who are incarcerated in Area 51.....

  52. First off, this is a well-written article, though clearly not original investigative journalism as it's a PR generated piece intended to help sell a book. Nonetheless an interesting story that needs to be told.

    The larger lesson for us all however is that hackers, programmers, technologists have -- regardless of the industry -- very loose ethics. Their idea of a shortcut is all too often some sort of fraud or questionable behavior. They live by their own set if rules and morality and we are all too often as a society (or industry) dependent on an infinitesimally small chance that one of them is ethical enough or willing to work to the right thing.

    We can see this loose morality in numerous areas that are either dependent on or becoming increasingly dependent on computer algorithms intended to achieve "optimal outcomes". Whether its travel airfare sites or event ticket hubs the fix is on and enabled by technologists with slippery notions about fairness. Whole industries are being transformed by the fetish for technology. The advertising media business is buying into this line of thinking hook, line and sinker with increasing emphasis on something called programmatic and with it there has been a steady increase in fraud in the form of phatom traffic estimated to be stealing $60 billion according to the WSJ and others.

  53. Is there any other better reason than this story to implement a financial transaction tax? Banks, Hedge funds and crooks are all gaming the system. When you own a share for less than 30 days that is gambling and there should be a special transaction tax that woudl eliminate the gain made through the game. I also think that short term gains should be taxed at a rate that is higher than ordinary income. Say 60%. Maybe this will spur good old fashioned business investment.

  54. Thankful that someone has figured it out.

  55. I'm reminded of an old poker saying I learned the hard way: "If you can't spot the sucker at the table after 3 or 4 hands, it's probably you."

  56. "Hope for the best. Expect the worst.
    The rich are blessed. The poor are cursed.
    That is a fact, friends. The deck is stacked, friends.
    Hope for the best- expect the worst.

    Mel Brooks, "The Twelve Chairs, 1970

    Comedians make their living by telling us The Truth.
    They know it. We know it. And everybody pretends it's a joke. What fools these mortals be.

  57. Thank goodness there are at least a couple of honest people left on Wall Street. Too bad they have to be Canadian...

  58. This is an incredible article and another marker in the intelligence, skill, ability and good graces of Michael Lewis. All are to be commended. The running of the article by the Times and the allotment of so much space is to be commended. Great job!

  59. So our young bright youth have been corrupted? So? They were only too willing! Was it like this in the time of Socrates? Will we make our bankers drink hemlock too for what they have done?

  60. Nahh, they have already manipulated the hemlock market to create an artificial shortage.

  61. The way to solve the bank/financial issues in the US? Simple, dump all the corrupt dopes presently in place running major banks and replace them with executives from a few of the major Canadian banks looking for a promotion, i.e RBC, TD, BMO, Scotiabank, etc. That will be a good start. There are very good reasons why Canadian banks didn't collapse during the financial crisis and continued stable and made money during all of this.

    America, there are people out there just as smart and sometimes even smarter than you are. For a change, why not take advantage of it?

  62. The problem is not personnel, it is systemic. Canada's banks did well during the last big crisis because they were well regulated. Without effective regulation in the U.S. it doesn't matter which country of origin the people come from. (And even WITH effective regulation problems will more-than-likely occur.)

    Too much of the total profits of the country come from the financial sector. Better oversight and regulation along with a more equitable taxation system can help to change this.

  63. Sounds to me like these Canadian guys are the sort of Americans who taught me my moral lessons and the cold hard facts about how choosing right over wrong does matter even if you don’t get into trouble and make more money for doing the wrong thing. In the end the wrong thing destroys more than it gives. Some would say that deregulation since 1980 is now proved right. Good actors in the market have corralled bad actors without regulation being necessary. Except that the long unbroken chain of corruption that started in 1980 was foreseen and could have been prevented by regulation not to mention the millions of lives destroyed by the corruption while waiting for this unforeseeable (again the corruption was foreseen) white night to appear. As you can see in the article everything that Mr. Katsuyama figured out or uncovered was done so by approaching from the POV of doing the right thing. Nothing he did was magical or too complex for your average Plumber or Electrician or stay at home spouse to accomplish if allowed the resources to get their questions answered. BTW Wall Street is still corrupt this is only one exchange. Conclusion: Regulation once again is shown to be the best way to control for corruption and prevent gaming of Our system. It is not too complex if you have honest folks doing it. Canadians don;t have a lock on that and I admonish you to be just as careful with them as you would anyone else.

  64. This is an excellent article on how the lack of a moral compass & greed combined to create the 2008 economic crisis. What have learned? Nothing as some people still try to game the system!

  65. Capitalists all like to talk about "free markets." These markets will adjust for the benefit of all, is what we're told. (Yeah, right.)

    But the whole point of capitalism is to tilt these "free markets" in a subtle institutionalized way so that certain market participants always make money.

    The point is there is no such thing as a "free market."

    The other point is a country can regulate these markets in such a way as to make them as "free" and unfettered as possible. (It's not easy, but the truth is you can do what the Icelanders did. Fire the management, nationalize virtually all the banks, and throw the criminals out on their butts.)

    Why do you think the .1%ers are always screaming about the need to de-regulate everything? Because regulations interfere with their theft of other people's money.

    It's that simple.

  66. Yes, a totally free market is an impossibility, and those who say otherwise are either deceptive or sadly deceived. Some relief is on the way, however. Read Jeremy Rifkin on "The Rise of Anti-capitalism." While capitalism as an aggregator of wealth for innovation and some production will continue, many of the inequities we now experience can be mitigated by the developing digital economy of shared resources and information.

  67. Great that the NYT published this. Did the Times do the investigative reporting that is the basis for this?

  68. It says, right at the top, in the title, "An Adaptation From ‘Flash Boys: A Wall Street Revolt,’ by Michael Lewis"

  69. Very interesting article. However, what's lost in this article is that "the little guy" is not typically an active trader. Front-running by high-frequency traders is a big problem if you're a mid-frequency trader, but not so much if you just have you're a working Joe with your savings passively invested. Good for these guys for coming up with a trading platform with fewer leaks, but let's not pretend that mid-frequency hedge funds are "the little guy" that society needs to protect.

  70. Incorrect.
    The little guy is typically the guy with a 401k or a pension plan.
    And this is exactly the type of trading that these HFT algorithms prey on.
    Traders looking to trade big blocks of stock.

  71. This article is so important on many levels. Extraordinarily well-written, it makes a perfectly opaque subject perfectly comprehensible. Additionally the article restores faith in humankind (I notice only one woman in the group photo!) to take morally corrective action in a risk-laden situation. Lastly, the reader sees that none of this would have happened without that penultimate characteristic of intelligent thought (the IEX team and Lewis: curiosity. Thank you to the IEX team and Michael Lewis (and his editor!) and thank you to the NY Times for printing such an important article.

  72. Networking advice of the day: “He gave me a job strictly because I was Irish,” Ryan says. It isn't what you know but who you know.

  73. Nice catch, ms muppet. I'm Irish so I caught that quote as well and found it funny. A long ways from the No Irish Need Apply signs but you're right that it is a little disheartening when hiring works that way.

  74. As usual Michael Lewis does a great job writing about Wall Street miscreants and their antidotes. Thank you.

    Would not a small stock-transaction-tax on every buy and sell order help to limit the profitability of high-speed trading and therefore curb the practice? Our society needs an effective and efficient market to help enable capitalism, but high-speed trading sounds a lot like parasitism which creates NO wealth for anyone but the high-speed traders.

    Our society would be better off if the profits from high-frequency trading were eliminated and the money redirected to help solve some of our real problems.

  75. The problem with at transaction tax? It is a 'Junk Food Tax'-

  76. I appreciate the effort and the results Mr. Katsuyama has provided to the market. So thank you for attempting to make the system more fair which is better for everyone. But, as and engineer, I can't help but notice that they created and analog solution within a digital world. Did anyone else notice that?

  77. Sure. However, the genius of it is that it can't be hacked. Some sort of faux-latency software, fix used to slow things down could be, conceivably.

  78. How many people work for the SEC? Is there anyone awake and aware in that agency? Institutional fraud on an unimaginable scale, and no one has ever been questioned, let alone prosecuted?

  79. Riveting!
    I have a tiny portfolio but this was better than a detective story!!

  80. If only the brilliance of these technicians could be put to more productive ends...

  81. A fascinating article. It calls into question the whole notion that stocks have to be traded in milliseconds. That's not investing, it's gambling. I seem to remember a French Nobel-prize winning economist suggesting that stock prices should be determined once/day, by tallying the orders to buy and sell. I love the idea, but it would put half of New York out of work.

  82. You have the answers right there, my friend. You solve the problem and then realize that too many people have their fingers in the pie. It's a great solution, however.

  83. Clawbacks are in order here. Computational trading is simply wire fraud, bank fraud stock fraud all rolled in one as far as I am concerned.

  84. Amazing stuff. Little wonder that the players i.e. customers, have always suspected that the game was rigged and the fix-was-in. The House always wins:

    “It was so insidious because you couldn’t see it,” Katsuyama says. “It happens on such a granular level that even if you tried to line it up and figure it out, you wouldn’t be able to do it. People are getting screwed because they can’t imagine a microsecond.”

    Imagine . . . that!

  85. As long as other exchanges and dark pools exist, IEX is only able to guarantee a "fair" market in stocks that are only traded via IEX. The ideal solution would be to force all exchanges and HFT operations to be co-located in a single facility; which would be a nightmare for DR (disaster recovery)

    Mr Katsyama should recruit more network engineers, as there is a growing opportunity for incredible mischief on WDM fiber networks. HFT occurs at time intervals that overlap what would be considered acceptable latency variation in optical networks; hence not easily detectable.

    The next "London Whale" may just be a network engineer that tweaks [Area 51 alert] the optimal transparent incremental scheduling algorithm for a WDM trading network.

  86. oss Architect: Could you be a bit more specific re "the optimal transparent incremental scheduling algorithm for a WDM trading network"? Sounds nefarious.

  87. Uncover/fix one "scam" and another takes its place almost as fast as those high-speed traders can blink. Face it.....the smartest guys in the world are drawn to worship at the foot of the NYSE (meaning pursuit of the almighty dollar). I hate it as much as the next guy but it's human nature. Nothing has changed since Morgan and Rockefeller were strong-arming everyone on the face of the earth in their lifelong pursuits to amass the biggest mountain of money. Today it's done through high-tech dishonesty right under the noses of regulators, and if you think the legislators that they lobby are going to change it think again.

  88. Brad's success seemed to take off about 5 years ago, and last year he really hit it big with IEX. Many Wall Street villains were mentioned, yet no one was prosecuted or went to jail. Didn't Obama promise to punish the evil doers at Wall street? To impose new regulations to discipline them? Seems like Wall street continued its merry way, as if profiting form Obama's negligence or perhaps even complicity.

    One reads Brad's success story and one fact is obvious: all was done by devoted, gifted individuals who saw wrongs and took risks. The government did nothing; yet the liberals and NYT repeatedly insist on the merits and need for big government to correct the wrongs and assist those who need assistance. At least in stock trading, Brad's assistance is most worthy, and I don't have to pay for taxes to get it.

    Excellent article; very glad NYT exposed more of this dark world. The explanation about milli and microsecond trading was particularly useful.

  89. If you are saying that the conclusion to draw from this article is that we have no need of government oversight because some "little guy" will always show up and save us, you are being deliberately ignorant. If we learn anything from this, it is that the markets do NOT regulate themselves, that when cheating makes so many billions of dollars, somebody has to come in and FORCE the cheating to stop. It's YOUR 401(k) and IRA that is worth less today because of this cheating. It's YOUR retirement that will have to be postponed because your returns weren't what your broker projected (while laughing at you behind your back as he raked in your dough).

    The only reason that these guys stopped the cheating was because they were looking for a way to use it to make money for their own bank, and then for themselves. What about the cheating that it doesn't benefit anyone in the system to uncover? The cheating that all the banks and brokers are perfectly happy with? Where is the savior of the small investor going to come from in those cases? This is why we need oversight. You are afraid of the word "government", but it's really just we, the people, looking out for our own interests.

  90. Fantastic reporting!

  91. I am in the industry (not a HFT player or a maladjusted debt-laden miscreant) and we still have the same difficulties that Mr. Katsuyama describes, but the difference is I don't think this is a problem at all and from some of the comments and the writing you would be forgiven for thinking a vast conspiracy had been exposed. People should be delighted at the involvement of this technology in the market place. Not only is there nothing illegal about it, there is also nothing even remotely immoral about HFT. We talk about bank bailouts etc and wall street versus main street and tar it all with one brush but that isn't the case at all. There is no fraud, no manipulation...just ultra fast reaction to market activity which is actually a sign of a very healthy, efficient and liquid market. Banks and brokers want rid of HFTs because they provide prices to Main street that are more efficient and more competitive and if banks and brokers succeed Main street will go back to paying extortionate market spreads where vested interests control the trades. HFT is actually one of the few changes in recent years that is a move in favor of Main street and I'm amazed at the reaction here. Sure HFT firms spend and make huge money but understand that the money they make comes from profits banks would have made off Main street anyway and of those would be profits more again has been left in the pockets of Main street...thanks not to HFT exclusively but to anybody providing liquidity.

  92. For someone "in the industry" you more than anyone should know that what you say is nonsense. Do you really believe that trading on a technical glitch is anything more than a loophole? These HFTs don't research anything, rather they wedge themselves into a faceless trade which will technically result in a market uptick in that stock and then they sell. This is EXACTLY the sort of thing that has converted Wall St. from a place designed to provide funding for corporate America and its shareholders into a playground for individuals to make billions in personal wealth without employing a single person.

  93. How is front-running not a problem?

  94. Orwell would be proud: Newspeak in the 21st century.

    Technology is mostly morally neutral and can be used for good or evil. The underlying problem here, in addition to the avarice inherent in human nature, is the phony optimism of our culture that leads so many to think that they alone are not suckers and can beat the system. Lottery tickets, anyone?

  95. And the Washington politicians will go on investigating Benghazi once again. Or taking another vote on repealing Obamacare.

    "Course, now that The Times (and, last night, 60 Minutes) have shown just how "corrupt" and "sinister" the Financial System can be sure, it's likely that the preening, self-absorbed poles will soon be demanding Congressional hearings. But you can also be sure that the spotlight will be on only a few fall guys 'cause the poles cure ain't going to take on the entire corrupt and sinister Financial System, which is what they should do. Nope, not when they know that to do so will bring down the whole corrupt and sinister house of cards, including them.

  96. Limit order. Problem solved.

  97. Why this stuff isn't illegal is beyond me. What they're doing isn't at all productive and the money that they're skimming off the top is just stealing from the rest of us who invest in standard retirement mutual funds and/or hold pension funds.

  98. Now, if the SEC were not in the pockets of the banksters, this would be an excellent opportunity to actually do something meaningful about this.

  99. Interesting article, but it's written almost entirely from just one person's point of view. It's almost like a first-person account, including detailed descriptions of Katsuyama's inner life, like which thoughts gave him pleasure and which ones didn't. This makes for interesting and animated reading, but I wonder if, from a journalistic viewpoint, it wouldn't have made sense to flesh this out with interviews from other sources, including some of the "antagonists".

  100. Imagine our SS being invested in the market as Bush Jr suggested?

  101. Two worlds of personal suspicion have come together in this article. One was that the country that reelected W for a second term had thrown roses at the feet of a strutting bully whose closest model was, to me, jerky black and white images of Mussolini. I seriously researched leaving for Canada because I suspected they were a nation of good people who would have easily seen the truth.

    The second world of suspicion began years earlier when big business successfully lobbied to undo their pension plans. Plain and simple: they said to the average US worker, you can invest this money yourself, and you won’t have to pay fees to some fund manager who simply doesn’t understand your personal retirement needs. What a crock. It was obvious then and it’s even more obvious now. At almost the hour, or should I say millisecond, that the average uninformed lamb-citizen was led to the doors of the stock market, the culture of the American bully took over. Suddenly the big bully was to be admired, whether on the stock market floor or the school playground, and everywhere in between, the bully culture took the lead. I hope that Canadian hero Brad Katsuyama and his band of merry men get a Nobel for this.

  102. The "privatization" of Social Security and its trillions held in Treasuries is the next target.

  103. As Big Al said many years ago: "Those Wall Street guys are crooks..." True. True. True.

    Now what to do about at? Go Schneiderman!

  104. Long ago in laboratories inside of AT&T's Bell Labs, coiling copper wire and fiber optic cable to introduce latency by modeling distance between two points was standard practice. Good to see the old chestnuts coming back to life in the modern tech world.

  105. So if I understand correctly…Frontrunning is illegal. Some aspects of HFT are indistinguishable from frontrunning. Yet de facto frontrunning is legal as long as you do it with the right algorithms, fast computers and some fiber optic lines. Can someone please remind me what this has to do with the efficient allocation of capital? Call me old school, but I thought that was what this whole stock market thing is supposed to be for.

  106. Co-location sold by the exchanges and dark pools have been written about in the NYT for years. How is it that regulators do nothing to look into it? The maxim on Wall Street is profits are to be made circumventing the intent of regulation. If the exchanges and the banks get into something in a big way, then it is a red flag and regulators should shine a light on it.

    Kudos to Brad Katsuyama, who stands to profit from fairness..... now that's a novel idea.

  107. What I find astounding is the apparent lack of fiduciary duty of brokers and other functionaries in this industry to their clients. Even we lawyers would be immediately disbarred for favoring our interests over that of the client. Incredible.

  108. You ask "How is it that regulators do nothing to look into it?" A couple of reasons: 1) at the top, it's an 'old boys club.' Is it realistic to think the chiefs of the SEC and the FRB-NY (Mary Jo White and William Dudley) are really going to impose effective regulation on their friends / clients / co-workers from Goldman / Morgan / et al ? Even if Dudley and White's intentions are sincere, it's impossible for them to escape the appearance of a conflict of interest.

    2) Down at the working level, the field soldiers (examiners doing the actual work) don't have the horsepower to do the job of effective regulation. They are outgunned by their counterparts Effective regulation would require resources the SEC and the Federal Reserve aren't willing to spend.

    And even if they were you think for a minute the Republicans in Congress would allow a budget that included sufficient funds to provide that effective supervision ? (Not on your life).

    Finally, take heed of the real life example of similar problems now at the feet of the Commodities Futures Trading Commission, who is now charged with overseeing the derivatives market. Talk about a morass of illicit activity. I predict we're not done with derivatives debacles yet. It you think the equities markets stink, don't peek under the rock of private derivatives trades.

    Wall Street is beyond being policed in it's current form.

  109. Journalism at its finest. Rrsearched, organized and lucid.
    The mythology of the stock market is that it functions to allow companies liquidoty and to raise capital for investmennt and for investors to own shares in corporations, deriving profits from their sucesses in the form oof dividenfs. How quaint.
    I wonder if a single congressperson, especially the podium pounding defenders of the virtues of capitalism, globalism- free trsde and the efficacy of the market as determinative of all that is righteous and good, have the slightest undetstanding of modern trading.
    Side note: the most fascinating & amusing reveal was the outsized role of Russians in "gaming" the procrss derived from their long experience exploitimg loopholes in the less than nimble Soviet system!

  110. This makes the CDS/RMBS mess look like a piece of cake to understand. Excellent article, NYTimes and Michael Lewis, thank you!

  111. This is a great story, but the line about the potato famine is incredibly and unjustifiably offensive.

  112. Not to mention the remark about Ronan Ryan looking like a handyman. What other ethnic group would put up with that?

  113. Phenomenal reporting by the NYT. We all have to thank Mr. Katsuyama, but still I cannot ignore the fact that the very act of "investing" in the modern day has become a very incestuous activity - money being made out of a concoction of other money and mathematical algorithms, with very little (if any) correlation to actual fundamentals and value analysis of the companies being traded. Call me old fashioned, but as a manager in businesses that actually "build" stuff, I feel that the stock exchange has lost all practical value for a "real" business, apart perhaps from the first 30 minutes after an IPO. I also wonder how much money and human effort is wasted in the incestuous circle of purely speculative investment - I am sure there are more productive ways for humanity to use all this energy and capital.

  114. What a great article, and kudos to Mr. Katsuyama for his excellent work. It is hard not to reflect on this story and the financiers who claim that they are doing "real work" that "creates jobs" and so they deserve the legislative support and subsidies (including the tax breaks) that ordinary workers do not. It is clear that a good part of the financial world works on theft and cheating and the perpetrators don't care. This is an example of the unregulated market at work. In the end such an unregulated market makes a lot of its profit from underhanded dealings that rob the public. May the cheaters be prosecuted to the hilt (but I'm not holding my breath waiting).

  115. Michael Lewis, Brad Katsuyama , et al have done an enormous service for our nation, in explaining the corruption of "Wall Street".

    Of course, as a skeptic, I think Wall Street is far more crooked than even this long form article indicates.

    I also am certain that this corruption existed probably from the earliest days of this and every other stock market in the world. It is just that the techniques of theft have changed as technology has enabled Wall Street to hide its larceny in new ways.

    I am not a sociologist, but only a learned sociologist would be able to explain how this financial thievery affects almost every aspect of society for the worse. I imagine that millions of lives are ruined every year so that a relatively small number of Wall Streeters can extract many billions of dollars from the rest of us every year.

    Anyone who has traded vigorously in the stock market eventually learns that it is a crooked place.

    Retail stock traders should cease all trading until the crooks are indicted, convicted, and sent to prison, and they should be fined hundreds of billions of dollars in the aggregate as a punishment, one that hits them where it hurts.

  116. Why wasn't this fixed by the financial regulators, exchanges, industry associations, lobbyists, think tanks, financial journalists and financial services firms who so loudly and frequently tell us they believe in and work everyday to bring America fair and open financial markets, markets that are the envy of the world and a key driver of growth?


  117. Katsuyama and his friends have helped restore our faith in the spiritual side of humanity. It is time for regulators to carry out their duties to earn the public trust.

  118. Gordon Gecko would marvel at the depraved human level of greed that encompasses wall street. Unfortunately, until the nature of humanity changes, it is what it is.

  119. “The people in Canada are always saying, ‘We’re paying too much for people in the United States,’ ” Katsuyama says. "

    This pretty much sums up the whole problem. Not that HFT guys are too fast - but that the big banks are cheap and stupid. Cheap and Stupid racing into a world controlled by the smartest phd's, scientists and mathematicians is a good way to lose alot of money.

    The banks completely underestimated the intelligence and skill on the other side of their trades :) Its good to see IEX can make a business work out of some standard of "fairness".

  120. This is the tip of the iceberg - Equities will spread to futures in the not too distant future. Futures exchanges have been selling co location access to the big firms for a good period of time

  121. Perhaps, I do not understand. Mr. Katsuyama et al. slowed trades in the millisecond range and that somehow has controlled the human drive for speed and money? Should not our insatiably greedy, everything-is-not-enough billionaires WANT the nanosecond trades? Am I to understand that security and fairness is now valued above serious money?? By billionaires?? And are not the HFTs raking in billions as they bring us fairness? This Lewis/Katsuyama tale sounds too wonderful to those of us who do not understand it, but it seems to defy human and Wall Street fundamentals.

  122. Go back and reread the article. Yes, they slowed the trades, but only so that all of their trades (in each trade order) would hit all of the exchanges at the same time. All of the trades were timed, in other words, making some go slower so all arrived at the same time. The human drive for speed in this case was too much for the capacity of the infrastructure the traders were relying on. Faster is not always better. I think this story is wonderfully written so that most of us can understand it fairly well…even those of us who are not "numbers people". If I can understand it…anyone could.

  123. This is incredible information and an incredible article. And most incredible are the vast numbers of people who should have understood the problem but didn't have a clue. I think I'm going to have to buy the book. Heroes who are both ethical and brilliant. Simply incredible. I want the movie, Scorsese, Spielberg, Pitt, do your duty.

  124. In this case it took somebody from the outside who worked in a similar yet somewhat different cultural business environment to recognize the problem and it din't take long, even at his youthful age, for Brad Katsuyama and his colleagues to eventually figure it all out especially when having to deal with the Wall street business types and their "dog eat dog" mentality. Clearly, like many of us who live elsewhere in the world, more often than not, when you are on the outside looking in, things can be much clearer.

  125. In this case it took somebody from the outside who worked in a similar yet somewhat different cultural business environment to recognize the problem and it din't take long, even at his youthful age, for Brad Katsuyama and his colleagues to eventually figure it all out especially when having to deal with the Wall street business types and their "dog eat dog" mentality. Clearly, like many of us who live elsewhere in the world, more often than not, when you are on the outside looking in, things can be much clearer.

  126. Eventually this whole business of stock trading needs to dissolve, to go away. It's a beast out of control. We need a vibrant community more than a wealthy few. And the wealthy few don't need the hoard. This whole financier game of amassing wealth by any means necessary--HFT, derivatives, bonds, interest rates, reverse mortgages, index funds, mutual funds--has created a rotten culture. If we had healthy communities, people would not be so worried about hoarding for retirement. Families would live with the elderly and take care together. Everyone in their own corner hoarding wealth to live on the beach in their seventies separates families. Not to mention, the "products" created are not tangible. We will evolve past this. These men are heroes, a prelude to what will rise to the top. Thanks Mr. Lewis.

  127. Brokerages and banks who profit by acting against best interests of their clients are intentionally, and systematically breaching their fiduciary duties. Thanks to Mr. Katsuyama et al. for making the effort to build a "fair" exchange. Hopefully this knowledge will lead to "fair" trading for all investors, and will reward IEX well for their efforts. He is right that the important thing is to create a level playing field for all investors. That is the role of the regulators -- how can the federal and state governments not take strong action to ensure that a few manipulators cannot unfairly profit from their purchased special access to the markets. Thanks to the NYT for this article -- your next step should be to name names -- tell the investment community which banks and brokerage firms are refusing to execute their client's instructions to utilize IEX. Transparency is a strong tool in achieving fairness.

  128. This article...and I assume the book...only confirms what all of us with IQs above 75 already know:

    Our system is rigged for the benefit of those most willing and able to stay at least a step ahead of the law. And since the law is written by the lawyers, politicians and lobbyists who work for the Amerocrats, it will always be thus.

    Shutting the barn door after the bull has fled doesn't work any better than it did for horses.



  129. Now that Wall Street has become the world's biggest casino, it should be moved to the Vegas Strip. At least that way there would be truth in advertising.

  130. I still don't understand the system. OK, I understand that a big order comes in for billions of dollars to buy and so some high speeder sees the request and raises the offer price? How're the sell offer and buy offer prices determined in the first place?

  131. Why not level the playing field? Greed.

  132. Another chapter in the annals of suckerhood. Meanwhile, the Tea-Party types will go on thinking that they can be "free" citizens in a "free market." Or that it is the fault of "too much government" if they are not. The home bound day traders would appear to be the biggest suckers of all.

  133. Government did not create this problem and government did not solve it.
    Why? Because government moves years too slow and this was a phenomenon dealing in fractions of a second.

  134. Spike The Dog, I think you are wrong. Government created this problem by not being present. Government was not present because the best regulators were forcibly retired and the rest hamstrung in the 80's.

  135. Spike The Dog, I think you are wrong. Government created this problem by not being present. Government was not present because the best regulators were forcibly retired and the rest hamstrung in the 80's.

  136. What never ceases to amaze me is the ability of some people to exploit or game the system for personal gain. This is particularly remarkable, since many at the top of the investment world had no idea what was happening regarding high-speed gaming of the markets.

    Kudos to Katsuyama and his team for their remarkable persistence and perspicacity in solving the riddle and bringing more transparency to a very opaque Wall Street.

  137. I don't know or care about Wall St.(I know, not wise),but this article kept me engrossed and I actually understood it. That translates as fantastic reporting!

  138. There are obviously some people in the top echelons of Wall Street who knew about this "unfair advantage" and remained silent. I would like to know what is SEC and FINRA doing about this and who should we hold accountable for allowing these "creative strategies" to beat the market.

  139. How do you blackmail the bad guys without balckmailing them? You create a playground where you tell every player this is where the game is played fairly and you invite all the bad guys to play. Naturally, every bad wolf who wants to give the appearance of being clean will come to play whether or not they like it. Katsuyama is the baddest gamer of all; he has found a way to force every bad wolf to come play in his palyground and profit from it in the process. There is nothing wrong with that. If only we could find a few more Katsuyama's.

  140. Truly a "flash boys" club. An interesting question is raised here: where are the women and why aren't more of them part of this?

  141. what does gender have to do with this ?

  142. Which part would you like the women to be part of? The scammers or the good guys?

  143. Excellent article. I saw the story on 60 Minutes last night, too. This man deserves the Nobel Prize for his work!

  144. What a great article! It reads like a thriller. Exceptional journalism, which I'm sure will be rewarded when the prizes come due. Thanks.

  145. FANTASTIC article. But I am left wondering if we are leaving the fairness of our market to a few entrepenures that sniffed out a problem. Is the FTC investigating the "dark pools" and shady electronic trades? Aren't there laws to keep the stock market open and fair to all?

  146. If Citadel is paying TD Ameritrade $100m+a year for my trades, how is TD Ameritrade supposed to act as my fiduciary. Isn’t it in TD’s best interests to enable the hedge fund to profit from my trade as much as possible?

    Where are the SEC and government regulators??

  147. Ameritrade knows that its customers are upset about this. They throw a sop to their customers by paying them "order flow rebates", in other words they cutting them in on the bribe that Citadel is paying them.

  148. Wonderful and enlightening article. How about having an article discussing putting a small penny tax on every transaction?

  149. Here's an article about taxing trades: DON'T DO IT!

    Boy, Democrats just want to tax the air we breathe.

  150. Spike: And the Republicans want to sell the air we breathe.

  151. Or ... are IEX and its principals a Russian or Chinese front? Has anyone bothered to ask Cheney or Rogers or King or Clapper or anyone at the SEC?

  152. The US's worship of money has corrupted many of our systems. Maybe we should ask the Canadians to come in and clean up our healthcare system, immigration, etc.

    Aside from "missing" the financial meltdown, they also seem very capable of handling other things we seem to find impossible.

  153. The activities described in this article are far removed from the REAL economy - the economy which produces goods and services which are essential or beneficial.

    Financial services are needed, but after all, what contribution to the world's well-being does high frequency trading make?

    A snapshot of decadence.

  154. I hope Martin Scorcese makes a movie out of this, lots of great bad guys on Wall Street, Russians named Vlad, perfect.

  155. Slowing down the trading was a good idea, but it did not go nearly far enough. I used to work for a major dug company. From the initiation of a project to approval of a new drug takes about 15 years if everything goes exactly right and you you can do it at all. With that kind of lead time what sense does it make to trade in milliseconds. That is not trading, that is gambling, and it adds nothing of value to the economy. Restricting trades to a week might be a good place to start.

  156. I don't think it's gambling. There's no gamble in HFT at all. What it is is front-running. Skimming. The mafia would be proud if they had come up with this.

  157. If you restrict trades to a week, it will be even more of a gamble. Say you bought 1,000 shares in an oil company on June 10th at $200 a share. Then, on June 11th, the oil company goes bankrupt because the wells it has drilled produced very little oil. Well, now you want sell everything you have to minimize the financial impact on you. But since it takes a week for your order to be processed, by the time the shares DO sell, it's already at $2 a share. Your risk increases exponentially the longer you have to wait for your order to be processed.

  158. Funnily enough, this tale actually exemplifies the futility of complex, comprehensive regulation that is commonly thought to be a panacea for all that went wrong in 2007.

    What it instead indicates that a few simple rules are the best ones. With the labyrinthine Frank-Dodd act, the 21st century Glass Steagal, it makes me wonder what new "dark pools" are in waiting.

    Unfortunately the Brad Katsuyamas are in a small minority today. Instead of tilting at Wall Street government would be more productive in trying to reform the education system that can result in more people with his ethics.

  159. Ahh! the webs we weave in Jersey...coil the optical fiber! counterintuitively brilliant.
    A tale of knowledge and malice..Claude Shannon would be so proud,
    and RBC letting the guy run with ball at great expense fab!
    If only the legal system could catch up with technology and progress...

  160. This has been an eye opening and very disturbing article. What leads to even more sadness is the lack of reaction from any national political figure. The New York Attorney General has commented, and for that I am very happy, but where are the expressions of outrage from our elected officials in Washington? The fact that I have not heard reaction from anyone in DC is a sign of how far the situation has fallen.

  161. And, further to your point....the article also shows how clueless and worthless the SEC is as a regulator.

  162. Greed seems to be the only thing that matters any more!

  163. Wow, there are honest brokers in this world. Uplifting article.

  164. More than twenty years ago, Maurice Allais, Nobel prize winning economist, suggested that trading should be slower, not faster, for market stability - and James Tobin, Nobel prize winning economist, suggested that a small tax on financial transactions would decrease speculation and increase stability. Alas, good counsel not followed - and now we have boom and bust, bubble and pop.

    Perhaps if their advice were heeded, financial trading would be brought back into some reasonable relation with the real needs of the economy, instead of the tail wagging the dog.

  165. Next we really need to have a Katsyyama to stop the health insurance companies from ripping off people by the billions by placing complexity in their systems to create friction they can profit from.

  166. A different take:

    All that has happened in recent times (consider HFT traders) is a change of who provides liquidity (so-called).

    Decades ago, it was Art History majors (the likes of Michael Lewis, he may not actually have) who worked for their uncle's brokerage firms (Old boy's network) charging huge bid offer spreads for trades.

    Nowadays, it math, computer science and engineering majors working for HFT firms. Nothing in principle has changed. They are providing liquidity.

    The Katsuyama's are the latest ones to come to market providing an even better alternative.

    This is how capitalism should work. Bringing efficiency to the work done. But if one cries about how the old guard was providing better liquidity selling sugared drinks stocks to market causing diabetes to the majority of population and thus a health crisis and furthermore a debt crisis (the debt crisis is because the country has a health crisis), then I have nothing to add.

    Its just a change of guard that Michael Lewis doesn't like. He would rather have a degree in Art History and skim the bid offer spreads claiming that he has done something worthwhile.

  167. I'm reminded of my short time working as a specialist clerk on an unnamed NY stock exchange where floor brokers often walked really slow with their orders over to my post where the trades were executed. By the time the broker got to the post the specialist had already traded ahead of the order.

  168. "The third, and probably by far the most widespread, they called slow-market arbitrage. This occurred when a high-frequency trader was able to see the price of a stock change on one exchange and pick off orders sitting on other exchanges before those exchanges were able to react."

    Remember the plot of "The Sting?" The con was betting on the outcome of a race that's already been run.

  169. Bravo, decency and fairness survive, even in the very midst of greed, after all.

  170. How are capital gains tabulated on transactions that occur hundreds of times a second, million of times a day - and who keeps tabs on the tabulators?

  171. This is a great story, and I hope it leads to some political action to fix some of the problems described herein, although it seems like at least some of these problems are being addressed through competition. I think we should be careful not to demonize computers and HFT too broadly as much of HFT is simply automation of trading techniques formerly employed by humans. Remember, front-running and crooked traders have been around for as long as there have been markets, and there are those who would like to return to the old days where specialists on trading floors made millions for themselves by ripping off their customers. HFT if regulated properly can reduce trading costs and market volatility

  172. I watched the 60 minutes story about this situation, and read the article with interest. It clearly illustrates why the "99%" are so fed up with the "1%". We are told by the political right that we must take responsibility for ourselves. Many of us have tried to do so for years, with varying degrees of success. However, we also have had this nagging suspicion that the game was rigged - and it turns out we were right. When even the big players are being gamed, what chance does the average person have to invest and build some savings for retirement? Between excessive fees charged by managed mutual funds and rigged trading on wall street, it's difficult to see why the average person would have any real confidence in the financial markets.