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1-Page Summary of Flash Boys
Manipulierte Märkte
The stock market is a place where people buy and sell stocks. The olden days’ image of the stock market is that it’s loud, crowded with traders running around frantically, and covered in paper scraps on the floor. However, today’s reality is completely different—the majority of trading happens through computers located in data centers all over the world. In addition to this change, there are many other changes that have occurred within the last ten years: There used to be only private investors, institutional investors, brokers and one or two exchanges; now there are numerous exchanges as well as several middlemen. Today high frequency traders (HFTs) make up more than half of US stock trades. They operate in obscurity because their business model depends on being secretive; they profit from taking advantage of others by keeping information hidden from them.
The stock market is fast paced and sensitive to the speed of data transmission. As a result, high-frequency traders (HFT) place their computers as close as possible to those at the stock exchange; this is known as co-location. This allows HFTs to get information about trades that investors are making before it reaches its destination. They can also issue buy orders for stocks they plan on selling back at a higher price in what’s called front running. The victims here are investors who pay more money for shares than they would have if there were fair practices in play. Additionally, many large amounts of buy orders are made without any actual intention to purchase shares. The goal: make prices rise by increasing demand through false signals of buying interest. Those who cancel their orders can then sell their own higher priced shares when supply exceeds demand. Victims include both individual and institutional investors who end up paying lower prices for stocks than they otherwise could have had these unfair practices not been taking place.
Auch Börsen machen mit
Flash traders aren’t the only culprits. The stock markets are also to blame for this mess. They provide flash traders with space near their computers in exchange for a large sum of money, which gives them an unfair advantage over other investors. Nowadays, there’s a multitude of stock exchanges available to these high-frequency traders, so it’s even easier for them to take advantage of everyone else. In 2007, the U.S.’s “Regulation National Market System,” or Reg NMS, went into effect with one goal: To give investors better access to more competitive prices by increasing competition among trading platforms and brokers. Instead of having just one central exchange like Nasdaq (Nasdaq), several new ones came out on the market such as BATS and Direct Edge (Direct Edge).
Additionally, dark pools were created. These are usually operated by investment banks and don’t have to reveal their trades like traditional stock exchanges do. This led to more opportunities for traders to get in front of investors on the way from one market to another. In addition, instead of a fixed commission per traded share, new complicated fee and rebate models were developed that had the effect that some markets paid traders when they directed business their way.
Katsuyama: der faire Banker
In October 2013, an alternative to the stock exchanges came into being: IEX (Investors Exchange), based in New York. Brad Katsuyama is a key figure behind this platform, which has its roots in Canada and Asia. Katsuyama worked for RBC (Royal Bank of Canada) for many years – first in Canada and then on Wall Street. The bank is known for its conservatism and focus on value; before the financial crisis, it did not sell questionable mortgage-backed securities to customers. In 2006, RBC acquired Carlin Financial Group USA Inc., a firm specializing in electronic trading that had been founded by Eric Noll, a former proprietary trader at UBS AG who now works as managing director at HFT boutique Latour Trading LLC. This acquisition brought with it another culture: instead of employees interested primarily in their clients’ well-being, traders became more important than ever before. Their goal was simple: become rich quickly.
