Flash Boys

A Wall Street Revolt

The American Stock Market: An Electrified Jungle

So, you’ve decided to take the plunge and invest in the stock market, huh? I remember when that used to mean you’d rub elbows with your trusty broker who’d then toss your order into the chaotic symphony of traders on the New York Stock Exchange floor. Those were the days. But now? It’s a whole different ballgame, my friend. The scene’s shifted from humans to humming servers and cryptic codes. Sure, the NYSE is still there, but it’s now lost in the crowd of numerous public and private exchanges. The goal was to make trading safer, faster — like strapping a jet engine to a horse-drawn cart. But this Summary will show you that this technological transformation made way for the Wall Street wolves ready to prey on the everyday investor.

When Trusting the Market Seems like a Fool’s Game

Here’s a tale for you: Brad Katsuyama, a decent guy working for the Royal Bank of Canada (or RBC, as the cool kids say), was sitting at his desk in New York one day in 2007. He goes to buy 10,000 shares of Intel and all hell breaks loose. Prices shooting off like a rogue fireworks display. He’s buying at $22 a pop, expecting a sweet flip, and bam! The price takes a nosedive. Just like that, the market becomes a stranger to him.

This wasn’t a simple bug in the system. This was Wall Street complexity at its finest, so thick that even seasoned brokers had trouble cutting through it. But Brad isn’t one to back down. Assembles a crew of pros from various fields, does his detective work and uncovers the culprit: front-running.

In a nutshell, these high-frequency trading firms (HFTs) — let’s just call them the Wall Street Cheetahs — would pounce on big orders like Brad’s before they got a chance to breathe. We’re talking milliseconds here. The speed of a blink. But that’s all they needed to flood the market with competing orders, forcing prices to dance to their tunes before the original order was sealed.

Katsuyama and his band of financial Avengers used their in-depth knowledge of the local fiber optic network to build their own weapon: “Thor”. Thor synchronized orders so they’d land on various exchanges simultaneously, foiling the cheetahs’ front-running game.

Yet, Thor was like putting a band-aid on a gunshot wound. The real villain was a system that let these HFT firms pocket up to $160 million a day by playing dirty, gnawing away at investor confidence and market stability. Thor alone wasn’t going to clean this mess.

Rising from the Ashes: A Stock Exchange with a Conscience

So, what’s Brad’s next move? A two-pronged strategy: education and innovation. He enlightens the big fish in the pond about how the market’s ripping them off. But then a bolder idea strikes him: why not launch a fair and transparent stock exchange, a sanctuary safe from these market sharks?

Now, creating your own stock exchange isn’t as easy as setting up a lemonade stand. Investors were largely in the dark about where their orders were being dispatched. Banks loved this ignorance, as it allowed them to operate “dark pools,” essentially private markets that catered to all sorts of business — the murkier, the better for them.

But Katsuyama had a few tricks up his sleeve. The financial meltdown of 2008 made some banks rethink their reckless sprint for short-term gains. And then there were the frequent flash crashes, like the 600-point plunge and recovery on May 6, 2010. It was pretty clear that these sudden market quakes were tied to the shenanigans of the HFT firms.

Enter IEX, or the Investor’s Exchange, Katsuyama’s creation that opened for business on October 25, 2013. It was a gamble, sure. They needed trades to flow in to stay afloat.

As fate would have it, Goldman Sachs saw the writing on the wall. After the 2008 debacle, the banking titan wanted to be on the right side of the fence when the next storm hit. And so, on December 19, 2013, IEX exhaled a collective sigh of relief when the first sizable Goldman Sachs order rolled in. In an instant, they leapfrogged the American Stock Exchange in market share. They were in the game, fighting for transparency and fairness, striving to mend a fractured financial system.

Conclusions

Here’s the bitter pill we had to swallow starting 2007: a cabal of Wall Street insiders had rigged the US financial system to their advantage. These high-frequency trading firms, backed by major banks, manipulated orders and made millions while everyday investors took the hit. But a revolution was brewing. Led by Brad Katsuyama, a new player emerged — a stock exchange grounded in transparency and fairness, a beacon of hope in a system marred by greed.

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