Let’s say you’re a large, institutional investor in charge of growing the funds of thousands and thousands of retirement accounts. Now let’s say you think that XYZ, Inc. is poised for great growth in the coming years. Acting on that, you place an order with your broker to buy 25,000 shares of XYZ, Inc.
So far, so good. But what can happen next blows my mind.
Your stock broker see that shares of XYZ are available for purchase at $50.00 per share. The order goes in to a stock exchange, of which there a currently 23 scattered around the nation, and then things get weird. High-frequency trading (HFT) firms see the order come in and before your order can be completed, they race ahead to the other exchanges and buy up the available shares of XYZ, driving the price up. Now, instead of paying $50.00 per share, you need to pay $50.01 per share. The HFT firms are happy to sell to their shares back to you at this inflated price after buying up the stock at $50.00 per share. This all happens within a span of milliseconds, or about one one-thousandth of the time it takes to blink your eye.
This is the story of how HFT firms make billions of dollars per year by placing bets they can’t lose. And it’s the story of banks knowingly working against the best interests of their customers as they get kickbacks from the HFT firms as they give them a special vantage point that isn’t available to the general public.
That’s the downside.
The upside is that — gasp! — there are ethical people on Wall Street, one of them being Brad Katsuyama. After spending years working at the Royal Bank of Canada trying to figure out why his trades routinely cost him more than he thought they should, he figured out that if he could get his orders to land on each exchange at the exact same time, he could buy and sell at the prices he anticipated. If the order only went to one exchange or landed at different times (again, measured in fractions of seconds) the HFT traders would outrace him to the better deal. Katsuyama pulled together a rogue team of Wall Street traders, coders, tech geeks and created an entirely new stock exchange — Investors Exchange (IEX) — expressly built to level the playing field and negate systematic advantages conferred upon any particular group of traders.
So while there is hope for transparency and fairness in the trading world, IEX currently controls only about 3% of the market share. Oof.
Well worth the read. 4 stars. Go find a copy here: http://www.worldcat.org/oclc/965121985
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