High Frequency Trading

Michael Lewis’ books read like hot butter on breakfast toast.  His latest effort appears to be no exception (which admittedly I’ve yet to read). Flash Boys has it all: Conspiracy, Money, FBI, Greed, and… an unassuming Canuck, the Royal Bank of Canada employee – Brad Katsuyama.

For the uninitiated, High Frequency Trading is the uncanny ability to get a head start on a given trade by taking advantage of the time it takes to actually process and put the trade through.  Yes, we are talking only about milliseconds here. But this is big business.  Billions.  So much so, that one company called Spread Networks, went to extraordinary lengths to actually build a secret cable in the straightest possible line from Chicago to New York.  All of this just to save 3 milliseconds (yes to reduce the signal time from 17 to 13 milliseconds). The price tag?  A cool $300 million. The return?  We can speculate, but it’s safe to say: shitloads.

The name of the game here is having access to the fastest connections in order to take advantage of this free market practice, and literally jump the queue.  The fastest players, who have spent countless time and money to gain privileged access, are using this speed advantage to make serious coin.

Like demigods, they have the omniscience to see trades that are coming into the market.

I find this absolutely fascinating.  The underlying moral debate really comes back to Michael Sandel’s compelling debate around Markets & Values.  Put simply, on the one hand this is a justified and commonplace practice of the stock market and on the other hand it is a clear misuse, and abuse, of technology for capital gain. I think the jury is out.

Lewis is on to something when he explains that what is tantamount to insider trading is now being challenged by “Silicon Valley Style” disruptive entrepreneurship. These quite mavericks, such as Daesun Yim of Robinhood, are coming out of the woodwork and shaking things up. Hear it from the horses mouth in this Guardian interview with Michael Lewis: here

For now, it’s probably time to stop writing this post and go pick up the book. Read more on this hot topic at the Washington Post or New York Times.

Image Courtesy of AmsterdamTrader.com

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