Another fun read by Michael Lewis. This book is on Wall Street’s High Frequency Traders and how they gamed the system and the public through the use of technology. HF trading companies precipitated in numbers all across the United States, increase market volatility, clouded the market, and made Billions off investors.
As bulge bracket banks tried to keep up with HF prop shops, they became the tools that facilitated profits for these same HF shops. Bulge Bracket Banks sold HF shops their customers’ order information. This gave HF prop shops a better understanding of which investors are behind specific stock transactions, and helped fine tune their ability to extract value from said investors. BB Banks also created dark pools (essentially an exchange) and sold dark pools access to HF shops that used it to front run investors’ orders and take on even more profit.
The book follows Brad a seasoned trader from RBC through his experience with HF trading. Almost overnight he can no longer trade stocks at prices shown on his screen at RBC. When he spoke to other traders, he realized this problem affect his whole company, and yet they have no idea why. We follow Brad through the journey of figuring out what has happened to his screen. He began to dabble with his trades, talked to IT personnel/ other traders/ finance people. Finally he figured out the reason, and began to hire a team to combat HF trading.
Soon he left RBC to pursue this mission on his own. The book delved into his journey along with others that joined him on this mission. The end result for Brad was the creation of an exchange that stops the predatory actions of HF traders.
Through this book we find that the history of the stock market is a big game of traders preying on investors. The SEC steps in to negate this predatory action but eventually traders will find a way to use the SEC rules against investors. Overall this was a fun read, and I’ve notes from each chapter down below.
Depict: to represent in words
Preside: to exercise management or control
Ch1: Hidden in Plain Sight
When creating a business: Find a reason not to do it
Create shell companies to hide intent
After telling the wall street traders how much it would cost to buy a line, the traders asked if Spivey can double the price.
Circumspect: watchful, discreet
Adept: very skilled
vying: competing, contending
Ch2: Brad’s problem
RBC is a nice company, without the wall street pathologies.
Whole chapter is about the start of HFT. HF traders see the order in the market, and before regular traders are able to execute their entire order, they replicate the order and front run it in the exchange, then resell/buy it to the regular traders at a profit. The way against this is to send out all orders to exchanges at the same time, thus no one has any information until the trade is executed.
Funny bit about how this one coder that seem to be the only person who can solve their problem goes against the company’s norm, and speak in indecipherable gibberish
Profilgate: utterly and shamelessly immoral or dissipated
Abstruse: hard to understand, esoteric
muse: to meditate on, or to comment thoughtfully on
cerebral: characterized by the use of intellect rather than instinct
Staid: settled or sedated
Pathologies: any deviation from a healthy, normal condition
Hemorrhaging: to bleed profusely
cronyism: the practice of favoring one close friend
Insidious: Stealthily treacherous or deceitful
Ch3: Ronan’s problem
This guy Roan, and his family came from Ireland, wanted to get a job in wall street, but couldn’t. He ended up working for a telecom company, and learned all about fibers, glass, switches. Basically everything on how data travel from one point to another. Wall street was in an era where everyone wanted to be faster than the other. Firms wanted to be faster than other firms, and traders wanted to be faster than other traders. If there were driving, they wanted to get rid of the airbags, and the seats to go even faster. And everyone wanted to keep everything top secret.
Finally Roan met Brad, and he got a job on the trading floor. His job is to tell people they are being “fucked”
Goes through the big investors realize something is up, and start to funnel information to Brad.
Apparently, T Rowe Price is an investor, while Goldman, and RBC, and Credit Suisse are trader brokers that execute investors’ trades
Enamor: to fill with love.
Despondent: feeling or showing profound hopelessness
convoluted: twisted, coiled
transient: not lasting, enduring, or permanent
extemporaneous: done without much preparation
Ch4. Tracking the Predator
Basically Brad hired more people. This one person who he hired call John Schwall was a product manager who was an intermediary between the IT and the traders. This is important because his job matches his personality of looking deeply into things, and when Brad hired him John started looking into how front running came to be. And he found out that the history of wall street is a history filled with traders front running the trade, and then SEC making a rule to stop it. Then the cycle repeat itself where the traders find a way to exploit that rule.
Goes into another story with this guy call Rich Gates, who owns a Mutual fund. BB kept trying to get him and his company to use their dark pool to execute trade but he wasn’t sure why. Soon he found out that the BB dark pool was the problem. Trading in the dark pool cost him money. Soon they found out that the Banks were selling their dark pool services to HFT shops, and so everyone was pocketing money except for small investors.
Abate: become less intense
Stymied: to block
Vied: strive in competition or rivalry with another
larcenous: guilty of larceny
Ch5:Putting a face on HFT
Serg a Russian Jew who migrated from Russia because the Russian government put a lot of limitation on Jews. He needed to take harder test in order to go to college, and only a few college would accept him. Then in college he couldn’t study certain subjects due to his religion.
He came to America, started coding, and was soon hired by Goldman after going through an extensive interview and solving sets of hard questions. At Goldman, it was a very individualistic culture, where everyone wanted to show off their contributions to the firm since they worry about their bonus, not their group or the company. No one talked or collaborated with one another.
Another point that the book made was that traders and programers have different skillsets. Traders looked at the big picture, they know their worth and what they have to offer. They know the connection between what they did and how much money was made and they are good at exaggerating the link.
Whereas the programmers are zoned in to the finer details, and are not aware of the bigger picture
Cornucopia: an abundant, overflowing supply
Finicky: excessively particular; difficult to please
assuage: to make milder or less extreme
Privy: participating in the knowledge of something secret
Nefarious: extremely wicked or villainous
Obfuscate: to make obscure or unclear
grotesquely: odd or unnatural in shape, appearance, or character
Ch6: How to take Billions from Wall street
Brad started fund raising for his project, at first no one wanted to give him money because they didn’t trust him but once he acted like he was doing it for the money, then everyone were more willing to lend him money. Also, thru the process he had to change his business idea so that it makes sense, and attracted investors.
Brad began hiring people, he looked for people that are willing to learn, and not be bothered by titles and things that are self serving.
Apparently, people who lived under the soviet regime was really good at gaming the system, because everything was sparse, and that was the only way you can get items.
Passive orders: going into the market with a bid below the market price, or offer above the market price. basically to create liquidity.
But HFT created a way to only execute passive orders, if they get a rebate, ie sell at a higher price/ buy at a cheaper price
They created the exchange, eliminated all the advantages that HFT have. Now the problem was how do they get banks, and brokerage firms to route investors order to the exchange?
convulsion: violent agitation or disturbance
taxonomy: the science or tech. or classifying
grotesquely: odd or unnatural in shape, appearance, or character
pernicious: cause insidious harm or ruin
conciliate: to become agreeable
loom: to rise before the vision with an appearance of great size
ruse: a trick
Ch7: One Man Army
Zoran is introduced into the story line. He was the tech person who controlled all of nasdaq and made sure that the exchange ran smoothly. His background was in Computer science, and coding, and running complex systems and taking data and making it into pictures for others to understand. Brad took his skill and was able to explain to investors why HFT did nothing but harm investors. Then story went on to explain why Goldman entrusted IEX with their trades and that was when IEX became profitable..
Exhilarating: invigorating, to make cheerful or merry
biff: to hit, punch
bedlam: a scene or state of wild uproar or confusion
skittish: restlessly or excessively lively
virtuoso: a person who has special knowledge or skill in a particular field
sensational: producing or designed to produce a startling effect/ reaction
bungled: to do clumsily or awkwardly
conspicuous: easily seen or noticeable
foisted: to force upon unjustifiably or fraudulently
sedition: incitement, or discontent, or rebellion against the government
quixotic: extravagantly chivalrous, or romantic, visionary
rebuff: a blunt or abrupt objection
inundated: to overwhelm
facade: a superficial appearance, or illusion of something
prelude: a preliminary action, event, or condition
vied: to strive in competition with another
incense: to burn
myopic: short sighted
anomaly: deviation from the common rule, etc.
calamity: great disaster or misfortune
Ch8: The spider and the fly
Goes thru the case of Serge, the IT who was charged with stealing goldman’s code, and sentence to prison. He was in prison for a year, his wife left him, his child didn’t pick up his call, and he was dead broke. His lawyer was working gratis. This whole case might have started because some manager inside Goldman was afraid of his bonus.. But thru it all, Serge remained sane, positive, and he said he learn to live like never before. That life is not ruled by your ego or your ambition, that it can end any day. In jail you meet people who are there because of crime, and people who are there because of circumstances like the one that Serge went through
Paucity: smallness of quantity, scarcity
nefarious: extremely wicked or villainous
Parse: to analyze
cornucopia: an abundant overflowing supply
gratis: without charge or payment
Stocks affect the future market before the regular market
To gain a certain edge in an uncertain world
Purport: to present, especially deliberately
festoon: a string or chain