14. August 2015 · Comments Off on Michael Lewis’ Flash Boys and Solving a Massive Information Disparity Problem · Categories: Uncategorized

Flash Boys

Solving a massive informational disparity problem by way of Michael Lewis’ Flash Boys in 23 Steps. Librarians will love the part where John Schwall uses the Staten Island Branch of the New York Public Library. As librarians strive to solve information gaps I hope this blog post will appeal to those of us in the library industry.

  • A Questioner Emerges: The questioner is the person that notices the informational disparity problem and acts to fix it. In this instance the questioner is Brad Katsumaya, who was a trader at the Royal Bank of Canada (RBC). Between late 2006 and mid 2007 Katsumaya noticed that the information concerning trades changed abruptly on the electronic trading platform he was using. The purchase price for stock listed on the platform was prone to change dramatically as soon as Katsumaya went to execute his trades. As noted on page 30, “By the spring of 2007, when his screens showed 10,000 shares of Intel offered at $22 and he pushed the button, the offers vanished.”
  • The Questioner tries to fix the problem by calling on his IT Department for help. As noted on pages 32 to 34, Katsumaya is informed that the problem is “user error.” When the Questioner asks his IT department to dig deeper he gets no effective response.
  • The Questioner then looks outside his organization for information that can help him understand what is happening. On page 37 Katsumaya talks to a broker in Toronto, selling stock to individual Canadians, and learns of Getco which owns 10% of the U.S. market.
  • The Questioner proceeds to see if other people, especially those outside his organization, are experiencing the same problem. On page 40 Katsumaya travels to Connecticut to see a friend at SAC Capital trade stocks and there Katsumaya witnesses the same informational disparity problem in that the trading screens do not reveal an accurate picture of the stock market.
  • The Questioner then seeks an ally to help him solve the problem. In this instance Katsumaya persuaded Rob Park to return to RBC, see page 42. Park had a good working relationship with Katsumaya and Park was tech savvy. Park could translate the technological problems (from “computer language to human language”) for Katsumaya.
  • The Questioner and his ally seek to create a team of people that can collectively solve the informational disparity problem. They try to talk to as many people as they can. They concentrate on high frequency traders and people who had worked at large banks. The best results come from pulling people from “in or near the banks’ technology departments (page 45).” These include Billy Zhao (formerly a Deutsche Bank software programmer, John Schwall (formerly a manager in Bank of America’s electronic trading division), Dan Aisen (a recent Standford Computer Science graduate), and Allen Zhang (a programmer who worked on the elite Golden Goose team affiliated with RBC).
  • The team then conducts a set of experiments to test out theories to solve or further understand the informational disparity problem. RBC permitted up to $10,000 to be lost a day to test out theories (p. 46).
  • One of the team members develops a theory to explain the informational disparity problem. Rob Park makes a case that the informational disparity problem exists because the trading orders are not arriving at the same time to the various stock exchanges (p. 49).
  • A team member builds a program to fix the problem. Allen Zhang creates a program that builds delays into the orders being sent to the exchanges so that the orders arrive at exactly the same time as they did at the exchanges that were slower to get to (p.49)
  • The program is tested and it works. Traders can now accurately buy stock and trust the stock market on their trading screens. The program is now called Thor. (p.50)
  • The Questioner turns into a Leader by taking the moral high ground. The Leader desires to use the tool that can fix the informational disparity problem to help others instead of taking advantage of them. Katsumaya goes about educating others, public information campaign style, on how to solve the problem (p.50)
  • The Leader now has to find someone else in the industry (apart from his team) who can corroborate the extent of the informational disparity problem. Katsumaya goes looking for someone who knows high frequency trading (p.55).
  • The Leader finds someone who is an expert in an important field no one knows much about and who is willing to make a change to join his team. On page 69, Ronan Ryan informs Katsumaya about the high value of speed to reach the exchanges (i.e. nano-seconds and micro-seconds). In one hour Ryan reveals more information about high frequency trading than Katsumaya learned in six months of reading about it. “The U.S. stock market was now a class system, rooted in speed, of haves and have-nots. The haves paid for nano-seconds; the have-nots had no idea that a nano-second had value.” A quid pro quo working relationship develops where Katsumaya teaches Ryan trading and Ryan teaches Katsumaya technology (p. 70).
  • The expert in the important field no one knows much about, joins the team, and then tells the team how to improve their tool to fix the information disparity problem. On pages 70 and 71 we learn that the Thor program operates inconsistently because it has to guess what the travel time is to the stock exchanges. The reason Thor has to guess is that the team has no control over the path the signals take to get to the exchanges nor do they have control over how much traffic is on the network. Ronan Ryan tells Katsumaya that the team needs to build and control its own fiber network. One learns of the router’s importance in determining where the orders are sent and that the exchanges closest to you execute your requested trades the quickest.
  • The team then starts to inform its industry of this problem and markets its tool (to solve the information disparity problem) to them. Ryan and Katsumaya start talking to leaders of important organizations in their industry such as T. Rowe Price (p.85).
  • A team member seeks to understand the underlying cause as to why the information disparity problem existed in the first place. John Schwall performs cyber sleuthing and visits the Staten Island Branch of the New York Public Library. On page 96 he learns of the Regulation National Market System (passed by the SEC in 2005, but not implemented until 2007). The regulation required brokers to find the best market prices for the investors they represented. All the bids and offers for stock were to go to the Securities Information Processor which would then issue a best market price identified as the National Best Bid and Offer. However, the informational disparity arose because there was no specification of the speed of the Securities Information Processor. This leads to front running, “the illegal practice of a stockbroker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers.” Schwall concludes on page 101, that “every systemic market injustice arose from some loophole in a regulation created to correct some prior injustice.”
  • The team has to decide what to do with its tool to fix the informational disparity problem. One page 119 Katsumaya as the leader moves to create a new stock exchange using what they have learned instead of licensing their product. Katsumaya surveys the most influential players in his industry and learns that his team will have to create a stock exchange on their own as the industry would question the credibility of a Wall Street bank such as RBC creating such an exchange.
  • The team has to start fresh and as a new organization, separate itself from its former parent organization. Katsumaya has to raise money and attract new talent to the team. We also learn on page 156 that Thor will remain the property of RBC.
  • The leader inspires people to follow him in his endeavor and brings key people on board to work on a myriad number of tasks. On page 162 Don Bollerman, formerly of NASADAQ, joins the team and provides a much needed skill set. Team members learn that Bollerman knows more about the inner workings of a stock exchange than anyone they have ever met. On page 166 Francis Chung and Constantine Sokoloff work on designing a stock exchange that protects investors from high frequency traders. On page 183 Matt Trudeau joins the team, he is vital because he is the only team member who has ever opened a new stock exchange. On page 200 Zoran Perkov, joins the team. Perkov had key experience running an electronic stock market. On page 220 Josh Blackburn is brought onboard to create for Katsumaya an idea of the activity on their new stock market. On pages 166 and 167 we learn that Katsumaya does not hire people who are very self serving or who are obsessed with titles and things that do not matter. He looks for “sponges,learners.”
  • The leader raises money for the organization. On page 160 we learn that Katsumaya secured millions from big money managers/investors. However, we also learn that Katsumaya put his life savings on the life and friends/family also contribute.
  • The team gives a name to their organization/ product. Investors Exchange, also known as IEX, is born on page 164.
  • The product is launched. On page 206 we learn that on October 25, 2013 IEX opens.
  • The organization garners industry support in order to survive and thrive. On page 241 Goldman Sachs trades 30 million shares on IEX. “Goldman Sachs was insisting that the U.S. stock market needed to change, and that IEX was the place to change it.



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