In today’s high-speed economy, hundreds of trades take place every second, profits and losses are calculated on infinitesimally small margins, and advantages that completely change the dynamics of trading can come down to something as simple as the speed of your internet connection. In the book “Flash Boys”, Michael Lewis argues that today’s stock market is rigged to benefit only those institutions that have invested billions to exploit a weakness in computerized trading.
“The modern stock market is must protect investors interests,” commented Peter Mougey, a partner with the Levin, Papantonio law firm and director of the firm’s business torts and securities litigation departments. “The securities markets were built on the backs of hard-working Americans and profits can’t be taken at their expense.”
According to Lewis, three men: Brad Katsuyama, Rob Park, and Ronan Ryan, are combatting this corruption by bringing transparency and honesty to the market at the structural level. The problem right now is that modern exchanges are bound by physics. Exchanges, traders, investors, etc. that are positioned closer to the servers a given product exists on, have an advantage in buying those products.
At its heart, the transfer rates for the signals to buy or sell and register a given transaction are the cause of much of the problem. Two parties can attempt to buy the same product at the same time, and the first one to have their purchase register with the server wins. Wall Street firms have been investing millions to get marginally faster transfer rates, installing fiber and moving their data centers closer and closer.
High frequency trading made the most of this system by being able to employ computer algorithms to process thousands of trades in moments. It was a system that, because of its technical complexity, a lot of people didn’t perceive that something was wrong or that someone could be taking advantage of the system.
To combat this, Katsuyama and his team have developed an exchange that simplified things by arbitrarily placing all server requests at an equal distance from the data centers. In their exchange, no advantage can be gained by placing your own centers closer to theirs. Everything travels the same distance to them.
Joshua is a writer and researcher with Ring of Fire. You can follow him on Twitter @Joshual33.