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Flash Boys: A Wall Street Revolt by Michael Lewis
automated trading system, bash_history, Berlin Wall, Bernie Madoff, collateralized debt obligation, computerized markets, drone strike, Fall of the Berlin Wall, financial intermediation, Flash crash, High speed trading, latency arbitrage, pattern recognition, risk tolerance, Rubik’s Cube, Sergey Aleynikov, Small Order Execution System, Spread Networks laid a new fibre optics cable between New York and Chicago, the new new thing, too big to fail, trade route, transaction costs, Vanguard fund
—Omar Little CONTENTS INTRODUCTION WINDOWS ON THE WORLD CHAPTER 1 HIDDEN IN PLAIN SIGHT CHAPTER 2 BRAD’S PROBLEM CHAPTER 3 RONAN’S PROBLEM CHAPTER 4 TRACKING THE PREDATOR CHAPTER 5 PUTTING A FACE ON HFT CHAPTER 6 HOW TO TAKE BILLIONS FROM WALL STREET CHAPTER 7 AN ARMY OF ONE CHAPTER 8 THE SPIDER AND THE FLY EPILOGUE RIDING THE WALL STREET TRAIL Acknowledgments INTRODUCTION WINDOWS ON THE WORLD I suppose this book started when I first heard the story of Sergey Aleynikov, the Russian computer programmer who had worked for Goldman Sachs and then, in the summer of 2009, after he’d quit his job, was arrested by the FBI and charged by the United States government with stealing Goldman Sachs’s computer code. I’d thought it strange, after the financial crisis, in which Goldman had played such an important role, that the only Goldman Sachs employee who had been charged with any sort of crime was the employee who had taken something from Goldman Sachs.
One of these people—a Canadian, of all things—stands at the picture’s center, organizing the many smaller pictures into a coherent whole. His willingness to throw open a window on the American financial world, and to show people what it has become, still takes my breath away. As does the Goldman high-frequency trading programmer arrested for stealing Goldman’s computer code. When he worked for Goldman Sachs, Sergey Aleynikov had a desk on the forty-second floor of One New York Plaza, the site of the old Salomon Brothers trading floor, two floors above the place I’d once watched the stock market crash. He hadn’t been any more interested in staying in that building than I had been and, in the summer of 2009, had left to seek his fortune elsewhere. On July 3, 2009, he was on a flight from Chicago to Newark, New Jersey, blissfully unaware of his place in the world.
Guess how many badge swipes it took me to get to my seat at Citadel? Five.” ** Those nine banks, in order of their (fairly evenly distributed) 2011 market share, from highest to lowest: Credit Suisse, Morgan Stanley, Bank of America, Merrill Lynch, Goldman Sachs, J.P. Morgan, Barclays, UBS, Citi, Deutsche Bank. †† Stampfli has not been charged with any wrongdoing. CHAPTER FIVE PUTTING A FACE ON HFT Sergey Aleynikov wasn’t the world’s most eager immigrant to America, or, for that matter, to Wall Street. He’d left Russia in 1990, the year after the fall of the Berlin Wall, but more in sadness than in hope. “When I was nineteen I haven’t imagined leaving it,” he says. “I was very patriotic about Russia. I cried when Brezhnev died. And I always hated English. I thought I was completely incapable of learning languages.”
algorithmic trading, automated trading system, banking crisis, bash_history, Bernie Madoff, butterfly effect, buttonwood tree, Chuck Templeton: OpenTable, cloud computing, collapse of Lehman Brothers, computerized trading, creative destruction, Donald Trump, fixed income, Flash crash, Francisco Pizarro, Gordon Gekko, Hibernia Atlantic: Project Express, High speed trading, Joseph Schumpeter, latency arbitrage, Long Term Capital Management, Mark Zuckerberg, market design, market microstructure, pattern recognition, pets.com, Ponzi scheme, popular electronics, prediction markets, quantitative hedge fund, Ray Kurzweil, Renaissance Technologies, Sergey Aleynikov, Small Order Execution System, South China Sea, Spread Networks laid a new fibre optics cable between New York and Chicago, stealth mode startup, stochastic process, transaction costs, Watson beat the top human players on Jeopardy!, zero-sum game
Indeed, 2007 and 2008, a time when most of Wall Street was falling apart at the seams, would be the heyday for the Bots. That would all change in the summer of 2009. In a matter of days, the computer-driven world that Island had helped spawn would come under a giant microscope. CHAPTER NINETEEN THE PLATFORM From: Mikhail Malyshev Sent: 11:11 pm To: Sergey Aleynikov Re: let’s move fast It was nearing midnight as Sergey Aleynikov nervously clicked on the e-mail from his future boss. The subject line—“let’s move fast”—said it all. Mikhail “Misha” Malyshev wasn’t one to waste time. Speed was paramount, speed was everything. “There’s a huge amount of work ahead of us,” the e-mail said. “Let’s triple our focus. The future is ours and the game is already on.” The message was clear. Aleynikov, who’d emigrated from Russia to the United States in 1991, knew he had to act quickly.
Aleynikov smiled as he said good-bye to Malyshev, hopped on the elevator, and caught a cab to Chicago International O’Hare Airport. He was eager to get home to his wife, Elina, and their three little girls, all under the age of five. At 9:20 P.M., as he stepped off his plane at Newark Liberty International Airport, six agents from the FBI were waiting for him in the terminal. Special Agent Michael McSwain, a stocky man with a salt-and-pepper buzz cut, approached, flashing a badge. “Are you Sergey Aleynikov?” he asked in a raspy voice that seemed a dead-on impression of Clint Eastwood. “Yes?” “You’re under arrest.” “This must be a mistake,” Aleynikov said in a panic. ALEYNIKOV was handcuffed, packed into an unmarked car, and taken to the Justice Department’s Federal Plaza headquarters in downtown Manhattan. Several hours of intense grilling followed. In a state of shock, Aleynikov declined the help of a lawyer.
Marketwide circuit breakers, which would trigger a brief stop in trading if the market made a major move in a short period of time, were quickly implemented. They amounted to a reversal of the speed-freak frenzy that had hijacked the financial system in the past decade. It was time to slow things down. Was it enough? No one knew. IN the weeks and months following the events the media dubbed the Flash Crash, the fierce debate over what had become of the U.S. stock market that had erupted after the arrest of Sergey Aleynikov grew even more heated. Angry words were exchanged in the halls of Capitol Hill, on financial television shows, and in the backrooms of giant trading firms in New York and Chicago. Congress held panel discussions. The SEC grilled the previously unknown chieftains of the high-speed merchants—and their critics. Stephen Schuler of Getco, Dave Cummings of Tradebot, Thomas Peterffy of Timber Hill, as well as Themis’s Sal Arnuk, spoke before an array of regulators who seemed more confused than anyone by what was going on in the depths of the market.
bank run, barriers to entry, bash_history, Bernie Madoff, computerized markets, computerized trading, Flash crash, housing crisis, index fund, locking in a profit, London Whale, market microstructure, merger arbitrage, prediction markets, price discovery process, Sergey Aleynikov, Spread Networks laid a new fibre optics cable between New York and Chicago, transaction costs, zero day
Flash Boys: Not So Fast An Insider’s Perspective on High-Frequency Trading Peter Kovac Directissima Press firstname.lastname@example.org Table of Contents Preface: What This Is and Why Introduction: The Dangers of Speed Chapter 1: Spread Networks and The Value of Speed Chapter 2: The Education of Brad Katsuyama Chapter 3: Trying to Connect the Dots Chapter 4: There’s Another Explanation, But It’s Not As Interesting Chapter 5: Sergey Aleynikov Chapter 6: How To Take Billions From Wall Street Chapter 7: IEX Launches Chapter 8: My Dinner with Sergey Epilogue Summing It Up Preface: What This Is and Why In the past few months many people have asked me to explain Michael Lewis’ recent book, Flash Boys. The topic is quite complex, and naturally people want to know if the U.S. stock market is actually rigged, as the book claims.
The fact of the matter is that the amount of data available is voluminous: not just trading records, but order records, market data, computer code, emails, instant messages. Regulators can demand this information from any broker at any time – no lengthy court process or subpoena is required. The data does exist, and lots of it. Oddly, in later chapters Lewis reveals some knowledge of the vast amounts of data available to investigators: John Schwall complains about his brokerage firm recording his email; Sergey Aleynikov talks about using a source control system called subversion, which records each and every change to the computer code used for trading. In fact, every single evening, every single broker-dealer registered with FINRA uploads a record of every single stock order they placed that day, complete with the millisecond that they sent it. That’s worth repeating, because it’s rather remarkable. Every night, every broker has to submit to the regulators a record of every order they touched that day.
Broker-dealers are subject to periodic audits, and the SEC can drop in at any time if they have the slightest suspicion about the broker-dealer’s activities (and they do drop in). It’s a good thing. Personally, I’d be more worried about the hedge funds that ultimately fund Katsuyama’s dark pool, who have virtually no regulator oversight. What do Scott Rothstein, Arthur Nadel, and Bernie Madoff have in common? Serving as hedge fund managers, and serving time in jail. Chapter 5: Sergey Aleynikov There’s not too much to add to this chapter, as (a) it mostly focuses on a single individual, and (b) it’s largely a reprint of Lewis’ September 2013 article, which benefitted from Vanity Fair’s fact-checking team. Goldman overreacted. They wanted to send a message to programmers everywhere, and they did: steal code, go to prison. It’s pretty harsh, but, I suppose, effective. In his race to skewer Goldman, though, Lewis tries a little too hard to paint Aleynikov as an angel, and in the process again demonstrates a tendency to avoid critical evaluation of the facts.
algorithmic trading, automated trading system, Bernie Madoff, Bernie Sanders, Bretton Woods, buttonwood tree, computerized trading, corporate raider, creative destruction, credit crunch, Credit Default Swap, financial innovation, fixed income, Flash crash, High speed trading, housing crisis, index arbitrage, locking in a profit, Long Term Capital Management, margin call, market bubble, market fragmentation, market fundamentalism, Myron Scholes, naked short selling, pattern recognition, Ponzi scheme, quantitative trading / quantitative ﬁnance, Renaissance Technologies, Ronald Reagan, Sergey Aleynikov, short selling, Small Order Execution System, statistical arbitrage, technology bubble, transaction costs, Vanguard fund, Y2K
Concerning dark pools, flash orders, high-frequency trading, and other market structure issues, www.sec.gov/news/testimony/2009/ts102809jab.htm. 5. Senator Ted Kaufman, “Unusual Market Activity: The SEC and High-Frequency Trading,” May 13, 2010, The Huffington Post. 6. Securities and Exchange Commission, 17 CFR Parts 200, 201, 230, 240, 242, 249, and 270 [Release No. 34-51808; File No. S7-10-04] RIN 3235-AJ18, Regulation NMS, page 19. 3. Screaming Headlines Sergey Aleynikov, a thin, amicable, 40-year-old naturalized citizen from Russia with a Richard-the-Lionhearted beard, thick black eyebrows, and a full head of thick black hair, had a nasty surprise waiting for him at Newark, New Jersey’s Liberty International Airport when he returned there from a job interview in Chicago on July 3, 2009. FBI agents were waiting at the gate to arrest him for the theft of a top-secret trading algorithm from his former employer, Goldman Sachs.
Automate This: How Algorithms Came to Rule Our World by Christopher Steiner
23andMe, Ada Lovelace, airport security, Al Roth, algorithmic trading, backtesting, big-box store, Black-Scholes formula, call centre, cloud computing, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, Donald Trump, Douglas Hofstadter, dumpster diving, Flash crash, Gödel, Escher, Bach, High speed trading, Howard Rheingold, index fund, Isaac Newton, John Markoff, John Maynard Keynes: technological unemployment, knowledge economy, late fees, Marc Andreessen, Mark Zuckerberg, market bubble, medical residency, money market fund, Myron Scholes, Narrative Science, PageRank, pattern recognition, Paul Graham, Pierre-Simon Laplace, prediction markets, quantitative hedge fund, Renaissance Technologies, ride hailing / ride sharing, risk tolerance, Sergey Aleynikov, side project, Silicon Valley, Skype, speech recognition, Spread Networks laid a new fibre optics cable between New York and Chicago, transaction costs, upwardly mobile, Watson beat the top human players on Jeopardy!, Y Combinator
Della Pietra, “The Mathematics of Statistical Machine Translation: Parameter Estimation,” Journal of Computational Linguistics 19, no. 2 (1993): 263–311. 7. Ingfei Chen, “Scientist at Work: Nick Patterson,” New York Times, December 12, 2006. CHAPTER 8: WALL STREET VERSUS SILICON VALLEY 1. Rana Foroohar, “Wall Street: Aiding the Economic Recovery, or Strangling It?” Time, April 4, 2011. 2. While building his team at Teza, Malyshev recruited a Goldman Sachs programmer, Sergey Aleynikov, by offering to triple his $400,000 salary to $1.2 million. Aleynikov agreed to come over and made a hasty move to Chicago. A day after he began working at Teza, Aleynikov was arrested on charges that he had stolen computer code from Goldman. During his last three days of work at Goldman, Aleynikov had systematically uploaded big chunks of Goldman’s trading code to a server in Germany. But Goldman’s tech security spotted the maneuver and alerted the FBI.
Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas
accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, labour market flexibility, law of one price, light touch regulation, Long Term Capital Management, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, Vilfredo Pareto, working-age population, World Values Survey
For Germany, the private research institute CapQM has pulled together all available information about managed funds, transaction frequency and fees for German money managers. They estimated that German retail investors paid a whopping €28 billion to banks, investment fund managers and insurers in 2007 for managing their savings, amounting to between a quarter and a third of the investment proceeds (CapQM 2009). A Reuters news report points at another troublesome issue. In July 2009, Sergey Aleynikov, a US and Russian national, was arrested on charges of theft just after he left his job as a programmer at Goldman Sachs. He had copied the trading program of the ﬁrm, on which he had been working, and transferred it to a server in Germany. What makes this case interesting is the warning that prosecutor Joseph Faccioponte issued based on information from Goldman Sachs. He said that because of the way this software interfaces with the various markets and exchanges it could be used to “manipulate markets in unfair ways.”
algorithmic trading, automated trading system, Bernie Madoff, buttonwood tree, commoditize, computerized trading, corporate governance, cuban missile crisis, financial innovation, Flash crash, Gordon Gekko, High speed trading, latency arbitrage, locking in a profit, Mark Zuckerberg, market fragmentation, Ponzi scheme, price discovery process, price mechanism, price stability, Sergey Aleynikov, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, transaction costs, two-sided market, zero-sum game
Momentum ignition is extremely damaging to long-term investors. It does not cost pennies; it costs them quarters, and it ferociously distorts the price discovery process. How the World Began to Learn About HFT While HFT has been steadily expanding since the millennium and exponentially since the implementation of the SEC’s Reg NMS in 2007, it stayed out of the mainstream media until mid-2009. Over the July 4 weekend, Sergey Aleynikov was arrested by the FBI at Newark Airport for stealing code from his prior employer, Goldman Sachs, and trying to bring it to his new job as an HFT programmer at Teza Technologies, where he was set to triple his $400,000 salary. According to Assistant U.S. Attorney Joseph Facciponti, Goldman raised the alarm that “somebody who knew how to use this program could use it to manipulate markets in unfair ways.”11 Aleynikov was found guilty under the Economic Espionage Act in December 2010 and began serving an eight-year sentence at a federal prison.
affirmative action, Affordable Care Act / Obamacare, Bernie Sanders, Bretton Woods, carried interest, clean water, collateralized debt obligation, collective bargaining, computerized trading, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, desegregation, diversification, diversified portfolio, Donald Trump, financial innovation, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, illegal immigration, interest rate swap, laissez-faire capitalism, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, medical malpractice, money market fund, moral hazard, mortgage debt, obamacare, passive investing, Ponzi scheme, prediction markets, quantitative easing, reserve currency, Ronald Reagan, Sergey Aleynikov, short selling, sovereign wealth fund, too big to fail, trickle-down economics, Y2K, Yom Kippur War
The NYSE memo reads: The purpose of this Information Memo is to advise all member organizations that the New York Stock Exchange LLC (“NYSE”) will be decommissioning the requirement to report program trading activity via the Daily Program Trading Report (“DPTR”), which was previously approved by the Securities and Exchange Commission (the “Commission”). The Zero Hedge war on Goldman became legend when his seemingly far-fetched conspiracy theories came sensationally true that summer. That’s when a Russian Goldman employee named Sergey Aleynikov was alleged to have stolen the bank’s computerized trading code. Aleynikov worked at precisely the desk Zero Hedge had accused of being involved in large-scale manipulations. And indeed, in a court proceeding after Aleynikov’s arrest, Assistant U.S. Attorney Joseph Facciponti reported that “the bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.”
The Quants by Scott Patterson
Albert Einstein, asset allocation, automated trading system, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, buttonwood tree, buy low sell high, capital asset pricing model, centralized clearinghouse, Claude Shannon: information theory, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Doomsday Clock, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, fixed income, Gordon Gekko, greed is good, Haight Ashbury, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, index fund, invention of the telegraph, invisible hand, Isaac Newton, job automation, John Meriwether, John Nash: game theory, law of one price, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, merger arbitrage, money market fund, Myron Scholes, NetJets, new economy, offshore financial centre, old-boy network, Paul Lévy, Paul Samuelson, Ponzi scheme, quantitative hedge fund, quantitative trading / quantitative ﬁnance, race to the bottom, random walk, Renaissance Technologies, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Sergey Aleynikov, short selling, South Sea Bubble, speech recognition, statistical arbitrage, The Chicago School, The Great Moderation, The Predators' Ball, too big to fail, transaction costs, value at risk, volatility smile, yield curve, éminence grise
While high-frequency firms were in many ways beneficial for the market, making it easier for investors to buy and sell stocks since there always seemed to be a high-frequency player willing to take the other side of a trade, the concern was that a rogue fund with poor risk-management practices could trigger a destabilizing sell-off. “We consider this dangerous,” said one executive for a company that provided services to high-frequency trading firms. “My concern is that the next LTCM problem will happen in less than five minutes.” The world of high-frequency trading leapt into the media spotlight in July 2009 when Sergey Aleynikov, a quant who’d just quit a job writing code for Goldman Sachs, stepped off a plane at Newark Liberty Airport after a trip to Chicago. Waiting for him at the airport were FBI agents. Aleynikov was arrested and charged with stealing code from Goldman’s secretive high-frequency trading group, a charge he fought in court. Adding to the mystery was a connection to a powerful quant Chicago hedge fund: Citadel.