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Wolves of Wall Street

Michael Lewis has a new book out called Flash Boys. Imagine yourself looking over some clothes, say, at a large departmental store. You check the price tags and select the jacket that you want. You take it up to the counter only to discover that the price has been jacked up after you showed interest in it! The store clerk tells you that someone else watching on a camera saw your interest and bought it just before you got up to the counter.  That person is willing to sell it on to you for $5.00 extra. This is essentially the story that Lewis tells.

Lewis tells how we place an order on Wall Street and before our order can be executed someone else steps in with a faster computer, buys the shares at our price and then sells them to us at a higher price. All this has been happening without our knowledge in what insiders call a dark pool and is thanks to computer-driven high-frequency trading.

He tells the story of how Brad Katsuyama, Ronan Ryan, Rob Park and a handful of other young men and women have created a stock exchange called IEX where our buy or sell orders will be executed in a fair and transparent way. Essentially, we won’t have to deal with prices being switched. In my book, these young people are following the golden rule. And, fortunately for us, the new exchange appears to be a success.

Lewis has adapted his book into a New York Times magazine article (http://nyti.ms/1hSSZXu) from which I quote: “The deep problem with the system was a kind of moral inertia. So long as it served the narrow self-interests of everyone inside it, no one on the inside would ever seek to change it, no matter how corrupt or sinister it became.”  That is until Brad Katsuyama decided to step up and do something about it proving once again that one individual can make a difference.

The fun technological twist to this story is that to achieve a fair exchange IEX has had to slow the traders down. They have done this by wrapping 38 miles of optical cable in a box and requiring the buy-sell signal to traverse those 38 miles first! That slows things down to five instead of one millisecond. Ah, the new world.

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