MICHAELLEWIS

FLASHBOYS

AWALLSTREETREVOLT

FORJIMPASTORIZA

WHOHASNEVERMISSEDANADVENTURE

Amangottohaveacode.—OmarLittle

CONTENTS

INTRODUCTION WINDOWSONTHEWORLD

CHAPTER1 HIDDENINPLAINSIGHT

CHAPTER2 BRAD’SPROBLEM

CHAPTER3 RONAN’SPROBLEM

CHAPTER4 TRACKINGTHEPREDATOR

CHAPTER5 PUTTINGAFACEONHFT

CHAPTER6HOWTOTAKEBILLIONSFROMWALLSTREET

CHAPTER7 ANARMYOFONE

CHAPTER8 THESPIDERANDTHEFLY

EPILOGUE RIDINGTHEWALLSTREETTRAIL

Acknowledgments

INTRODUCTION

WINDOWSONTHEWORLD

I suppose this book startedwhenIfirstheardthestoryofSergey Aleynikov, theRussian computerprogrammerwhohadworkedforGoldmanSachsand then,in the summer of 2009, afterhe’dquithisjob,wasarrestedby the FBI and charged bytheUnitedStatesgovernmentwith stealing GoldmanSachs’s computer code. I’d

thought it strange, after thefinancial crisis, in whichGoldmanhadplayedsuchanimportant role, that the onlyGoldman Sachs employeewho had been charged withany sort of crime was theemployee who had takensomething from GoldmanSachs. I’d thought it evenstranger that governmentprosecutors had argued thatthe Russian shouldn’t be

freed on bail because theGoldman Sachs computercode, in the wrong hands,couldbeused to“manipulatemarkets in unfair ways.”(Goldman’s were the righthands?IfGoldmanSachswasable to manipulate markets,couldotherbanksdoit,too?)But maybe the strangestaspect of the case was howdifficult it appeared to be—for the fewwho attempted—

to explain what the Russianhad done. I don’tmean onlywhat he had done wrong: Imeanwhat he had done.Hisjob.Hewasusuallydescribedas a “high-frequency tradingprogrammer,”butthatwasn’tan explanation. That was aterm of art that, in thesummer of 2009, mostpeople, even onWall Street,hadneverbeforeheard.Whatwas high-frequency trading?

Why was the code thatenabledGoldmanSachstodoit so important that, when itwas discovered to have beencopied by some employee,Goldman Sachs needed tocalltheFBI?Ifthiscodewasatoncesoincrediblyvaluableandsodangeroustofinancialmarkets, how did a RussianwhohadworkedforGoldmanSachs for a mere two yearsgethishandsonit?

At some point I wentlooking for someone whomightanswerthosequestions.My search ended in a roomlooking out at the WorldTrade Center site, at OneLiberty Plaza. In this roomwere gathered a small armyof shockingly well-informedpeople from every corner ofWall Street—big banks, themajor stock exchanges, andhigh-frequency trading firms.

Many of them had left high-payingjobstodeclarewaronWall Street, which meant,amongotherthings,attackingthe very problem that theRussian computerprogrammer had been hiredbyGoldman Sachs to create.Inthebargainthey’dbecomeexperts on the questions Isoughtanswersto,alongwitha lot of other questions Ihadn’t thought toask.These,

it turned out, were far moreinteresting than I expectedthemtobe.Ididn’tstartoutwithmuch

interestinthestockmarket—though, like most people, Ienjoy watching it go boomandcrash.WhenitcrashedonOctober19,1987,Ihappenedto be hovering around thefortieth floor of One NewYorkPlaza, the stockmarkettrading and sales department

of my then employer,Salomon Brothers. That wasinteresting. If you everneeded proof that evenWallStreet insiders have no ideawhat’s going to happen nextonWall Street, there it was.One moment all is well; thenext, the value of the entireU.S. stock market has fallen22.61 percent, and no oneknowswhy.Duringthecrash,someWall Street brokers, to

avoid the orders theircustomerswanted toplace tosellstocks,simplydeclinedtopick up their phones. Itwasn’tthefirsttimethatWallStreet people had discreditedthemselves, but this time theauthorities responded bychanging the rules—makingit easier for computers to dothe jobs done by thoseimperfect people. The 1987stock market crash set in

motion a process—weak atfirst, stronger over the years—that has ended withcomputers entirely replacingthepeople.Over the past decade, the

financial markets havechanged too rapidly for ourmental picture of them toremain true to life. Thepicture I’ll bet most peoplehave of themarkets is still apicture a human beingmight

havetaken.Init,atickertaperuns across the bottom ofsome cable TV screen, andalpha males in color-codedjackets stand in trading pits,hollering at each other. Thatpicture is dated; the world itdepicts is dead. Since about2007, there have been nothick-necked guys in color-coded jackets standing intrading pits; or, if they are,they’re pointless. There are

still some human beingsworking on the floor of theNew York Stock Exchangeand the various Chicagoexchanges,buttheynolongerpreside over any financialmarket or have a privilegedview inside those markets.The U.S. stock market nowtrades inside black boxes, inheavily guarded buildings inNew Jersey and Chicago.What goes on inside those

black boxes is hard to say—the ticker tape that runsacrossthebottomofcableTVscreens captures only thetiniestfractionofwhatoccursin the stock markets. Thepublic reports of whathappens inside the blackboxes are fuzzy andunreliable—even an expertcannot say what exactlyhappensinsidethem,orwhenit happens, or why. The

average investorhasnohopeof knowing, of course, eventhe little he needs to know.He logs onto his TDAmeritrade or E*Trade orSchwab account, enters aticker symbol of some stock,and clicks an icon that says“Buy”: Then what? He maythinkheknowswhathappensafterhepressesthekeyonhiscomputerkeyboard,but, trustme, he does not. If he did,

he’d think twice before hepressedit.Theworldclings to itsold

mental picture of the stockmarket because it’scomforting; because it’s sohardtodrawapictureofwhathas replaced it; and becausethefewpeopleabletodrawitfor you have no interest indoing so. This book is anattempt to draw that picture.Thepictureisbuiltupfroma

bunchofsmallerpictures—ofpost-crisis Wall Street; ofnew kinds of financialcleverness; of computers,programmed to behaveimpersonallyinwaysthattheprogrammer himself wouldnever do personally; ofpeople,comingtoWallStreetwithone ideaofwhatmakestheplacetickonlytofindthatit ticksratherdifferentlythanthey had supposed. One of

thesepeople—aCanadian,ofall things—stands at thepicture’s center, organizingthe many smaller picturesinto a coherent whole. Hiswillingness to throw open awindow on the Americanfinancial world, and to showpeople what it has become,stilltakesmybreathaway.AsdoestheGoldmanhigh-

frequency tradingprogrammer arrested for

stealingGoldman’s computercode. When he worked forGoldman Sachs, SergeyAleynikovhad a desk on theforty-second floor of OneNew York Plaza, the site ofthe old Salomon Brotherstrading floor, two floorsabove the place I’d oncewatched the stock marketcrash. He hadn’t been anymore interested in staying inthatbuilding than I hadbeen

and, in the summer of 2009,had left to seek his fortuneelsewhere. On July 3, 2009,he was on a flight fromChicago to Newark, NewJersey, blissfully unaware ofhisplaceintheworld.Hehadnowayofknowingwhatwasabout tohappentohimwhenhelanded.Thenagain,hehadno idea how high the stakeshad become in the financialgame he’d been helping

Goldman Sachs to play.Oddly enough, to see themagnitudeofthosestakes,hehad only to look out thewindowofhisairplane,downon the American landscapebelow.

CHAPTERONE

HIDDENINPLAINSIGHT

By thesummerof2009 thelinehadalifeofitsown,andtwo thousand men weredigging and boring thestrange home it needed tosurvive. Two hundred andfivecrewsofeightmeneach,plus assorted advisors andinspectors, were now risingearly to figure out how toblast a hole through someinnocent mountain, or tunnel

undersomeriverbed,ordigatrench beside a country roadthat lacked a roadside—allwithout ever answering theobvious question:Why? Theline was just a one-and-a-half-inch-wide hard blackplastic tube designed toshelter fourhundredhair-thinstrandsofglass,butitalreadyhad the feeling of a livingcreature, a subterraneanreptile,withitspeculiarneeds

and wants. It needed itsburrow to be straight,maybethe most insistently straightpatheverdugintotheearth.Itneeded to connect a datacenter on the South Side ofChicago*toastockexchangein northern New Jersey.Above all, apparently, itneededtobeasecret.Theworkersweretoldonly

what they needed to know.They tunneled in small

groupsapartfromeachother,with only a local sense ofwhere the line was comingfrom or where it was goingto.Theywerespecificallynottoldoftheline’spurpose—tomake sure they didn’t revealthat purpose to others. “Allthe time, people are askingus,‘Isthistopsecret?Isitthegovernment?’ I just said,‘Yeah,’ ” said one worker.The workers might not have

knownwhat thelinewasfor,but they knew that it hadenemies:Theyallknewtobealert to potential threats. Iftheysawanyonediggingnearthe line, for instance, ornoticedanyoneaskingalotofquestions about it, theywereto report what they’d seenimmediately to the headoffice. Otherwise they wereto say as little as possible. Ifpeopleasked themwhat they

weredoing,theyweretosay,“Just laying fiber.” Thatusually ended theconversation, but if it didn’t,it didn’t really matter. Theconstruction crews were asbewildered as anyone. Theywere used to digging tunnelsthat connected cities to othercities, and people to otherpeople. This line didn’tconnect anyone to anyoneelse. Its sole purpose, as far

as they could see, was to beasstraightaspossible,evenifthat meant they had torocksaw through a mountainrather than take the obviouswayaroundit.Why?Right up until the end,

mostworkersdidn’tevenaskthequestion.Thecountrywasflirting with anotherdepressionandtheywerejusthappy for the work. As DanSpivey said, “No one knew

why. People began to maketheirreasonsup.”Spivey was the closest

thing the workers had to anexplanation for the line, orthebedtheywerediggingforit.AndSpiveywasbynaturetight-lipped, one of thosecircumspect southerners withmore thoughts than he caredtoshare.He’dbeenbornandraised in Jackson,Mississippi, and, on those

rare occasions he spoke, hesoundedasifhe’dnever left.He’djustturnedfortybutwasstill as lean as a teenager,with the face of a WalkerEvans tenant farmer. Aftersome unsatisfying yearsworking as a stockbroker inJackson he’d quit, as he putit, “to do something moresporting.” That turned out tobe renting a seat on theChicago Board Options

Exchange and makingmarkets for his ownaccount.LikeeveryothertraderontheChicago exchanges, he sawhow much money could bemade trading futurescontracts in Chicago againstthe present prices of theindividual stocks trading inNew York and New Jersey.Every day there werethousands of moments whenthepriceswereoutofwhack

—when, for instance youcouldsellthefuturescontractformorethanthepriceofthestocks that comprised it. Tocapturetheprofits,youhadtobe fast to both markets atonce. What was meant by“fast” was changing rapidly.In the old days—before, say,2007—the speed with whicha trader could execute hadhuman limits. Human beingsworked on the floors of the

exchanges,andifyouwantedto buy or sell anything youhad to pass through them.The exchanges, by 2007,were simply stacks ofcomputers in data centers.The speed with which tradesoccurred on them was nolongerconstrainedbypeople.The only constraintwas howfastanelectronicsignalcouldtravel between Chicago andNew York—or, more

precisely, between the datacenterinChicagothathousedthe Chicago MercantileExchange and a data centerbeside the Nasdaq’s stockexchange in Carteret, NewJersey.What Spivey had realized,

by2008,wasthattherewasabig difference between thetrading speed that wasavailable between theseexchanges and the trading

speed that was theoreticallypossible. Given the speed oflight in fiber, it should havebeenpossibleforatraderwhoneededtotradeinbothplacesatoncetosendhisorderfromChicago to New York andback in roughly 12milliseconds, or roughly atenthof the time it takesyouto blink your eyes, if youblink as fast as you can. (Amillisecondisonethousandth

of a second.) The routesoffered by the varioustelecom carriers—Verizon,AT&T,Level3,andsoon—were slower than that, andinconsistent. One day it tookthem17milliseconds tosendanorder tobothdatacenters;the next, it took them 16milliseconds. By accident,some traders had stumbledacross a route controlled byVerizon that took 14.65

milliseconds. “The GoldRoute,” the traders called it,becauseontheoccasionsyouhappened to find yourself onityouwerethefirsttoexploitthe discrepancies betweenprices in Chicago and pricesin New York. Incredibly toSpivey, the telecom carrierswerenotsetuptounderstandthe new demand for speed.Not only did Verizon fail tosee that it could sell its

special route to traders for afortune; Verizon didn’t evenseem aware it ownedanything of special value.“Youwouldhavetoorderupseveral lines and hope thatyou got it,” says Spivey.“Theydidn’tknowwhattheyhad.”As late as 2008,majortelecom carriers wereunaware that the financialmarkets had changed,radically, the value of a

millisecond.Upon closer investigation,

Spivey sawwhy.Hewent toWashington,DC,andgothishands on the maps of theexisting fiber cable routesrunningfromChicagotoNewYork. They mostly followedthe railroads and traveledfrom big city to big city.Leaving New York andChicago, they ran fairlystraight toward each other,

but when they reachedPennsylvania they began towiggle and bend. Spiveystudied a map ofPennsylvania and saw themainproblem: theAlleghenyMountains. The only straightline running through theAlleghenieswastheinterstatehighway,andtherewasalawagainst layingfiberalong theinterstatehighway.Theotherroadsandrailroadszigzagged

across the state as thelandscape permitted. SpiveyfoundamoredetailedmapofPennsylvania and drew hisown line across it. “Thestraightest path allowed bylaw,” he liked to call it. Byusing small paved roads anddirt roads and bridges andrailroads, along with theoccasionalprivateparkinglotor front yard or cornfield, hecould cut more than a

hundred miles off thedistance traveled by thetelecomcarriers.Whatwastobecome Spivey’s plan, thenhis obsession, beganwith aninnocent thought: I’d like toseehowmuchfastersomeonewouldbeiftheydidthis.In late 2008, with the

global financial system inturmoil, Spivey traveled toPennsylvania and found aconstructionguytodrivehim

the length of his idealizedroute.Fortwodaystheyrosetogether at five in themorning and drove untilsevenatnight.“Whatyouseewhen you do this,” saysSpivey,“isverysmall towns,andverytinyroadswithcliffsonone side and a sheer rockwall on the other.” Therailroads traveling east towesttendedtotacknorthandsouthtoavoidthemountains:

They were of limited use.“Anything that wasn’tabsolutely east-west that hadanykindofcurveinitIdidn’tlike,” Spivey said. Smallcountry roadswerebetter forhis purposes, but so tightlysqueezed into the roughterrainthattherewasnoplaceto lay the fiberbutunder theroad. “You’d have to closethe road to dig up the road,”hesaid.

The construction guy withhim clearly suspected hemightbeoutofhismind.Yetwhen Spivey pressed him,even he couldn’t come upwith a reason why the planwasn’t at least theoreticallypossible. That’s what Spiveyhadbeenafter:areasonnottodo it. “I was just trying tofind the reason no [telecom]carrier had done it,” he says.“I was thinking: Surely I’ll

see some roadblock.” Asidefrom the constructionengineer’s opinion that noone inhis rightmindwantedto cut through the hardAllegheny rock, he couldn’tfindone.That’swhen, asheputs it,

“I decided to cross the line.”ThelineseparatedWallStreetguys who traded options onChicago exchanges frompeople who worked in the

county agencies andDepartmentofTransportationoffices that controlled publicrights-of-way through whicha private citizen might dig asecret tunnel. He soughtanswers to questions: Whatwere the rules about layingfiber-optic cable? Whosepermissiondidyouneed?Theline also separated WallStreet people from peoplewho knew how to dig holes

and lay fiber. How longwould it take? How manyyardsadaymightacrewwiththe right equipment tunnelthrough rock? What kind ofequipment was required?Whatmightitcost?Soon a construction

engineer named SteveWilliams, who lived inAustin, Texas, received anunexpectedcall.AsWilliamsrecalls, “Itwas froma friend

ofmine. He said, ‘I have anold friendwhosecousin is introuble, and he has someconstruction questions heneeds answers to.’ ” Spiveyhimselfthencalled.“Thisguygets on the phone,” recallsWilliams, “and is askingquestions about case sizes,and what kind of fiber youuse, and howwould you digin thisgroundandunder thisriver.” A few months later

Spivey called him again—toaskhimifhewouldsupervisethe laying of a fifty-milestretch of fiber, starting inCleveland. “I didn’t knowwhatIwasgettinginto,”saidWilliams. Spivey told himnothing more about theproject than what he neededtoknow to laya single fifty-mile stretch of cable. Inbetween, Spivey hadpersuaded JimBarskdale, the

former CEO of NetscapeCommunicationsandafellownative of Jackson, to fundwhatSpiveyestimatedtobea$300 million tunnel. Theynamed the company SpreadNetworks, though theydisguised the constructionbehind shell companies withdull names like NortheasternITS and Job 8. JimBarksdale’s son, DavidBarksdale, came on board—

to cut, asquietly aspossible,the four hundred or so dealsthey needed to cut withtownships and counties inorder to be able to tunnelthrough them. Williams thenprovedsoadeptatgettingtheline into the ground thatSpivey and Barksdale calledand asked him to take overthe entire project. “That’swhen they said, ‘Hey, this isgoing all the way to New

Jersey,’”Williamssaid.Leaving Chicago, the

crews had raced acrossIndianaandOhio.Onagooddaytheywereabletolaytwoto three miles of the line inthe ground. When theyarrived in westernPennsylvania they hit therock and the pace slowed,sometimes to a few hundredfeet aday. “Theycall it bluerock,” says Williams. “It’s

hard limestone. And it’s achallengetogetthrough.”Hefound himself having thesame conversation, over andoveragain,withPennsylvaniaconstruction crews. “I’dexplain to them thatweneedtogothroughsomemountain,and one after another theywould say, ‘That’s crazy.’And I would say, ‘I knowthat’s crazy, but that’s howwe’re doing it.’ And they

would ask, ‘Why?’ And I’dsay, ‘It’s more of acustomized route to theowner’swishes.’ ”Towhichthey really didn’t havemuchtosayexcept,“Oh.”Hisotherproblem was Spivey, whowas all over him about theslightest detours. Forinstance, every so often theright-of-way crossed overfrom one side of the road totheother,andthelineneeded

to cross the road within itsboundaries. These constantroad crossings irritatedSpivey—Williams wasmaking sharp right and leftturns. “Steve, you’re costingme a hundred nanoseconds,”he’d say. (A nanosecond isone billionth of one second.)And: “Canyou at least crossitdiagonally?”Spivey was a worrier. He

thought that when a person

tookrisks,thethingthatwentwrongwasusuallyathingtheperson hadn’t thought about,andsohetriedtothinkaboutthe things he wouldn’tnaturally think about. TheChicago MercantileExchange might close andmove to New Jersey. TheCalumet River might proveimpassable. Some companywith deep pockets—a bigWall Street bank, a telecom

carrier—might discoverwhathe was doing and do itthemselves. That last fear—that someone else wasalreadyout there,digginghisown straight tunnel—consumed him. Everyconstructionpersonhe talkedto thought hewas out of hismind,andyethewassuretheAlleghenies were crawlingwith people who shared hisobsession. “When something

becomesobvious to you,” hesaid, “you immediately thinksurely someone else is doingthis.”What never crossed his

mind was that, once his linewas finished, Wall Streetwould not want to buy theline. Just the reverse: Heassumed that the line wouldbe the site of a gold rush.Maybeforthatreason,heandhis backers hadn’t thought

much about how to sell thelineuntilthetimecametodoit. It was complicated. Whatthey were selling—speed—was only valuable to theextent that it was scarce.What theydidnotknowwasthe degree of scarcity thatwould maximize the line’smarketvalue.Howmuchwasitworth to a single player intheU.S.stockmarkettohavean advantage in speed over

everyoneelse?Howmuch totwenty-five different players—to share the sameadvantageovertherestofthemarket? To answer thesesorts of questions, it helps toknow how much moneytraderscanmakepurelyfromspeed in the U.S. stockmarket, and how, exactly,theymake it. “No one knewthismarket,”saysSpivey.“Itwasopaque.”

They considered holding aDutch auction—that is, startat some high reserve priceandlowerituntilthelinewasbought by a single WallStreetfirm,whichwouldthenenjoy a monopoly. Theyweren’t confident that anyone bank or hedge fundwould fork over the manybillions of dollars theyassumed the monopoly wasworth, and they didn’t like

the sound of the inevitableheadlines in the newspapers:Barksdale Makes BillionsSelling Out OrdinaryAmerican Investor. Theyhired an industry consultantnamed Larry Tabb, who hadcaught Jim Barksdale’sattention with a paper he’dwritten called “TheValue ofa Millisecond.” One way topriceaccesstotheline,Tabbthought, was to figure out

how much money might bemade from it, from the so-called spread trade betweenNewYork andChicago—thesimplearbitragebetweencashand futures. Tabb estimatedthat if a single Wall Streetbank were to exploit thecountless minusculediscrepancies in pricebetweenThingA inChicagoand Thing A in New York,they’d make profits of $20

billion a year. He furtherestimated that there were asmany as four hundred firmsthenvyingtocapturethe$20billion. All of them wouldneed tobeon the fastest linebetween the two cities—andthere were only places fortwo hundred of them on theline.Both estimates happily

coincidedwithSpivey’ssenseof themarket,andhetookto

saying, with obviouspleasure, “We have twohundred shovels for fourhundred ditch diggers.” Butwhat to charge for eachshovel? “Itwas really a totalwet finger in the air,” saysBrennan Carley, who hadworked closely with a lot ofhigh-speed traders, and whohad been hired by Spivey tosellhisnetworktothem.“Allof us were just guessing.”

The number they came upwith was $300,000 a month,roughlytentimesthepriceofthe existing telecom lines.The first two hundred stockmarketplayerswillingtopayin advance and sign a five-year lease would get a deal:$10.6 million for five years.The traders who leasedSpread’slinewouldalsoneedtobuyandmaintaintheirownsignal amplifiers, housed in

thirteen amp sites alongSpread’sroute.All-in,theup-front cost to each of the twohundred traders would cometo about $14 million, or agrandtotalof$2.8billion.By early 2010 Spread

Networks still hadn’tinformedasingleprospectivecustomeroftheirexistence.Ayear after the workers hadstarted digging, the linewas,incredibly, still a secret. To

maximize the line’s shockvalue and minimize thechance that someone elsewould seek to replicate whatthey had done, or evenannouncetheirintentiontodoso, theydecided towaituntilMarch 2010, three monthsbefore the linewasdue tobecompleted, before they triedtosellit.Howtoapproachtherichandpowerfulmenwhosebusinessestheywereaboutto

disrupt? “The general modusoperandiwastofindsomeoneatoneofthesefirmsoneofusknew,” saysBrennanCarley.“We’d say, ‘You know me.You know of JimBarksdale.We have somethingwewanttocomeoverand talk toyouabout.Wecan’ttellyouwhatit is until we get there.And,by the way, we want you tosignanNDA[non-disclosureagreement] before we come

in.’”That’s how they went to

Wall Street—in stealth.“There were CEOs at everymeeting,” says Spivey. Themen with whom they metwere among the most highlypaid people in the financialmarkets.The first reactionofmost of them was totaldisbelief. “People told melaterthattheythought,Surelynot, but let’s talk to him

anyway,” says Spivey.Anticipating theirskepticism,he carried with him a map,four feet by eight feet. Hefinger-walked them throughhis cross-country tunnel.Even then people stilldemanded proof. Youcouldn’t actually see a fiber-optic line buried three feetundertheground,buttheampsites were highly visiblethousand-square-foot

concretebunkers.Lightfadesas it travels; the fainter itbecomes,thelesscapableitisof transmitting data. Thesignals transmitted fromChicago to New Jerseyneeded tobeamplifiedeveryfifty to seventy-five miles,andfortheamplifiersthatdidthe work, Spread had builtthese maximum-securitybunkers along the route. “Iknow you guys are straight

shooters,” one trader said tothem. “But I never heard ofyou before. I want to see apicture of this place.” Everydayforthenextthreemonths,Spivey emailed this man aphotographofthemostrecentamp site under constructionto show him that it wasactuallybeingbuilt.Once their disbelief faded,

most of theWall Street guyswere just in awe. Of course

they all still asked the usualquestions.What do I get formy $14 million in assortedfees and expenses? (Twoglass fibers, one for eachdirection.) What happens ifthe line’s cut by a backhoe?(We have people on the linewho will have it up andrunning in eight hours.)Where is the backup if yourlinegoesdown?(Sorry,thereisn’t one.) When can you

supply us with the five yearsof audited financialstatements that we requirebefore we do business withanyfirm?(Um,infiveyears.)But even as they asked theirquestions and ticked theirboxes, they failed todisguisetheir wonder. Spivey’sfavorite meeting was with atrader who sat stone-facedlistening to him for fifteenminutesontheothersideofa

long conference table, thenleapt to his feet and shouted,“SHIT,THISISCOOL!”In these meetings what

didn’t get said was often asinteresting as what did. Thefinancial markets werechanging in ways evenprofessionals did not fullyunderstand.Theirnewabilityto move at computer, ratherthanhuman, speedhadgivenrise to a new class of Wall

Streettraders,engagedinnewkinds of trading. People andfirms no one had ever heardofweregettingveryrichveryquickly without having toexplain who they were orhow they were making theirmoney: These people wereSpread Networks’ targetaudience. Spivey actuallydidn’t care to pry into theirwarring trading strategies.“We never wanted to come

across as if we knew howthey were making money onthis,” he said.He didn’t ask,they didn’t say. But theresponse of many of themsuggested that their entirecommercial existencedependedonbeingfasterthantherestofthestockmarket—and that whatever they weredoingwasn’tassimpleastheage-old cash to futuresarbitrage. Some of them, as

BrennanCarleyputit,“wouldsell their grandmothers for amicrosecond.” (Amicrosecond is onemillionthof a second.) Exactly whyspeed was so important tothemwasnotclear;whatwasclear was that they feltthreatened by this faster newline. “Somebody would say,‘Wait a second,’ ” recallsCarley. “ ‘If we want tocontinue with the strategies

we are currently running,wehave to be on this line. Wehave no choice but to paywhatever you’re asking.Andyou’re going to go from myoffice to talk to all of mycompetitors.’”“I’lltellyoumyreactionto

them,” says DarrenMulholland, a principal at ahigh-speedtradingfirmcalledHudson River Trading. “Itwas, ‘Get out of my office.’

The thing I couldn’t believewas that when they came tomyoffice theyweregoing togo live inamonth.And theydidn’t even know who theclients were! They onlydiscoveredus fromreadingaletter we’d written to theSEC. . . .Who takes thosekindsofbusinessrisks?”For$300,000amonthplus

a few million more in up-frontexpenses, thepeopleon

Wall Street then makingperhaps more money thanpeople have ever made onWall Street would enjoy theright to continue doing whattheywere alreadydoing. “Atthat point they’d get kind ofpissed off,” says Carley.After one sales meeting,David Barksdale turned toSpivey and said, Thosepeople hate us. Oddlyenough, Spivey loved these

hostile encounters. “It wasgood tohave twelveguysontheothersideofthetable,andthey are all mad at you,” hesaid.“Adozenpeopletoldusonly four guyswould buy it,and they all bought it.”(Hudson River Tradingbought the line.) BrennanCarleysaid,“Weusedtosay,‘We can’t take Dan to thismeeting,becauseeveniftheyhavenochoice,peopledonot

want to do business withpeoplethey’reangrywith.’”When the salesmen from

SpreadNetworksmovedfromthe smaller, lesser-knownWall Street firms to the bigbanks, the view inside thepost-crisis financial worldbecameevenmoreintriguing.Citigroup, weirdly, insistedthat Spread reroute the linefrom thebuildingnext to theNasdaq in Carteret to their

offices in lower Manhattan,the twistsand turnsofwhichadded several millisecondsand defeated the line’s entirepurpose. The other banks allgrasped the point of the linebut were given pause by thecontractSpreadrequiredthemto sign. This contractprohibitedanyonewholeasedthe line fromallowingothersto use it. Any big bank thatleased a place on the line

could use it for its ownproprietary trading but wasforbidden from sharing itwith itsbrokeragecustomers.To Spread this seemed anobvious restriction: The linewasmore valuable the fewerpeople that had access to it.The whole point of the linewastocreateinsidethepublicmarkets a private space,accessible only to thosewilling to pay the tens of

millions of dollars in entryfees. “Credit Suisse wasoutraged,” says a Spreademployee who negotiatedwith the big Wall Streetbanks. “They said, ‘You’reenablingpeopletoscrewtheircustomers.’ ” The employeetried to argue that this wasnot true—that it was morecomplicatedthanthat—butintheendCreditSuisse refusedto sign the contract. Morgan

Stanley, on the other hand,came back to Spread andsaid,We need you to changethe language. “We say, ‘Butyou’re okay with therestrictions?’ And they say,‘Absolutely, this is totallyabout optics.’ We had towordsmith it so they hadplausible deniability.”MorganStanleywantedtobeable to trade for itself in away it couldnot trade for its

customers; it justdidn’twanttoseemasifitwantedto.Ofall thebigWallStreetbanks,Goldman Sachs was theeasiest to deal with.“Goldman had no problemsigning it,” the Spreademployeesaid.It was at just thismoment

—as the biggest Wall Streetbanks were leaping onto theline—that the line stopped initstracks.

There’dbeenchallengesallalongtheroute.AfterleavingChicago they had tried andfailedsixtimestotunnel120feetundertheCalumetRiver.They were about to give upandfindaslowerwayaroundwhen they stumbled upon acentury-oldtunnelthathadn’tbeenusedinfortyyears.Thefirst amp site after leavingCarteret was supposed to benear a mall in Alpha, New

Jersey. The guy who ownedthe landsaidno.“Hesaidheknewitwasgoingtobesomekindofterroristtargetandhedidn’t want it in theneighborhood,” said Spivey.“There’salwayslittlegotchasout there thatyouhave tobecarefulof.”Pennsylvania had proved

even more difficult thanSpivey had imagined.Coming from the east, the

line ran to a small forest inSunbury, just off the eastbank of the SusquehannaRiver, where it stopped andwaited for its western twin.The line coming from thewest needed to cross theSusquehanna. That stretch ofriver was breathtakinglywide. There was one drill inthe world—it would costthem $2 million to rent—capable of boring a tunnel

undertheriver.InJune2010,the drill was in Brazil. “WeneedadrillthatisinBrazil,”says Spivey. “That idea isquite alarming. Obviouslysomeone is using the drill.Whendowegettouseit?”Atthelastminutetheyovercamesome objections fromPennsylvania bridgeauthorities and werepermittedtocrosstheriveronthe bridge—by boring holes

through its concrete pylonsand running the cable on theundersideofthebridge.At which point the

technical problems gavewayto social problems. Leavingthebridge,theroadsplit;onebranchwent north; theother,south. If you attempted totraveldueeast,youhitadeadend. The road just stopped,nearasignbesidealeveethatsaid, Welcome to Sunbury.

Blockingtheline’spathweretwo big parking lots. Onebelonged to a company thatmanufactured wire rope, thecable used on ski lifts; theother was owned by acentury-old grocery storenamed Weis Markets. Toreach its twin in theSunburyforest,thelineneededtopassthrough one of these parkinglotsortravelaroundtheentirecity. The owners of both

Weis Markets and theWireropeWorkswerehostileor suspicious, or both; theyweren’t returning calls. “Thewhole state has been abusedby coal companies,” SteveWilliams explained. “Whenyou say you want to dig,everyonegetssuspicious.”Going around rather than

through the town, Spiveycalculated,wouldcostseveralmonths and a lot of money

and would add fourmicroseconds to his route. Itwould also prevent SpreadNetworksfromdeliveringthecable on time to the WallStreetbanksandtradersreadyto write checks for $10.6million for it. But the guywhoranthewireropefactorywasforsomereasonsoangrywithSpread’slocalcontractorthat he wouldn’t speak tothem. The guy who ran the

Weis Markets was evenhardertoreach.Hissecretarytold Spread that he was at agolf tournament, andunavailable. He’d alreadydecided—without informingSpread Networks—to rejectthesomewhatstrangeofferoflowsixfiguresplusfreehigh-speed Internet access theyhad offered him in exchangeforaten-footeasementunderhis parking lot. The line

passed too close to his icecream–making plant. Thechairman had no interest insigning over a permanenteasement that wouldmake itdifficult to expand the icecreamplant.In July 2010 the line

dropped back undergroundbeneaththebridgeinSunburyandjuststopped.“Wehadallthis fiber out there and weneededittotalktoeachother

and itcouldn’t,”saidSpivey.Then, for some reason henever fully understood, thewire rope people softened.They sold him the easementhe needed. The day afterSpread Networks acquiredlifetime rights to a ten-foot-widepathunderthewireropefactory’s parking lot, it sentout its first press release:“Round-trip travel time fromChicago to New Jersey has

beencut to13milliseconds.”They’d set a goal of comingin at under 840 miles andbeaten it; the line was 827miles long. “It was thebiggest what-the-fuckmoment the industryhadhadinsometime,”saidSpivey.Even then, none of the

line’s creators knew for surehow the line would be used.The biggest question aboutthe line—Why?—remained

imperfectly explored. All itscreators knew was that theWall Street people whowanted it wanted it verybadly—and also wanted tofind ways for others not tohave it. In one of his firstmeetings with a big WallStreet firm, Spivey had toldthe firm’s boss the price ofhis line: $10.6 million pluscosts ifhepaidupfront,$20million or so if he paid in

installments. The boss saidhe’d like to go away andthink about it. He returnedwith a single question: “Canyoudoubletheprice?”

_____________* The principal data center was latermoved to Aurora, Illinois, outsideChicago.

CHAPTERTWO

BRAD’SPROBLEM

Up till the moment of thecollapseof theU.S. financialsystem, Brad Katsuyamacouldtellhimselfthatheboreno responsibility for thatsystem. He worked for theRoyalBankofCanada, for astart.RBCmightbetheninthbiggestbankintheworld,butit was on no one’s mentalmap of Wall Street. It wasstableandrelativelyvirtuous,

and soon to be known forhavingresistedthetemptationto make bad subprime loanstoAmericansorpeddle themto ignorant investors. But itsmanagement didn’tunderstand just what anafterthoughttheirbankwas—on the rare occasionsAmerican financiers thoughtabout them at all. Brad’sbosses had sent him fromTorontotoNewYorkbackin

2002, when he was twenty-four years old, as part of a“big push” to become aplayer on Wall Street. Thesad truth about the big pushwas that hardly anyonenoticed it. As a trader whomoved toRBCfromMorganStanley put it, “When I gotthere, itwas like, ‘Holy shit,welcometothesmalltime!’”Brad himself said, “Thepeople in Canada are always

saying, ‘We’re paying toomuchforpeopleintheUnitedStates.’ What they don’trealize is that the reason youhavetopaythemtoomuchisthatnoonewantstoworkforRBC. RBC is a nobody.” Itwas as if the Canadians hadsummoned the nerve toaudition for a role in theschool play, then turned upfor it wearing a carrotcostume.

Before they senthim thereto be part of the big push,Brad had never laid eyes onWall Street or New YorkCity. It was his firstimmersive course in theAmericanwayoflife,andhewas instantly struck by howdifferent it was from theCanadian version.“Everything was to excess,”he said. “I met moreoffensive people in a year

than I had in my entire life.People lived beyond theirmeans, and theway they didit was by going into debt.That’s what shocked me themost. Debt was a foreignconcept inCanada.Debtwasevil.I’dneverbeenindebtinmylife,ever.Igothereandarealestatebrokersaid,‘Basedon what you make, you canafford a $2.5 millionapartment.’ I was like,What

the fuck are you talkingabout?”InAmerica,eventhehomeless were profligate.Back in Toronto, after a bigbank dinner, Brad wouldgather the leftovers intocovered tin trays and carrythem out to a homeless guyhesaweverydayonhiswaytowork.Theguywasalwaysappreciative. When the bankmovedhim toNewYork, hesawmorehomelesspeoplein

adaythanhesawbackhomein a year.When no one waswatching, he’d pack up theking’s banquet of untouchedleftovers after theNewYorklunches and walk it down tothe people on the streets.“Theyjust lookedatmelike,‘What the fuck is this guydoing?’ ” he said. “I stoppeddoing it because I didn’t feellikeanyonegaveashit.”In the United States, Brad

alsonoticed,hewasexpectedtoacceptdistinctionsbetweenhimself and others that he’dsimply ignored in Canada.Growingup,he’dbeenoneofthe very fewAsian kids in awhite suburb of Toronto.During World War II, hisJapanese Canadiangrandparents had beeninterned in prison camps inwestern Canada. Brad nevermentioned this or anything

elsehavingtodowithracetohisfriends,andtheyendedupthinking of him almost as aperson who did not have aracial identity. His genuinelackof interest in the subjectbecameanissueonlyafterhearrived in New York.Worried that it needed to domore to promote diversity,RBCinvitedBradalongwitha bunch of other nonwhitepeopletoameetingtodiscuss

the issue. Going around thetable, people took turnsresponding to a request to“talk about your experienceofbeingaminorityatRBC.”When Brad’s turn came hesaid, “Tobehonest, theonlytime I’ve ever felt like aminority is this exactmoment.Ifyoureallywanttoencourage diversity youshouldn’t make people feellikeaminority.”Thenheleft.

The group continued tomeetwithouthim.The episode said as much

about himas it did about hisnewhome.Eversincehewasa little kid, more by instinctthan conscious thought, hehad resisted the forces thatsought to separate him fromanygrouptowhichhefelthebelonged.Whenhewassevenhismothertoldhimhe’dbeenidentified as a gifted student,

and she offered him thechance to attend specialschool.Hetoldherhewantedto stay with his friends andattend the normal school. Inhigh school the track coachthoughthecouldbeastar(heran a 4.5-second forty-yarddash),untilhe told thecoachthat he’d rather play a teamsport—he stuck with hockeyand football. Upon leavinghigh school at the top of his

class, he could have gone onscholarship to any universityintheworld:Hewasnotonlythebeststudentbutacollege-calibertailbackandatalentedpianist. Instead he chose tofollow his girlfriend and hisfootballteammatestoWilfridLaurierUniversity,anhourorso from Toronto. After hegraduated from Laurier,taking the prize for beststudent in the business

program, he wound uptrading stocks at the RoyalBank of Canada—notbecausehehadanyparticularinterest in the stock marketbut because he had no ideawhat else to do for a living.Up till the moment he wasforced to, he hadn’t reallythoughtaboutwhathewantedto be when he grew up, orthathemightendupinsomeradically different place than

the friends he’d grown upwith.WhathelikedabouttheRBCtradingfloor,asidefromthefeelingitgavehimthat itwould reward his analyticalabilities,wasthatitremindedhim of a locker room.Another group, to which henaturallybelonged.The RBC trading floor at

OneLibertyPlazalookedoutontheholesoncefilledbytheTwin Towers. When Brad

arrived, the firm was stillconductingairqualitystudiestodetermineifitwassafeforits employees to breathe. Intime they just sort of forgotabout what had happened inthis place; the hole in theground became the view youlookedatwithouteverseeingit.For his first few years on

WallStreet,BradtradedU.S.tech and energy stocks. He

hadsomefairlyabstruseideasabout how to create what hecalled “perfectmarkets,” andthey worked so well that hewas promoted to run theequity trading department,consisting of twenty or sotraders. The RBC tradingfloorhadwhat thestaff likedto refer to as a “no-assholerule”;ifsomeonecameinthedoor looking for a job andsounding like a typical Wall

Street asshole, theywouldn’thire him, no matter howmuchmoneyhesaidhecouldmake the firm. There waseven an expression used todescribe the culture: “RBCnice.” Although Brad foundthe expressionembarrassinglyCanadian, he,too,wasRBCnice.The bestway to manage people, hethought, was to convincethem that youwere good for

their careers. He furtherbelieved that theonlyway togetpeopletobelievethatyouwere good for their careerswas actually to be good fortheir careers. These thoughtscame naturally to him: Theyjustseemedobvious.Iftherewasacontradiction

between who BradKatsuyama was and what hedidforaliving,hedidn’tseeit.Heassumedhecouldbea

traderonWallStreetwithoutits having the slightest effecton his habits, tastes,worldview,or character.Andduring his first few years onWallStreetheappearedtobecorrect.Justbybeinghimselfhebecame,onWallStreet, agreatsuccess.“HisidentityatRBC in NewYorkwas verysimple,” says a formercolleague. “Brad was thegolden child. People thought

he was going to end uprunning the bank.” Formoreor less his entire life, BradKatsuyama had trusted thesystem; and the system, inreturn, trusted BradKatsuyama. That left himespecially unprepared forwhat thesystemwastodotohim.

HIS TROUBLES BEGAN at theend of 2006, after RBC paid$100 million for a U.S.electronic stock markettrading firm called CarlinFinancial. In what appearedtoBradtobeunduehaste,hisbossesbackinCanadaboughtCarlinwithoutknowingmuchabout either it or electronictrading.Inwhathethoughttobe typical Canadian fashion,theyhadbeenslowtoreactto

a big change in the financialmarkets; but once they feltcompelled to act, they’dpanicked.“Thebank’srunbythese Canadian guys fromCanada,” a former RBCdirector put it. “They don’thave the slightest idea of theinsandoutsofWallStreet.”In buying Carlin they

received a crash course. In astroke Brad found himselfworking side by side with a

group of American traderswhocouldnothavebeenlesssuited to RBC’s culture. Thefirst day after the merger,Brad got a call from aworried female employee,who whispered, “There is aguy in here with suspenderswalking around with abaseball bat in his hands,taking swings.” That turnedout to be Carlin’s CEO,Jeremy Frommer, who,

whateverelsehewas,wasnotRBCnice.OneofFrommer’ssignature poses was feet upon his desk, baseball batswingingwildlyoverhisheadwhile some poor shoeshineguy tried to polish his shoes.Another was to find a perchonthetradingfloorandmusein loud tones about whomight get fired next.Returning to his almamater,the University of Albany, to

tell a group of businessstudents the secret of hissuccess, Frommer actuallysaid,“It’snotjustenoughthatI’m flying in first class. Ihave to knowmy friends areflyingincoach.”“Jeremywasemotional,erratic,andloud—everything the Canadianswere not,” says one formersenior RBC executive. “Tome,Toronto is like a foreigncountry,”saidFrommerlater.

“Thepeopletherearenot thesamecultureasus.Theytakea very cerebral approach toWallStreet.Itwasjustsuchadifferentworld.Itwasahardadjustment for me. If youwere a hitter, you couldn’tswing your dick around theway you could in the olddays.”With each mighty swing

Jeremy Frommer scored adirect hit on Canadian

sensibilities. The firstChristmasafter thetwofirmsmerged, he took it uponhimselftoorganizetheofficeparty. The RBC Christmaspartyhadalwaysbeenastaidaffair. Frommer rented outMarquee, the Manhattannightclub. “RBC doesn’t dostuff at Marquee,” says oneformer RBC trader.“Everyone was like, ‘Whatthe fuck isgoingonhere?’ ”

“I walked in and I didn’tknow ninety percent of thepeople there,” says another.“It looked likewewere in aVegashotel lobbybar.Therewere these girls walkingaround half-naked, sellingcigars. I asked, ‘Who are allthesepeople?’”Intothisold-fashioned Canadian bank,heretofore immune from theusualWallStreetpathologies,Frommerimportedabunchof

people who were not. “Thewomen at Carlin had adifferent look than thewomenatRBC,”saysanotherformerRBCtraderdelicately.“You got the feeling theywerehiredbecausetheywerehot.”WithCarlinalsocameaboiler room full of daytraders, some of whom hadrap sheets with variousfinancial police, others ofwhomwereabouttowindup

in jail for financial crimes.*“Carlin was what I alwaysimagined a bucket shop waslike,” says another formerRBCtrader.“Therewasalotofthegoldchainsattire,”saidanother.Itwasasifatribeof1980s Wall Street alphamales had stumbled upon atimemachineand,asaprank,identified the most mild-mannered, well-behavedprovince in Canada and

teleported themselves into it.The RBC guys were at theirdesksat6:30;theCarlinguysrolled in at 8:30 or so,lookingdistinctlyunwell.TheRBC guys were understatedand polite; the Carlin guyswere brash and loud. “Theylied or exaggerated a lotabout their relationshipswithaccounts,” says a currentRBC salesman. “They werelike, ‘Yeah, I cover [hedge

fundgiantJohn]Paulsonandwe’re tight.’ And you’d callPaulsonupand they’dbarelyheardoftheguy.”For reasons Brad did not

fullygrasp,RBCinsistedthathemovewith his entireU.S.stock trading departmentfrom their offices near theWorld TradeCenter site intoCarlin’sbuildinginMidtown.This bothered him a lot. Hegot the distinct impression

that people in Canada haddecided that electronictradingwasthefuture,eveniftheydidn’tunderstandwhyorevenwhat itmeant. Installedin Carlin’s offices, the RBCpeopleweresoongatheredtohear a state-of-the-financial-markets address given byFrommer. He stood in frontof a flat panel computermonitorthathungonhiswall.“He gets up and says the

markets are now all aboutspeed,”saysBrad.“‘Tradingis all about speed.’And thenhe says, ‘I’m going to showyou how fast our system is.’He had this guy next to himwith a computer keyboard.He said to him, ‘Enter anorder!’AndtheguyhitEnter.And the order appeared onthe screen so everyone couldsee it. And Frommer goes,‘See! See how fast that

was!!!’ ” All the guy haddonewas type thenameof astock on a keyboard, and thename was displayed on thescreen, thewaya letter,onceithasbeen typed,appearsona computer screen. “Then hegoes, ‘Do it again!’ And theguy hits the Enter button onthe keyboard again. Andeveryonenods. Itwas five inthe afternoon. The marketwasn’t open; nothing was

happening. But he was like,‘Oh my God, it’s happeninginrealtime!’AndIwaslike,‘I don’t fucking believethis.’”Bradthought:Theguywho just sold us our newelectronic trading platformeitherdoesnotknow thathisdisplayoftechnicalvirtuosityisabsurd,or,worse,hethinkswedon’tknow.As it happened, at almost

exactly the moment Jeremy

FrommerfullyenteredBrad’slife, the U.S. stock marketbegan to behave oddly.Before RBC acquired thissupposedly state-of-the-artelectronic trading firm, hiscomputers worked. Now,suddenly, they didn’t. UntilhewasforcedtousesomeofCarlin’s technology, hetrusted his trading screens.When his trading screensshowed10,000sharesofIntel

offered at $22 a share, itmeant that he could buy10,000sharesofIntelfor$22ashare.Hehadonlytopushabutton.Bythespringof2007,when his screens showed10,000sharesofIntelofferedat $22 and he pushed thebutton,theoffersvanished.Inhissevenyearsasatraderhehadalwaysbeenable to lookatthescreensonhisdeskandseethestockmarket.Nowthe

market as it appeared on hisscreenswasanillusion.This was a big problem.

Brad’s main role as a traderwas to sit between investorswho wanted to buy and sellbigamountsof stockand thepublic markets, where thevolumes were smaller. Someinvestormightwant to sell a3-million-shareblockofIntel;themarketswouldonlyshowdemand for 1million shares;

Brad would buy the entireblock, sell off a millionsharesofitinstantly,andthenwork artfully over the nextfewhourstounloadtheother2million shares. If he didn’tknow what the marketsactually were, he couldn’tpricethelargerblock.Hehadbeen supplying liquidity tothe market; now, whateverwashappeningonhisscreenswas reducing his willingness

to do it. Unable to judgemarket risks, he was lesshappytotakethem.By June2007 theproblem

had grown too big to ignore.An electronics company inSingapore called Flextronicsannounced its intention tobuyasmallerrival,Solectron,forabit less than$4ashare.A big investor called Bradand said he wanted to sell 5million shares of Solectron.

The public stock markets—the New York StockExchange (NYSE) andNasdaq—showed the currentmarket.Sayitwas3.70–3.75,whichistosayyoucouldsellSolectronfor$3.70ashareorbuyitfor$3.75.Theproblemwasthat,atthoseprices,onlyamillion shareswerebid forandoffered.Thebig investorwhowished to sell 5millionshares of Solectron called

BradbecausehewantedBradtotaketheriskontheother4million shares. And so Bradbought the shares at $3.65,slightly below the pricequoted in thepublicmarkets.But when he turned to thepublic markets—the marketson his trading screens—theshare price instantly moved.Almost as if the market hadread his mind. Instead ofselling a million shares at

$3.70, as he’d assumed hecould do, he sold a fewhundredthousandandtriggedaminicollapseinthepriceofSolectron. It was as ifsomeone knew what he wastryingtodoandwasreactingtohisdesire tosellbeforehehadfullyexpressedit.Bythetimehewasdonesellingall5million shares, at prices farbelow $3.70, he had lost asmallfortune.

Thismadenosensetohim.Heunderstoodhowhemightmove the price of aninfrequently traded stocksimply by satisfying thedemand for the highestbidder. But in the case ofSolectron, the stock of acompany about to be takenover at a known price byanothercompanywas tradingheavily. There should beplentyof supplyanddemand

inaverynarrowpricerange;it just shouldn’t move verymuch. The buyers in themarket shouldn’t vanish themomenthe sought to sell.Atthat point he did what mostpeople do when they don’tunderstand why theircomputer isn’t working theway it’s supposed to: Hecalled tech support. “If yourkeyboard didn’t work, thesewere the guys who would

comeupandreplaceit.”Liketech support everywhere,theirfirstassumptionwasthatBrad didn’t know what hewasdoing.“‘Usererror’wasthethingthey’dthrowatyou.They just thought of ustraders as a bunch of dumbjocks.”Heexplained to themthat all he was doing washitting the Enter key on hiskeyboard: It was hard toscrewthatup.

Once it was clear that theproblem was morecomplicated than user error,the troubleshooting wasbumped to a higher level.“They started to send meproduct people, the peoplewhohadboughtandinstalledthesystems,andtheyat leastsort of sounded liketechnologists.” He explainedthatthemarketonhisscreensused to be a fair

representation of the actualstock market but that now itwasnot.Inreturnhereceivedmainly blank stares. “Itwoundupbeingmetalkingtosomeone and them looking,like, befuddled.” Finally hecomplained so loudly thattheysenthimthedevelopers,the guys who had come toRBC in the Carlinacquisition. “We would hearhowtheyhadthisroomfulof

Indians and Chinese guys.Rarely would you see themon the trading floor. Theywere called “the GoldenGoose.” The bank did notwant the Golden Goosedistracted, and, when thegeesearrived,theyhadtheairofpeopleonleavefromsomecritical mission. They, too,explainedtoBradthathe,andnot his machine, was theproblem. “They told me it

was because I was in NewYorkandthemarketswereinNew Jersey and my marketdatawasslow.Thentheysaidthat it was all caused by thefact that there are thousandsof people trading in themarket. They’d say, ‘Youaren’t the only one trying todo what you’re trying to do.There’sother events.There’snews.’”If that was the case, he

asked them, why did themarketinanygivenstockdryuponlywhenhewastryingtotradeinit?Tomakehispoint,he asked the developers tostand behind him and watchwhile he traded. “I’d say,‘Watchclosely.Iamabouttobuy one hundred thousandsharesofAMD. Iamwillingto pay forty-eight dollars ashare.Therearecurrentlyonehundred thousand shares of

AMD being offered at forty-eight dollars a share—tenthousand on BATS, thirty-five thousand on the NewYork Stock Exchange, thirtythousand on Nasdaq, andtwenty-five thousand onDirect Edge.’ You could seeitallonthescreens.We’dallsit there and stare at thescreenandI’dhavemyfingerover the Enter button. I’dcountoutloudtofive...

“‘One...“‘Two.. . .See,nothing’s

happened.“ ‘Three. . . . Offers are

stillthereatforty-eight...“ ‘Four. . . . Still no

movement.“ ‘Five.’ Then I’d hit the

Enter button and—boom!—all hell would break loose.The offerings would alldisappear, and the stockwouldpophigher.”

Atwhichpointheturnedtotheguysstandingbehindhimand said, “You see, I’m theevent.Iamthenews.”To that thedevelopershad

noresponse.“Theywerekindof like, ‘Ohhh, yeah. Letmelook into that.’ Then they’ddisappear and never comeback.”Hecalledafewtimes,but “when I realized theyreally had no shot at solvingthe problem, I just left them

alone.”Brad suspected that the

culprit was the technologyfrom Carlin that RBC hadmore or less bolted onto theside of his tradingmachines.“As the market problem gotworse,” he said, “I started tojust assumemy real problemwas with how bad theirtechnology was.” A patternwasestablished:Themomenthe attempted to react to the

market on his screens, themarketmoved.And itwasn’tjust him: The exact samethingwashappeningtoalloftheRBCstockmarkettraderswho worked for him. Inaddition, for reasons hecouldn’tfathom,thefeesthatRBC was paying to stockexchanges were suddenlyskyrocketing. At the end of2007Bradconductedastudyto compare what had

happened on his tradingbooks to what should havehappened, or what used tohappen, when the stockmarket as stated on histrading screens was themarket he experienced. “Thedifference to us was tens ofmillions of dollars” in lossesplus fees, he said. “Wewerehemorrhaging money.” Hisbosses inToronto called himin and told him to figure out

how to reduce his risingtradingcosts.Up till then, Brad had

takenthestockexchangesforgranted.Whenhe’darrivedinNew York, in 2002, 85percent of all stock markettradinghappenedontheNewYork Stock Exchange, andsomehumanbeingprocessedevery order. The stocks thatdidn’ttradeontheNewYorkStock Exchange traded on

Nasdaq.No stocks traded onbothexchanges.Atthebehestof the SEC, in turnresponding to public protestsabout cronyism, theexchanges themselves, in2005, went from beingutilities owned by theirmembers to publiccorporations run for profit.Once competition wasintroduced, the exchangesmultiplied. By early 2008

there were thirteen differentpublic exchanges, most oftheminnorthernNewJersey.Virtually every stock nowtraded on all of theseexchanges: You could stillbuyandsellIntelontheNewYork Stock Exchange, butyoucouldalsobuyandselliton BATS, Direct Edge,Nasdaq, Nasdaq BX, and soon. The idea that a humanbeing needed to stand

between investors and themarket was dead. The“exchange” at Nasdaq or atthe New York StockExchange, or at their newcompetitors, such as BATSandDirectEdge,wasa stackof computer servers thatcontained the program calledthe“matchingengine.”Therewas no one inside theexchange to talk to. Yousubmitted an order to the

exchange by typing it into acomputer and sending it intothe exchange’s matchingengine.AtthebigWallStreetbanks, the guys who oncepeddled stocks to biginvestors had beenreprogrammed. They nowsold algorithms, or encodedtrading rules designed by thebanks, that investors used tosubmit their stock marketorders. The departments that

created these tradingalgorithms were dubbed“electronictrading.”That was why the Royal

BankofCanadahadpanickedandboughtCarlin.Therewasstill a role for Brad andtraders like Brad—to sitbetweenbuyersandsellersofgiantblocksof stock and themarket. But the space wasshrinking.At the same time, the

exchangeswerechanging theway they made money. In2002theychargedeveryWallStreetbrokerwhosubmittedastock market order the samesimple fixed commission pershare traded. Replacingpeoplewithmachinesenabledthe markets to become notjust faster but morecomplicated. The exchangesrolled out an incrediblycomplicated system of fees

and kickbacks. The systemwas called the “maker-takermodel”and,likealotofWallStreet creations, wasunderstoodbyalmostnoone.Even professional investors’eyes glazed over when Bradtriedtoexplainittothem.“Itwas the one thing I’d skip,because a lot of people justdidn’t get it,” he said. Sayyou wanted to buy shares inApple, and the market in

Apple was 400–400.05. Ifyou simply went in andboughtthesharesat$400.05,youweresaidtobe“crossingthe spread.” The trader whocrossed the spread wasclassified as the “taker.” Ifyou insteadrestedyourorderto buy Apple at $400, andsomeonecamealongandsoldthesharestoyouat$400,youwere designated a “maker.”In general, the exchanges

charged takers a few penniesa share, paid makerssomewhat less, and pocketedthe difference—on thedubious theory that whoeverresisted the urge to cross thespread was performing somekind of service. But therewere exceptions. Forinstance,theBATSexchange,in Weehawken, New Jersey,perversely paid takers andchargedmakers.

In early 2008 all of thiscame as news to BradKatsuyama.“Ithoughtalltheexchanges just charged us aflat fee,” he said. “I’m like,‘Holy shit, you meansomeone will pay us totrade?’ ” Thinking he wasbeing clever, he had all ofRBC’s trading algorithmsdirectthebank’sstockmarketorders to whatever exchangewouldpay them themost for

what they wanted to do—which, at that moment,happened to be the BATSexchange. “It was a totaldisaster,”saidBrad.Whenhetried tobuyor sell stockandseize the payment from theBATS exchange, the marketfor that stock simplyvanished,andthepriceofthestockmovedawayfromhim.Instead of being paid, hewounduphemorrhagingeven

moremoney.Itwasnotobvious toBrad

why some exchanges paidyoutobeatakerandchargedyou to be a maker, whileothers charged you to be ataker and paid you to be amaker. No one he askedcould explain it, either. “Itwasn’t like therewasanyonesaying, ‘Hey, you shouldreally be paying attention tothis.’ Because no one was

paying attention to this.” Tofurther bewilder the WallStreetbrokerswhosentstockmarket orders to theexchanges, the amounts thatwere charged varied fromexchange to exchange, andthe exchanges often changedtheirpricing.ToBradthisalljust seemed bizarre andunnecessarily complicated—and it raised all sorts ofquestions. “Why would you

pay anyone to be a taker? Imean, who is willing to payto make a market? Whywouldanyonedothat?”He took to asking people

around the bank who mightknow more than he did. Hetried Googling, but therewasn’t really anything toGoogle. One day he wastalking to aguywhoworkedon the retail end in Torontoselling stocks to individual

Canadians. “I said, ‘I’mgetting screwed, but I can’tfigure out who is screwingme.’ And he says, ‘Youknow, therearemoreplayersout thereinthemarketnow.’And I say, ‘What do youmeanmoreplayers?’Hesays,‘You know, there’s this newfirmthat’snowtenpercentofthe U.S. market.’ ” The guymentioned the firm’s name,butBraddidn’tfullycatchit.

It sounded like Gekko. (ThenamewasGetco.) “I’d neverevenheardofGetco. Ididn’teven know the name. I’mlike, ‘WHAT??’ They wereten percent of the market.How can that be true? It’sinsanethatsomeonecouldbeten percent of theU.S. stockmarket and I’m running aWall Street trading desk andI’ve never heard of theplace.” And why, he

wondered,would a guy fromretail in Canada know aboutthemfirst?He was now running a

stock market tradingdepartment unable to tradeproperly in the U.S. stockmarket. He was forced towatch people he cared forharassed and upset by abunch of 1980s Wall Streetthrowbacks.And then, in thefall of 2008, as he sat and

wonderedwhatelsemightgowrong, the entire U.S.financial system went into afreefall. The way Americanshandled their money had ledto market chaos, and themarket chaos created lifechaos: The jobs and careersofeveryonearoundhimweresuddenly on the line. “EverydayI’dwalkhomeandfeelasifIhadjustgothitbyacar.”Hewasn’t naïve.Heknew

thatthereweregoodguysandbadguys,andthatsometimesthebadguyswin;buthealsobelievedthatusuallytheydidnot. That view was nowchallenged.Whenhebegantograsp, along with the rest oftheworld,whatbigAmericanfirmshaddone—riggedcreditratings to make bad loansseemlikegoodloans,createdsubprime bonds designed tofail, sold them to their

customers and then betagainst them, and soon—hismind hit some kind of wall.For the first time in hiscareer, he felt that he couldonlywinifsomeoneelselost,or,morelikely, thatsomeoneelsecouldonlywinifhelost.Hewasnotbynatureazero-sum person, but he hadsomehow wound up in themiddle of a zero-sumbusiness.

His body had alwaystended to register stressbefore hismind. It was as ifhismindrefusedtoacceptthepossibilityofconflictevenashisbodywasengaged in thatconflict. Now he bouncedfrom one illness to another.His sinuses became infectedand required surgery. Hisblood pressure, chronicallyhigh, skyrocketed. Hisdoctors had him seeing a

kidneyspecialist.Byearly2009he’ddecided

toquitWallStreet.He’d justbecome engaged.Afterworkeverydayhe’dsitdownwithhisfiancée,AshleyHooper—a recent Ole Miss graduatewho’d grown up inJacksonville, Florida—todecidewhere to live. They’dwhittled the list down toSanDiego, Atlanta, Toronto,Orlando, and San Francisco.

He had no ideawhat hewasgoing to do; he just wantedout. “I thought I could justsell pharmaceuticals orwhatever.” He’d never felt aneedtobeonWallStreet.“Itwasneveracalling,”hesaid.“I didn’t think about moneyor the stock market when Iwas growing up. So theattachment was not strong.”Maybemoreoddly,hehadn’tbecome all that wedded to

money, even though RBCwas now paying him almost$2 million a year. His hearthad been in his job, butmainly because he reallyliked the people he workedfor and the people whoworked for him. What heliked about RBC was that ithadneverpressuredhimtobeanyonebuthimself.Thebank—or themarkets, or perhapsboth—was now pushing him

tobesomeoneelse.Thenthebank,onitsown,

changeditsmind.InFebruary2009 RBC parted ways withJeremy Frommer and askedBradtohelpfindsomeonetoreplace him. Even as he hadone foot out the door, Bradfound himself interviewingcandidatesfromalloverWallStreet—and he saw thatbasically none of the peoplewho held themselves out as

knowledgeable aboutelectronic trading understoodit.“Theproblemwasthattheelectronic people facingclients were just front men,”he said. “They had no cluehowthetechnologyworked.”Hewithdrewhis foot from

the doorway and thoughtabout it. Every day, themarkets were driven lessdirectlybyhumanbeingsandmore directly by machines.

Themachines were overseenbypeople,ofcourse,butfewof them knew how themachines worked. He knewthat RBC’s machines—notthe computers themselves,but the instructions to runthem—werethird-rate,buthehad assumed it was becausethecompany’snewelectronictrading unit was bumblingand inept.As he interviewedpeople from themajor banks

on Wall Street, he came torealize that they hadmore incommon with RBC than hehad supposed. “I’d alwaysbeena trader,”hesaid.“Andas a trader you’re kind ofinside a bubble. You’re justwatching your screens allday.NowIsteppedbackandfor the first time started towatch other traders.”He hada good friend who tradedstocks at a big-time hedge

fund in Stamford,Connecticut, called SACCapital. SAC Capital wasfamous (and soon to beinfamous) for being one stepahead of the U.S. stockmarket. If anyone was goingtoknowsomethingabout themarketthatBraddidn’tknow,hefigured, itwouldbe them.One spring morning he tookthe train up to Stamford andspent the day watching his

friend trade. Right away hesaw that, even though hisfriend was using technologygiven to him by GoldmanSachs and Morgan Stanleyand the other big firms, hewas experiencing exactly thesame problem as RBC: Themarketonhisscreenswasnolonger themarket.His friendwould hit a button to buy orsell a stock and the marketwouldmove away fromhim.

“When I see thisguy tradingandhewasgettingscrewed—Inowseethatitisn’tjustme.Myfrustrationisthemarket’sfrustration. And I was like,Whoa,thisisserious.”Brad’sproblemwasn’tjust

Brad’sproblem.Whatpeoplesawwhen they looked at theU.S. stock market—thenumbersonthescreensoftheprofessional traders, thetickertaperunningacrossthe

bottom of the CNBC screen—was an illusion. “That’swhen I realized the marketsarerigged.AndIknewithadto do with the technology.That the answer lay beneaththesurfaceofthetechnology.I had absolutely no ideawhere. But that’s when thelightbulb went off that theonly way I’m going to findoutwhat’sgoingonisifIgobeneaththesurface.”

THERE WAS NO way he, BradKatsuyama, was going to gobelow the surface of thetechnology. People alwaysassumed, because he was anAsianmale,thathemustbeacomputerwizard.Hecouldn’t(or wouldn’t) program hisownVCR.What he hadwasan ability to distinguishbetween computer peoplewho didn’t actually knowwhat theywere talkingabout

and thosewho did. The verybestexampleof the latter,hethought,wasRobPark.Park, a fellow Canadian,

was a legend at RBC. Incollegeinthelate1990she’dbecome entranced by whatwas then a novel idea: toteach a machine to behavelikeaverysmarttrader.“Thething that interested me wastaking a trader’s thoughtprocess and replicating it,”

Park said. He and Brad hadworkedtogetheratRBConlybriefly, back in 2004, beforehe left to start his ownbusiness, but they had hit itoff. Rob took an interest inthe way Brad thought whenhe traded. Rob then turnedthosethoughtsintocode.Theresult was RBC’s mostpopular trading algorithm.Here’s how it worked: Saythe trader wanted to buy

100,000 shares in GeneralMotors.Thealgoscannedthemarket;itsawthattherewereonly 100 shares offered. Nosmart trader seeking to buy100,000 shareswould tip hisdesire for amere100 shares.Themarketwastoothin.Butwhat was the point at whichthe trader should buy GMstock? The algorithm Robbuilt had a trigger point: Itonly bought stock if the

amount on offer was greaterthan thehistorical averageoftheamountoffered.Thatis,ifthe market was thick. “Thedecisions he makes makesense,”BradsaidofRob.“Heputs an incredible amount ofthought into them.Andsinceheputssomuch thought intohisdecisions,he’scapableofexplaining those decisions toothers.”After Brad persuaded Rob

to return toRBC, he had theperfect person to figure outwhat had happened to theU.S. stock market. And inBrad, Rob saw the perfectpersontograspandexplaintoothers whatever hediscovered. “All Brad needsisa translator fromcomputerlanguage to humanlanguage,” said Park. “Oncehe has a translator, hecompletelyunderstandsit.”

Brad wasn’t exactlyshocked when RBC finallygaveup lookingforsomeoneto run its mess of anelectronic trading operationand asked him if he wouldtake it over and fix it.Everyone else was shockedwhenheagreedtodoit,as(a)he had a safe and cushy $2-million-a-yearjobrunningthehuman traders and (b) RBChad nothing to add to

electronictrading.Themarketwas cluttered; big investorshad only so much space ontheir desks for tradingalgorithms sold by brokers;and Goldman Sachs andMorgan Stanley and CreditSuissehadlongsinceoverrunthat space and colonized it.All that was left of RBC’spurchase of Carlin was theGolden Goose. Thus Brad’sfirst question to the Golden

Goose: How do we plan tomake money? They had ananswer:TheyplannedtoopenRBC’s first “dark pool.”That, as it turned out, waswhat the Golden Goose hadbeen up to all along, writingthe software for the darkpool.Dark pools were another

rogue spawn of the newfinancialmarketplace.Privatestock exchanges, run by the

big brokers, they were notrequired to reveal to thepublic what happened insidethem.Theyreportedanytradetheyexecuted,buttheydidsowith sufficient delay that itwas impossible to knowexactly what was happeningin the broader market at themoment the trade occurred.Their internal rules were amystery, and only the brokerwhoranadarkpoolknewfor

sure whose buy and sellorders were allowed inside.The amazing idea the bigWallStreetbankshadsoldtobig investors was thattransparency was theirenemy. If, say, Fidelitywanted to sell a millionshares of Microsoft Corp.—so the argument ran—theywere better off putting theminto a dark pool run by, say,Credit Suisse than going

directly to the publicexchanges. On the publicexchanges, everyone wouldnoticeabigsellerhadenteredthe market, and the marketprice of Microsoft wouldplunge.Insideadarkpool,noonebutthebrokerwhoranithad any idea what washappening.ThecostofRBC’screating

and running its own darkpool, Brad now learned,

wouldbenearly$4millionayear. Thus his secondquestion for the GoldenGoose: How will we makemore than $4 million fromour own dark pool? TheGoldenGoose explained thatthey’dsaveallsortsofmoneyinfeestheypaidtothepublicexchanges—by puttingtogetherbuyersandsellersofthesamestockswhocametoRBC at the same time. If

RBC had some investorwhowanted to buy a millionshares of Microsoft, andanotherwhowanted to sell amillion shares of Microsoft,they could simply pair themoff in the dark pool ratherthan payNasdaq or theNewYork Stock Exchange to doit. In theory thismade sense;inpractice,notsomuch.“Theproblem,” said Brad, “wasRBCwas two percent of the

market.Iaskedhowoftenwewere likely to have buyersand sellers to cross. No onehad done the analysis.” Theanalysis, once finished,showed that RBC, if itopened a dark pool androuted all its clients’ ordersintoitfirst,wouldsaveabout$200,000 a year in exchangefees. “So I said, ‘Okay, howelsewillwemakemoney?’”Theanswerthatcameback

explained why no one hadbothered to do any analysison dark pools in the firstplace.Therewasalotoffreemoney to be made, thecomputer programmersexplained, by selling accessto the RBC dark pool tooutside traders. “They saidthere were all these peoplewhowillpaytobeinourdarkpool,” recalled Brad. “And Isaid,‘Whowouldpaytobein

our dark pool?’ And theysaid, ‘High-frequencytraders.’”Bradtriedtothinkof good reasons why tradersof any sort would pay RBCfor access to RBC’scustomers’ stock marketorders, but he came up withnone. “It just felt weird,” hesaid. “Ihada feelingofwhyand the feeling didn’t feelgood.So I said, ‘Okay, noneof this sounds like a good

idea.Killthedarkpool.’”Thatjustpissedoffalotof

people and fueled suspicionsthat Brad Katsuyama wasengaged in some activityother than the search forcorporateprofits.Nowhewasinchargeofabusinesscalledelectronic trading—withnothing to sell.Whathehad,instead, was a fast-growingpileofunansweredquestions.Why,between thedarkpools

and the public exchanges,were there nearly sixtydifferentplaces,mostofthemin New Jersey, where youcould buy any listed stock?Why did the publicexchanges fiddle with theirown pricing so often—andwhydidyougetpaidbyoneexchange to do exactly thesamethingforwhichanotherexchange might charge you?How did a firm he’d never

heard of—Getco—trade 10percent of the entire volumeofthestockmarket?Howhadthis guy in the middle ofnowhere—inretailinCanada—learned of Getco’sexistence before him? Whywas the market displayed onWallStreettradingscreensanillusion?In May 2009, what

appeared to be a scandalinvolving the public stock

exchanges added morequestions toBrad’s list.NewYork senator CharlesSchumerwrotea letter to theSEC—then issued a pressreleasetellingtheworldwhathe had done—condemningthe stock exchanges forallowing “sophisticated high-frequency traders to gainaccess to trading informationbeforeitissentoutwidelytoother traders. For a fee, the

exchange will ‘flash’information about buy andsell orders for just a fewfractions of a second beforethe information is madepubliclyavailable.”Thatwasthe first time that Brad hadheardtheterm“flashorders.”Tothegrowinglistofmentalquestions, he added another:Why would stock exchangeshaveallowed flash trading inthefirstplace?

HEANDROBsetout tobuildateamof people to investigatethe U.S. stock market. “Atfirst I was looking for guyswho had worked in HFT orwho had worked at largebanks,” said Brad. No onewho had worked in high-frequency trading wouldreturn his calls. Findingpeople who worked for thebig banks was easier: WallStreet firms were shedding

people. Guys who wouldn’thave given RBC a secondthoughtwerenow turningupin his office begging forwork. “I interviewed morethan seventy-fivepeople,”hesaid. “We didn’t hire any ofthem.” The problem with allofthesepeoplewasthatevenwhen they said they hadworked in electronic trading,theyclearlydidn’tunderstandhow the electronics did the

trading.Instead of waiting for

résumés to find him, Bradwent looking for peoplewhoworked inornear thebanks’technology departments. Inthe end his new teamconsisted of a formerDeutsche Bank softwareprogrammer named BillyZhao, a former manager inBankofAmerica’selectronictrading division named John

Schwall, and a twenty-two-year-old recent Stanfordcomputer science graduatenamed Dan Aisen. He thenset out with Rob forPrinceton,NewJersey,wheretheGoldenGoose resided, tofigureoutifanypiecesoftheGoose were worth keeping.There they found a Chineseprogrammer named AllenZhang, who, it turned out,had written the computer

code for the doomed darkpool.“Icouldn’ttellwhowasgood and who was not fromjust talking to them, butRobcould,” said Brad. “And itbecame clear that Allen wasthe Goose.” Or, at any rate,the only part of the Goosethatmight be turned to gold.Allen, Brad noticed, had nointerest in conforming to thenorms of corporate life. Hepreferredtoworkonhisown,

inthemiddleofthenight,andrefused to ever take off hisbaseball cap, which he worepulled down low over hiseyes, giving him theappearance of a getawaydriverbadlyinneedofsleep.Allen was alsoincomprehensible: What wasjust possibly English cametumbling out of him soquickly and indistinctly thathiswordstendedtofreezethe

listenerinhistracks.AsBradput it, “WheneverAllen saidanything,I’dturntoRobandsay, ‘What the fuck did hejustsay?’”Once he had a team in

place, Brad persuaded hissuperiors at the Royal Bankof Canada to conduct whatamounted to a series ofscience experiments in theU.S. stock markets. For thenext several months he and

his team would trade stocksnottomakemoneybuttotesttheories—totrytoanswerhisoriginal question: Why wasthereadifferencebetweenthestockmarketdisplayedonhistradingscreensandtheactualmarket?Why,when hewentto buy 20,000 shares of Intelofferedonhistradingscreens,did the market only sell him2,000? To search for ananswer,RBCagreedtolethis

team lose up to $10,000 aday.BradaskedRobtocomeup with some theories tospendthemoneyon.The obvious place to start

was the public markets—thethirteen stock exchangesscattered in four differentsites run by the New YorkStock Exchange, Nasdaq,BATS,andDirectEdge.Robinvitedtheexchangestosendrepresentatives to RBC to

answera fewquestions. “Wewere asking really basicquestions: ‘How does yourmatching engine work?’ ”recalls Park. “ ‘How does ithandle a lot of differentordersatthesameprice?’Butthey sent salespeople andthey had no idea. When wekept pushing, they sentproduct managers, businesspeople who knew a littleabout the technology—but

theyreallydidn’tknowmuch.Theyfinallysentdevelopers.”They were the guys whoactually programmed themachines. “The question wewantedtoanswerwas,‘Whathappens between the timeyou push the button to tradeand the time your order getstotheexchange?’”saysPark.“People think pushing abuttonisassimpleaspushinga button. It’s not. All these

things have to happen.There’s a ton of stuffhappening. The data we gotfrom them about what washappeningatfirstjustseemedrandom. But we knew theanswerwas out there. It wasjustaquestionofhowtofindit.”Rob’s first theorywas that

theexchangesweren’tsimplybundling all the orders at agiven price but arranging

them in some kind ofsequence. You and I mightboth submit an order to buy1,000sharesofIntelat$30ashare, but you mightsomehow obtain the right tocancelyourorderifmyorderis filled. “We started gettingthe idea that people werecanceling orders,” says Park.“Thattheywerejustphantomorders.” Say the markets,together, showed 10,000

shares of Apple offered at$400 a share. Typically, thatdidn’t represent one personwho wanted to sell 10,000shares of Apple but rather abunch of smaller sell orderslumped together. Theysuspectedthattheorderswerelined up in such a way thatsome people at the back ofthe line had the ability tojump out of the queue themoment the people in the

front of the line sold theirshares. “We tried calling theexchangesandaskingthemifthat’s what they did,” saidPark. “But we didn’t evenknow what words to use.”Thefurtherproblemwas thatthe trading reports did notseparateouttheexchanges:Ifyou tried to buy 10,000shares of Apple that seemedtobeonoffer and succeededinbuyingonly2,000ofthem,

you weren’t informed whichexchanges the 8,000 missingshareshadvanishedfrom.Allenwroteanewprogram

that allowed Brad to sendorders to a single exchange.Brad was fairly certain thatthis would prove that some,or maybe even all, of theexchanges were allowingthesephantomorders.Butno:When he sent an order to asingle exchange, hewas able

to buy everything on offer.Themarketas itappearedonhis screens was, once again,themarket. “I thought,Crap,there goes that theory,” saidBrad. “And that’s our onlytheory.”It made no sense: Why

would the market on thescreens be real if you sentyour order only to oneexchange but prove illusorywhen you sent your order to

all the exchanges at once?Lacking an actual theory,Brad’s team began to sendorders into variouscombinations of exchanges.First NYSE and Nasdaq.ThenNYSE andNasdaq andBATS. Then NYSE, NasdaqBX,Nasdaq,andBATS.Andsoon.Whatcamebackwasafurther mystery. As theyincreased the number ofexchanges, the percentage of

the order that was filleddecreased; the more placesthey tried to buy stock from,the less stock they actuallybought. “There was oneexception,” said Brad. “Nomatter how many exchangeswe sent an order to, wealways got one hundredpercent of what was offeredonBATS.”RobPark studiedthis and said, “I had no ideawhy this would be. I just

thought, BATS is a greatexchange!”Onemorning,while taking

a shower, Rob had anothertheory. He was picturing abarchartAllenhadcreated.Itshowed the time it tookorders to travel from Brad’strading desk in the WorldFinancial Center to thevarious exchanges. (Towidespread relief, they’d leftCarlin’s old offices and

moved back downtown.) “Iwas just visualizing thatchart,” he said. “It justoccurred to me that the barsare different heights.What ifthey were the same height?That got me fired upimmediately. I went to workand went right to Brad’soffice and said, ‘I think it’sbecausewe’renotarrivingatthesametime.’”The increments of time

involvedwereabsurdlysmall:In theory, the shortest traveltime,fromBrad’sdesktotheBATS exchange inWeehawken, was about 2milliseconds,andtheslowest,fromBrad’sdesk toCarteret,wasaround4milliseconds.Inpractice,thetimescouldvarymuch more than that,dependingonnetworktraffic,static, and glitches in thepieces of equipment between

any two points. It took 100milliseconds to blink youreyes; it was hard to believethata fractionof theblinkofan eye could have such vastmarket consequences. Allenwrote a program—this onetook him a couple of days—that built delays into theordersBradsenttoexchangesthat were faster to get to, sothat they arrived at exactlythe same time as they did at

the exchanges that wereslower to get to. “It wascounterintuitive,” says Park.“Because everyone wastelling us it was all aboutfaster. We had to go faster.And we were slowing itdown.”Onemorningtheysatdownatthescreentotesttheprogram. Ordinarily, whenyouhitthebuttontobuyandfailed to get the stock, thescreens lit up red; when you

got only some of the stockyouwereafter,thescreenslitupbrown; andwhenyougoteverythingyouaskedfor, thescreens lit up green. Allenhadn’t taken his Series 7exam,whichmeanthewasn’tallowed to press the Enterbutton and make a trade, soRob actually hit the button.Allen watched the screenslightupgreen,and,ashelatersaid,“Ihadthethought:This

is too easy.” Rob did notagree. “As soon as I pushedthe button, I ran to Brad’sdesk,” recalled Rob. “ ‘Itworked!Itfuckingworked.’Iremember there was a pauseand then Brad said, ‘Nowwhatdowedo?’”That question implied an

understanding: Someone outthere was using the fact thatstockmarketordersarrivedatdifferent times at different

exchanges to front-runordersfrom one market to another.Knowing that, what do youdo next? That questionsuggested another: Do youuse this knowledge to joinwhatever game is beingplayed in the stock market?Orforsomeotherpurpose?Ittook Brad roughly sixseconds to answer thequestion. “Brad said, ‘Wehave togoon an educational

campaign,’” recallsPark.“Itwouldhavebeenveryeasytomakemoneyoff this.Hejustchosenotto.”

THEY NOW HAD an answer toone of their questions—which, as always, raisedanotherquestion.“It’s2009,”said Brad. “This had beenhappening to me for almost

three years. There’s no wayI’m the first guy to havefigured this out. So whathappened to everyone else?”They also had a tool theycould sell to investors: theprogramAllenhadwritten tobuild delays into the stockexchangeorders.Before theydidthat,theywantedtotestiton RBC’s own traders. “Irememberbeingatmydesk,”said Park, “and you hear

people going, ‘OOOOOOO!’and ‘Holy shit, you can buystock!’”Thetoolenabledthetraders to do the job theywere meant to do: take riskonbehalfofthebiginvestorswho wanted to trade bigchunks of stock. They couldonceagaintrustthemarketontheirscreens.Thetoolneededa name. Brad and his teamstewedoverthisuntilonedaya trader stood up at his desk

and hollered, “Dude, youshould just call it Thor! Thehammer!” Someone wasassigned to figure out whatThor might be an acronymfor, and they found somewords that worked, but noone remembered them. Thetoolwasalways justThor.“Iknew we were ontosomethingwhenThorbecamea verb,” said Brad. “When Iheard guys shouting, ‘Thor

it!’”The other way he knew

they were on to somethingwas from conversations hehadwithafewoftheworld’sbiggestmoneymanagers.Thefirst visitBradandRobParkmade was to Mike Gitlin,who oversaw $700 billion inU.S. stock marketinvestments for T. RowePrice. The story they tolddidn’t come to Gitlin as a

complete shock. “You couldsee that something had justchanged,” said Gitlin. “Youcouldseethatwhenyouweretrading a stock, the marketknewwhatyouweregoingtodo,anditwasgoingtomoveagainst you.” But what Braddescribed was a far moredetailedpictureofthemarketthan Gitlin had everconsidered—and, in thatmarket, all the incentives

were screwed up. The WallStreet brokerage firmdeciding where to send T.Rowe Price’s buy and sellorders had a great deal ofpower over how and wherethose orders got submitted.The firmswerenowpaid forsending orders to someexchanges and billed forsendingorders to others.Didthe broker resist theseincentives when they didn’t

alignwiththeinterestsof theinvestors he was meant torepresent?Noone could say.Anotherwackyincentivewascalled “payment for orderflow.” As of 2010, everyAmericanstockbrokerandalltheonlinebrokers effectivelyauctioned their customers’stock market orders. TheonlinebrokerTDAmeritrade,for example, was paidhundreds of millions of

dollarseachyeartosendtheirorders to a high-frequencytrading firm called Citadel,whichexecutedtheordersontheirbehalf.WhywasCitadelwillingtopaysomuchtoseethe flow? No one could saywithcertainty.Ithadbeenhardtomeasure

the cost of the new marketstructure. But now therewasa tool for gauging not justhow orders reached their

destination but also howmuch money this new WallStreetintermediationmachinewas removing from thepocketsofinvestorslargeandsmall: Thor. Brad explainedtoMikeGitlin how his teamhad placed big trades tomeasure how much morecheaply they bought stockwhen they removed theability of the machine tofront-run them. For instance,

theybought10millionsharesof Citigroup, then trading atroughly $4 per share, andsaved$29,000—orlessthanatenthof1percentofthetotalprice.“Thatwasthetax,”saidRob Park. It sounded smalluntil you realized that theaverage daily volume in theU.S. stock market was $225billion. The same tax rateapplied to that sum came tomorethan$160millionaday.

“It was so insidious becauseyou couldn’t see it,” saidBrad. “It happens on such agranularlevelthatevenifyoutriedtolineitupandfigureitout you wouldn’t be able todo it. People are gettingscrewed because they can’timagineamicrosecond.”Thor showed you what

happenedwhenaWallStreetfirm helped an investor toavoid paying the tax. The

evidencewas indirect but, toGitlin’s mind, damning. Themere existence of BradKatsuyama was totallyshocking. “To have RBChave the foremost electronictrading expert in the worldwas a little strange,” saidGitlin. “Youwouldnot thinkthat is where the world’sforemost electronic expertwouldreside.”ThediscoveryofThorwas

not theendofastory; itwascloser to a beginning. Bradandhis teamwerebuildingamentalpictureofthefinancialmarkets after the crisis. Themarket was now a pureabstraction. It called tomindnoobviouspicture to replacethe old one that people stillcarriedaround in theirheads.The same old ticker tape ranacross the bottom oftelevision screens—even

though it represented only atiny fraction of the actualtrading. Market experts stillreportedfromtheflooroftheNew York Stock Exchange,eventhoughtradingnolongerhappened there.Foramarketexpert truly to get inside theNew York Stock Exchange,he’d need to climb inside atall black stack of computerservers locked inside a cagelocked inside a fortress

guarded by a small army ofheavily armed men andtouchy German shepherds inMahwah, New Jersey. If hewanted an overview of theentire stockmarket—or eventhe trading in a singlecompany like Intel—he’dneed to inspect the computerprintouts from twelve otherpublic exchanges scatteredacross northern New Jersey,plus records of the private

dealings that occurred insidethe growing number of darkpools. If he tried to do this,he’d soon learn that thereactually was no computerprintout. At least no reliableone. No mental pictureexisted of the new financialmarket. There was only thisyellowing photograph of amarket now dead that servedasastand-infortheliving.Bradhadnoideahowdark

and difficult the picture he’dcreatewould become.All heknew for sure was that thestockmarketwasnolongeramarket.Itwasacollectionofsmall markets scatteredacrossNewJerseyand lowerManhattan. When bids andoffersforsharessenttotheseplacesarrivedatpreciselythesame moment, the marketsacted as markets should. Ifthey arrived even a

millisecond apart, themarketvanished, and all bets wereoff. Brad knew that he wasbeing front-run—that someother trader was, in effect,noticinghisdemandforstockon one exchange and buyingitonothers inanticipationofselling it to him at a higherprice. He’d identified asuspect: high-frequencytraders.“Ihadasensethattheproblemsarebeingcausedby

this new participant in themarket,” said Brad. “I justdidn’t know how they weredoingit.”By late 2009 U.S. high-

frequency trading firmswereflying to Torontowith offersto pay Canadian banks toexpose their customers tohigh-frequency traders.Earlier that year, one ofRBC’s competitors, theCanadian Imperial Bank of

Commerce (CIBC), hadsublet its license on theToronto Stock Exchange toseveral high-frequencytrading firms and, within afew months, had seen itshistoricallystable6–7percentshare of Canadian stockmarkettradingtriple.†Seniormanagers at the Royal BankofCanadawere now arguingthat the bank should create aCanadian dark pool, route

their Canadian customers’stock market orders into it,and then sell to high-frequency traders the right tooperate inside the dark pool.Brad thought that it made alot more sense for RBCsimply to expose the newgame for what it was, andperhaps establish themselvesas the only broker on WallStreetnotconspiringtoscrewinvestors.“Theonlycard left

toplaywashonesty,”asRobParkputit.Brad argued to his bosses

thatheshouldbepermittedtolaunch what amounted to apublic informationcampaign.He wanted to go out andexplain, to anyone withmoneytoinvestintheUnitedStates stock markets, thatthey were now the prey. Hewantedtotellthemaboutthisnew weapon they might use

to defend themselves fromthe predator. But the marketwasalreadypressuringhimtosaynothingatall.Hewasinarace towin a debate in frontof RBC’s top managementabout how to respond to thenewly automated stockmarkets.Allhehadgoingforhimwashisweirddiscovery,which proved . . . what,exactly? That the stockmarket now behaved

strangely, except when itdidn’t? The RBC executiveswho wanted to join forceswith high-frequency tradersknew as little about high-frequency trading as he did.“I needed someone from theindustry toverify thatwhat Iwas saying was real,” saidBrad.Heneeded,specifically,someonefromdeepinsidetheworld of high-frequencytrading.He’dspent thebetter

part of a year cold-callingstrangersinsearchofanHFTstrategistwillingtodefect.Henow suspected that everyhumanbeingwhoknewhowhigh-frequency traders mademoneywasmakingtoomuchmoney doing it to stop andexplain what was going on.He needed to find anotherwayin.

_____________

* Intheroomwas,amongotherpeople,ZviGoffer,whowaslatersentencedtoten years in jail for orchestrating aninsidertradingringinhispriorjob,withtheGalleonGroup.† The rules of the Canadian stockmarket are different from the rules ofthe U.S. stock market. One rule inCanadathatdoesnotexistintheUnitedStates is “broker priority.” The idea isto enable brokerage firms that havebothsidesofa trade topairoffbuyersand sellers without the interference ofother buyers and sellers. For example,imagine that CIBC (representing someinvestor) has a standing order to buyshares in Company X at $20 a share,

butthatitisnotalone,andseveralotherbanks also have standing orders forCompany X’s shares at $20. If CIBCthen enters the market with an orderfrom another CIBC customer to sellsharesinCompanyXat$20,theCIBCbuyer has priority on the trade and isthe first to have his order filled. Byallowing high-frequency traders tooperate with CIBC’s license, CIBCwas,ineffect,creatinglotsofcollisionsbetweenitsowncustomersandtheHFTfirms.

CHAPTERTHREE

RONAN’SPROBLEM

Part of Ronan’s problemwasthathedidn’tlooklikeaWall Street trader. He hadpaleskinandnarrow,stoopedshoulders, and the uneasycaution of a man who hassurvived one potato famineand is expecting another. Healso lacked the Wall Streettrader’s ability to bury hisself-doubt, and to seemmoreimportantandknowledgeable

thanheactuallywas.Hewaswiry and wary, like amongoose.And yet from themoment he caught his firstglimpse of a Wall Streettrading floor, in his earlytwenties, Ronan Ryan badlywanted to work on WallStreet—and couldn’tunderstand why he didn’tbelong. “It’s hard not to getenamored of being one ofthese Wall Street guys who

people are scared of andmakeallthismoney,”hesaid.But it was hard to imagineanyone being scared ofRonan.The other part of Ronan’s

problem was his inability orunwillingness to disguise hismodest origins. Born andraised inDublin,he’dmovedtoAmericain1990,whenhewas sixteen. The Irishgovernment had sent his

father to New York to talkAmerican companies intomoving to Ireland for the taxbenefits, but few imaginedthattheywoulddoso.Irelandwaspooranddreary(“kindoflikeashithole,tobehonest”).Hisfather,whowasnotmadeof money, had spent everylast penny he had to rent ahouse in Greenwich,Connecticut, so that Ronanmight attend the Greenwich

public high school and seewhat life was like on the“right side of the tracks.” “Icouldn’t believe it,” saysRonan. “The kids had theirown cars at sixteen! Kidswould complain they had torideonaschoolbus. I’dsay,‘This fucking thing actuallytakesyou to school!And it’sfree! I used to walk threemiles.’ It’s hard not to loveAmerica.” When Ronan was

twenty-two, his father wasrecalled to Ireland; Ronanstayed behind. He didn’tthink of Ireland as a placeanyonewouldevergobacktoif given the choice, and he’dnowembracedhisideaoftheAmerican Dream—Greenwich, Connecticut,version. The year before,through an Irish guy hisfatherhadmet,he’dlandedasummer internship in the

backofficeatChemicalBankand had been promised aplace in the managementtrainingprogram.Then they canceled the

training program; the Irishguy vanished. Graduatingfrom Fairfield University in1996,hesentletterstoalltheWall Street banks butreceivedjustonefalseflickerofinterest,fromwhat,eventohis untrained eyes, was a

vaguely criminal, pump-and-dump penny stock brokeragefirm.“It’snotaseasyasyouthink to get a job on WallStreet,” he said. “I didn’tknowanyone.Myfamilyhadno contacts whatsoever. Weknewnoone.”Eventually he gave up

trying. He met another IrishguywhohappenedtoworkintheNewYorkofficeofMCICommunications, the big

telecom company. “He gaveme a job strictly because Iwas Irish,” said Ronan. “Iguess he had a few charitycases a year. I was one ofthem.” For no particularreasonother than thatnooneelsewouldhirehim,hewentto work in the telecomindustry.Thefirstbig job theygave

himwastomakesurethattheeight thousand new pagers

MCI had sold to a bigWallStreet firm were wellreceived. As he was told,“People are really sensitiveabout their pagers.” Ronantraveled in the back of arepair truck in the summerheat to some office buildingtodeliverthenewpagers.Heset up his little table at theback of the truck andunpacked the crates andwaited for the Wall Street

people to come and get theirnew pagers. An hour into ithe was sweating and huffinginside the truck while a lineof people waited for theirpagers, and a crowd hadformed, of guys to whomhe’dalreadygiventhepagers:pager protestors. “These newpagerssuck!”and“Ihatethisfucking pager!” theyscreamed, as he tried to passout evenmore pagers.As he

dealt with the revolt, one ofthe Wall Street firms’secretaries called him abouther boss’s new pager. Shewas so despondent about thething that Ronan thought hecould hear her crying. “Shekeeps saying over and over,‘It’s too big! It’s going toreally hurt him! It’s too big!It’s going to really hurthim!’ ” Ronan was nowtotallyconfused:Howcoulda

pagerinflictharmonagrownman? It was a tiny box, aninch by an inch and a half.“Then she tells me he’s amidget,anditwoulddigintohis sidewhen he bent over,”said Ronan. “And that hewasn’t like a normal-sizedmidget.Hewasareallysmalldude.AndI’mthinking,butIdon’t say it because I don’twanther to think I’madick,Why don’t you just strap it

onto his back, like abackpack?”Atthatmoment,andothers

like it, many things crossedRonan’smindthathedidnotsay. Sizing pagers to littleWallStreetpeople,andbeingholleredatbybigWallStreetpeople who didn’t like theirnew gadgets, was not whathe’dimagineddoingwithhislife. He was upset he hadn’tfoundapathontoWallStreet.

He decided tomake the bestofit.That turned out to be the

viewthatMCIofferedhimofthe entire U.S. telecomsystem. Ronan had alwaysbeen handy, but he’d neveractually studied anythingpractical. He knew next tonothing about technology.Now he started to learn allabout it. “It’s prettycaptivating, when you take

the nerdiness out of it, howthisshitworks,”hesaid.Howa copper circuit conveyedinformation, compared to aglass fiber. How a switchmadebyCiscocomparedtoaswitch made by Juniper.Which hardware companiesmade the fastest computerequipment, and whichbuildings in which citiescontained floors that couldwithstand the weight of that

equipment—oldmanufacturingbuildingswerebest. He also learned howinformation actually traveledfrom one place to another—which was usually not in astraight line run by a singletelecom carrier but in aconvoluted path run byseveral. “When you make acall to New York fromFlorida, you have no ideahow many pieces of

equipment you have to gothrough for that call tohappen. You probably justthink it’s fucking like twocansandapieceofstring.Butit’s not.” A circuit thatconnectedNewYorkCity toFlorida would have Verizonon the New York end,BellSouthontheFloridaend,and MCI in the middle; itwouldzigzagfrompopulationcenter to population center;

once it got there it wouldwind in all sorts of crazywaysthroughskyscrapersandcity streets. To soundknowing, telecom peopleliked to say that the fiberroutes ran through “the NFLcities.”That was another thing

Ronan learned: A lot ofpeople in and around thetelecom industry were moreknowingthanknowledgeable.

Thepeople atMCIwho soldthe technology often didn’tactuallyunderstanditandyetwere paid far better thanpeople, likehim,whosimplyfixedproblems.Or,asheputit, “I’m making thirty-fiveand they’re making a bucktwenty and they’re fuckingidiots.”Hegothimselfmovedtosalesandbecamealeadingsalesperson.Afewyearsintothe job, he was lured from

MCI by QwestCommunications; three yearslater, he was lured fromQwestbyanotherbigtelecomcarrier,Level3.Hewasnowmaking good money—acouple of hundred grand ayear. By 2005, he alsocouldn’t help but notice, hisclientsweremore likely thanever to be big Wall Streetbanks.Hespententireweeksinside Goldman Sachs and

Lehman Brothers andDeutsche Bank, figuring outthe best routes to run fiberandthebestmachinestohookthatfiberupto.Hehadn’tlosthis original ambition. Atsome point on every WallStreet job he had, he’d nosearound for a job opening.“I’mthinking:I’mmeetingsomanypeople.Whycan’tIgetajobatoneoftheseplaces?”Actually, the big banks

offeredhimjobsall thetime,but the jobs were neverfinance jobs. They offeredhim tech jobs—working insome remote site withcomputerhardwareandfiber-optic cable. There was avividly clear class distinctionbetween tech guys andfinance guys. The financeguys saw the tech guys asfacelesshelpandwereunableto think of them as anything

else. “They always said thesame thing to me: ‘You’re aboxes and lines guy,’ ” hesaid.Then,in2005,BTRadianz

called. Radianz was born of9/11, after the attacks on theWorldTradeCenter knockedout big pieces of WallStreet’s communicationsystem. The companypromised to build for bigWall Street banks a system

less vulnerable to outsideattack than the existingsystem. Ronan’s job was tosellthefinancialworldontheidea of subcontracting theirinformation networks toRadianz.Inparticular,hewasmeant to sell the banks on“co-locating” theircomputersin Radianz’s data center inNutley, New Jersey. But notlongafterhestartedhisjobatRadianz, Ronan had a

differentsortofinquiry,fromahedgefundbasedinKansasCity. The caller said heworked at a stock markettrading firm called BountifulTrust, and that he had heardRonanwas expert at movingfinancialdata fromoneplaceto another. Bountiful Trusthad a problem: In makingtrades between Kansas Cityand NewYork, it took themtoo long to determine what

happened to their orders—that is, what stocks they hadbought and sold. They alsonoticed that, increasingly,whentheyplacedtheirorders,themarket was vanishing onthem,justasitwasvanishingon Brad Katsuyama. “Hesays, ‘My latency time isforty-three milliseconds,’ ”recalls Ronan. “And I said,‘What the hell is amillisecond?’”

Latency was simply thetime between the moment asignal was sent and when itwas received. There wereseveral factors thatdetermined the latency of astock market trading system:the boxes, the logic, and thelines. The boxes were themachinery the signals passedthrough on their way fromPoint A to Point B: thecomputer servers and signal

amplifiers and switches. Thelogic was the software, thecode instructions thatoperated the boxes. Ronandidn’t know much aboutsoftware, except that, moreand more, it seemed to bewrittenbyRussianguyswhobarely spoke English. Thelines were the glass fiber-optic cables that carried theinformation from one box toanother. The single biggest

determinantofspeedwas thelength of the fiber, or thedistance the signal needed totravel to get fromPointA toPoint B. Ronan didn’t knowwhat a millisecond was, buthe understood the problemwith this Kansas City hedgefund: It was in Kansas City.Lightinavacuumtraveledat186,000milespersecond,or,putanotherway,186milesamillisecond. Light inside of

fiber bounced off the wallsandso traveledatonlyabouttwo-thirds of its theoreticalspeed. But it was still fast.The biggest enemy of thespeed of a signal was thedistance the signal needed totravel. “Physics is physics—this iswhat thetradersdidn’tunderstand,”saidRonan.The whole reason

Bountiful Trust had set upshop inKansasCitywas that

its founders believed that itno longer mattered wheretheywere physically located.That Wall Street was nolonger a place. They werewrong.WallStreetwas,onceagain, a place. It wasn’tactually onWall Street now.Itwas inNew Jersey.Ronanmoved the computers fromKansasCitytoRadianz’sdatacenter inNutley and reducedthe time it took them to find

outwhattheyhadboughtandsold from 43milliseconds to3.8milliseconds.From that moment the

demand on Wall Street forRonan’s services intensified.Notjustfrombanksandwell-known high-frequencytrading firms but also fromprop shops (proprietarytrading firms) no one hadeverheardof,withjustafewguys in them. All wanted to

beabletotradefasterthantheothers. To be faster theyneeded to find shorter routesfor their signals to travel; tobe faster they needed thenewest hardware, strippeddown to its essentials; to befaster they also needed toreduce the physical distancebetween their computers andthe computers inside thevarious stock exchanges.Ronanknewhowtosolveall

of these problems.But as allhis new customers housedtheir computers inside theRadianz data center inNutley, this was a trickybusiness. Ronan says, “Oneday a trader calls and asks,‘Where am I in the room?’I’m thinking, In the room?What do you mean ‘in theroom’?What the guymeant,it turned out, was in theroom.”Hewaswillingtopay

to move his computer thatsent orders into the stockmarketascloseaspossibletothe pipe that exited thebuilding in Nutley—so thathewould have a slight jumpontheothercomputersintheroom. Another trader thencalled Ronan to say that hehad noticed that his fiber-optic cable was a few yardslonger than it needed to be.Instead of having it wind

around the outside of theroom with everyone else’scable—which helped toreducetheheatintheroom—thetraderwantedhiscabletohew a straight line rightacross the middle of theroom.Itwasonlyamatteroftime

before the stock exchangesfigured out that, if peoplewere willing to spendhundreds of thousands of

dollars to move theirmachinesaround insidesomeremote data center just sotheymightbeatinybitcloserto thestockexchange, they’dpaymillions to be inside thestock exchange itself. Ronanfollowedthemthere.Hecameup with an idea: sellproximity toWallStreetasaservice. Call it “proximityservices.” “We tried totrademarkproximity,butyou

can’tbecauseit’saword,”hesaid.What hewanted to callproximity soon becameknown as “co-location,” andRonan became the world’sauthority on the subject.Whentheyranoutofwaystoreduce the length of theircable,theybegantofocusonthe devices on either end ofthe cable. Data switches, forinstance. The differencebetween fast data switches

and slow oneswasmeasuredin microseconds (millionthsof a second), butmicroseconds were nowcritical.“Oneguysaystome,‘It doesn’t matter if I’m onesecond slower or onemicrosecond; either way Icomeinsecondplace.’”Theswitchingtimesfellfrom150microseconds to 1.2microsecondspertrade.“Andthen,” says Ronan, “they

started to ask, ‘What kind ofglass are you using?’ ” Allopticalfiberswerenotcreatedequal; some kinds of glassconveyed light signals moreefficiently than others. AndRonan thought:Never beforeinhumanhistoryhavepeoplegone to somuch trouble andspentsomuchmoneytogainso little speed. “People weremeasuring the length of theircables to the foot inside the

exchanges. People werebuying these servers andchuckingthemoutsixmonthslater.Formicroseconds.”Hedidn’tknowhowmuch

moneyhigh-frequencytraderswere making, but he couldguess from how much theywere spending.From theendof 2005 to the end of 2008,Radianz alone billed themnearly $80 million—just forsetting up their computers

near the stock exchangematching engines. AndRadianz was hardly the onlyone billing them. Seeing thatthe fiber routes between theNew Jersey exchanges wereoften less than ideal, Ronanprodded a company calledHudson Fiber into findingstraighterones.HudsonFiberwas now doing a land-officebusiness digging trenches inplaces that would give Tony

Soprano pause. Ronan couldalso guess howmuchmoneyhigh-frequency traders weremaking by the trouble theytook to conceal how theymadeit.OneHFTfirmhesetup inside one of the stockexchanges insisted that hewrap their new computerservers in wire gauze—toprevent anyone from seeingtheir blinking lights orimprovements in their

hardware.AnotherHFT firmsecured the computer cagenearest the exchange’smatching engine—thecomputercodethat, ineffect,was now the stock market.FormerlyownedbyToys“R”Us (the computers probablyran the toy store’s website),the cage was emblazonedwith store logos. The HFTfirm insisted on leaving theToys “R” Us logos in place

so that no one would knowthey had improved theirposition, in relation to thematching engine, by severalfeet. “They were allparanoid,” said Ronan. “Buttheywere right to be. If youknow how to pickpocketsomeone and you were thepickpocketer, you would dothe same thing. You’d seesomeone find a new switchthat was three microseconds

faster, and in two weekseveryone in the data centerwouldhavethesameswitch.”By theendof2007Ronan

was making hundreds ofthousands of dollars a yearbuilding systems to makestockmarkettradesfaster.Hewas struck, over and overagain, by how little thetraders he helped understoodof the technology they wereusing. “They’d say, ‘Aha! I

saw it—it’s so fast!’And I’dsay, ‘Look, I’m happy youlike our product. But there’sno fucking way you sawanything.’Andthey’relike,‘Isaw it!’ And I’m like, ‘It’sthree milliseconds—it’s fiftytimes faster than theblinkofaneye.’”Hewasalsokeenlyaware that he had only thefaintestideaofthereasonforthis incredible new lust forspeed.Heheardalotofloose

talk about “arbitrage,” butwhat, exactly, was beingarbitraged, and why did itneed to be done so fast? “Ifelt like the getaway driver,”he said. “Each time, it waslike, ‘Drive faster! Drivefaster!’Thenitwaslike,‘Getrid of the airbags!’ Then itwas, ‘Get rid of the fuckingseats!’ Towards the end I’mlike, ‘Excuse me, sirs, butwhat are you doing in the

bank?’ ” He had a sense ofthe technological aptitude ofthe various players. The twobiggest high-frequencytrading firms, Citadel andGetco, were easily thesmartest. Some of the propshops were smart, too. Thebig banks, at least for now,wereallslow.Beyondthat,hedidn’teven

really know much about hisclients. The big banks—

Goldman Sachs, CreditSuisse—everyone had heardof.Others—Citadel,Getco—werefamousonasmallscale.Helearnedthatsomeofthesefirms were hedge funds,which meant that they tookmoney from outsideinvestors. But most of themwerepropshops,tradingonlytheirownfounders’money.Ahuge number of the firms hedealt with—Hudson River

Trading, Eagle Seven,Simplex Investments,Evolution FinancialTechnologies, Cooperfund,DRW—no one had everheard of, and the firmsobviously intended tokeep itthat way. The prop shopswere especially strange,because they were bothtransient and prosperous.“They’dbejustfiveguysinaroom.Allofthemgeeks.The

leaderofeach five-manpackis just an arrogant version ofthatgeek.Afuckingarrogantversion of that.” One day aprop shop was trading; thenext,ithadclosed,andallthepeople in it had moved towork for some big WallStreet bank. One group ofguys Ronan saw over andover: four Russian, oneChinese. The arrogantRussianguywhowasclearly

their leader was namedVladimir. Vladimir and hisboys ping-ponged from propshop tobigbankandback toprop shop, writing thecomputer code thatmade theactual stock market tradingdecisions. Ronan watchedthem meet with one of themost senior guys at a bigWall Street bank that hopedto employ them—and theWall Street big shot sucked

up to them. “He walks intothe meeting and says, ‘I’malways the most importantman in the room, but in thiscase Vladimir is.’ ” Ronanknewthat theserovingbandsof geeks felt nothing butcondescensiontowardthelesstechnical guys who ran thebigWallStreet firms. “Iwaslistening to them talk aboutsome calculation they hadbeen asked to make, and

Vladimir goes, ‘Ho, ho, ho.That’s what Americans callmath.’ He said it like moth.That’s what Americans callmoth. I thought, I’m fuckingIrish,butfuckyouguys.Thiscountrygaveyouashot.”By early 2008 Ronan was

spending a lot of his timeabroad, helping high-frequency traders exploit theAmericanization of foreignstock markets. A pattern

emerged:Acountryinwhichthe stock market had alwaystraded on a single exchange—Canada, Australia, the UK—would,inthenameoffree-market competition, permitthe creation of a newexchange.Thenewexchangewas always located at somesurprising distance from theoriginalexchange.InTorontoit was inside an olddepartment store building

across the city from theToronto Stock Exchange. InAustralia itwasmysteriouslylocated not in the Sydneyfinancial district but acrossSydneyHarbor,inthemiddleof a residential district. Theold London Stock ExchangewasincentralLondon.BATScreated a British rival in theDocklands, NYSE createdanother, outside of London,in Basildon, and Chi-X

created a third in Slough.Eachnewexchangegaveriseto the need for high-speedroutes between theexchanges. “It was almostlike theypickedplaces to setup exchanges so that themarketwouldfragment,”saidRonan.He still didn’t have a job

on Wall Street, but Ronanhad every reason to bepleasedwithhimselfandwith

his career. In 2007, the firstyearof thespeedboom,he’dmade $486,000, nearly twiceas much as he’d ever made.Yet he did not feel pleasedwith himself or with hiscareer. He was obviouslygood at what he did, but hehad no idea why he wasdoingit,andhewantedto.Atthe end of 2007, on NewYear’sEve,hefoundhimselfsitting in a pub in Liverpool

with“LetItBe”playingdullyon the radio. His wife hadgiven him the trip as thislovely gift. Around aminiature soccer ball she’dwrapped a note that saidshe’d bought him a planetickettoEnglandandaticketto see his favorite footballteam.“I’mdoingsomethingIalwaysdreamedaboutdoing,and it was about the mostdepressingmoment I’ve ever

had in my life,” said Ronan.“I’m thirty-four years old.I’m thinking it’s never goingtogetanybetter.I’mgoingtobe fucking Willy Loman forthe rest of my life.” He feltordinary.In the fall of 2009, out of

the blue, the Royal Bank ofCanada called him andinvitedhimtointerviewforajob.Hewasmorethanalittlewary. He’d barely heard of

RBC, and when he checkedout their website it told himnext to nothing. He’d grownweary of self-importantWallStreet traders who wantedhim to do theirmanual laborfor them.“I said, ‘Imeannodisrespect, but if you’recallingtooffermesometechjob, I have no fuckinginterest.’”TheRBCguywhocalledhim—BradKatsuyama—insisted that it wasn’t a

tech jobbuta job in finance,onatradingfloor.Ronan met Brad at seven

the next morning andwondered if that was aWallStreetthing,haulingpeopleinfor interviewsatseven in themorning. Brad asked him abunch of questions and theninvited him back tomeet hisbosses. In what seemed toRonan like “the quickesthiring in the history ofWall

Street,” RBC offered him ajob on the trading floor. Itpaid $125,000, or roughly athird of what Ronan wasmaking peddling speed tohigh-frequency traders. Itcamewithafancytitle:Headof High-Frequency TradingStrategies. For a chance toworkonaWallStreettradingfloor, Ronan was willing totake a big pay cut. “To behonest, I would have taken

less,” he said. But the titledisturbedhim,because,asheput it, “I didn’t know anyhigh-frequency tradingstrategies.”Hewassoexcitedto have finally landed a jobonaWallStreettradingfloorthat he didn’t bother to askthe obvious question. Hiswife asked it for him. “Shesays to me, ‘What are yougoingtodofor them?’AndIrealized I didn’t really

fuckingknow.Ireally,honesttoGod,havenoideawhatthejob is. There was no jobdescription ever discussed.He never told me what hewantedmefor.”

INTHEFALLof2009,anarticlein a trade magazine caughtBrad Katsuyama’s eye. He’dspentthebetterpartofayear

trying and failing to findanyone who actually workedin what was now regularlyreferred to as high-frequencytrading who was willing toexplain to him how hemadehis money. The articleclaimed that HFTtechnologists were unhappywiththewideninggulfinpaybetween themselves and thesenior trading strategists oftheir firms, some of whom

were rumored to be takinghomehundredsofmillionsofdollars a year. He wentlooking for one of theseunhappy technologists. Thevery first call he made, to aguy at Deutsche Bank whodealt often with HFT, gavehimtwonames.Ronan’swasthefirst.In his interview, Ronan

described to Brad what he’dwitnessed inside the

exchanges: the franticcompetition for nanoseconds,the Toys “R” Us cage, thewiregauze,thewarforspacewithintheexchanges,thetensof millions being spent byhigh-frequency traders fortiny increments of speed. Ashe spoke, he filled hugeemptytractsonBrad’smentalmapof thefinancialmarkets.“What he said told me thatwe needed to care about

microseconds andnanoseconds,”saidBrad.TheU.S.stockmarketwasnowaclasssystem,rootedinspeed,of haves and have-nots. Thehaves paid for nanoseconds;thehave-notshadnoideathata nanosecondhadvalue.Thehavesenjoyedaperfectviewof the market; the have-notsnever saw the market at all.What had once been theworld’s most public, most

democratic, financial markethad become, in spirit,somethingmorelikeaprivateviewing of a stolen work ofart. “I learned more fromtalkingtohiminanhourthanI learned from sixmonths ofreading about HFT,” saidBrad.“ThesecondImethimIwantedtohirehim.”He wanted to hire him

without being able to fullyexplain,tohisbossesoreven

toRonan,what hewanted tohirehimfor.Hecouldn’tverywell call him Vice Presidentin Charge of Explaining toMy Clueless Superiors WhyHigh-Frequency Trading Is aTravesty. So he called himHead of High-FrequencyTrading Strategies. “I felt heneededa‘Headof’title,”saidBrad, “to get more respectfrom people.” That wasBrad’s main concern: that

people on the trading floor,evenatRBC,wouldtakeonelook atRonan and see a guyin a yellow jumpsuit who’djust emerged from somemanhole. Ronan didn’t evenpretend to know whathappened on a trading floor.“He had questions that wereunbelievably rudimentarybutthat were necessary,” saidBrad. “He didn’t know what‘bid’ and ‘offer’ was. He

didn’tknowwhat itmeant to‘crossthespread.’”On the side, without

makingabigdealof it,Bradstarted to teach Ronan thelanguage of trading. A “bid”was an attempt to buy stock,an “offer” an attempt to sellit.Tocrossthespread,ifyouwere selling,meant toacceptthe bidder’s price, or, if youwere buying, the offeringprice. “This fucking guy

didn’t laugh at me,” saidRonan. “He sat down andexplained it.” That was theirprivate deal: Brad wouldteach Ronan about trading,andRonanwould teachBradabouttechnology.Right away there was

something to teach.Bradandhis teamwerehaving troubleturning Thor into a productthey could sell to investors.The investors they’d told

about their discovery wereclearlyeagertobuyThoranduse it for themselves—T.RowePrice’sGitlinhadmoreor less tried to buy it on thespot—but Thor now had itsproblems. The experiment ofarriving at the exchanges atthe same time had workedperfectly—the first time. Itproved hard to repeat,because it was difficult tocoax thirteen light signals to

arrive in thirteen differentstock exchanges spreadacross northern New Jerseywithin 350 microseconds ofeach other—or roughly 100microseconds less than thetime they had calculated itwould take some high-speedtradertofront-runtheirorder.They’d succeeded the firsttime by estimating thedifferences in travel time ittook to send themessages to

thevariousexchanges,andbybuildingtheequivalentdelaysinto their software. But thetravel times were never thesame. They had no controloverthepaththesignalstookto get to the exchanges, orhowmuch trafficwas on thenetwork.Sometimesittook4milliseconds for their stockmarketorders toarriveat theNew York Stock Exchange;other times, it took 7

milliseconds.Whenthetraveltime differed from theirguesses ofwhat it would be,the market, once again,vanished.In short, Thor was

inconsistent; and it wasinconsistent, Ronanexplained, because the pathsthe electronic signals tookfrom Brad’s desk to thevarious exchanges wereinconsistent.Ronancouldsee

that these traders hadn’tthought much about thephysical process by whichtheir signals traveled to theNew Jersey stock exchanges.“I realized very quickly,” hesaid, “and they’ll admit this,so Imean no disrespect, thattheyhadnofuckingcluewhattheyweredoing.”The signalsentfromBrad’sdeskarrivedat theNew Jersey exchangesat different times because

some exchangeswere fartherfromBrad’sdeskthanothers.The fastest any high-speedtrader’s signal could travelfrom the first exchange itreached to the next one was465 microseconds, or onetwo-hundredthsof the time ittakestoblinkyoureye,ifyouhave a talent for it. That is,for Brad’s trading orders tointeract with the market asdisplayed on his trading

screens,theyneededtoarriveat all the exchangeswithin a465-microsecond window.The only way to do that,Ronan told his newcolleagues at RBC, was tobuild and control your ownfibernetwork.To make his point, Ronan

brought inoversizedmapsofNew Jersey showing thefiber-optic networks built bytelecom companies. On the

mapsyoucould see justhowasignal traveledfromBrad’stradingstationatOneLibertyPlazatotheexchanges.Whenhe unrolled his first map, aguy who worked in RBC’snetwork support team burstout, “How the fuck did youget those? They’re telecomproperty! They’reproprietary!” Ronanexplained, “When they saidthey wouldn’t give them to

me because they wereproprietary, I said, ‘Well,then,proprietarilyfuckoff.’”The high-frequency traderswere paying the telecomcarriers too much to bedeniedwhatevertheywanted,andRonanhadbeentheagentof theirdesires. “Thesemapsare like fucking gold,” hesaid.“ButIhadbroughtthemso much business that theywould letme see inside their

freaking wife’s underweardrawerifIaskedthemto.”Themapstoldastory:Any

trading signal that originatedin lower Manhattan traveledup the West Side Highwayand out the Lincoln Tunnel.Perched immediately outsidethe tunnel, in Weehawken,New Jersey, was the BATSexchange. From BATS theroutes became morecomplicated, as they had to

find their way through theclutter of the Jersey suburbs.“New Jersey is now carvedup like a Thanksgivingturkey,”saidRonan.Onewayor another, they traveled eastto Secaucus, the location ofthe Direct Edge family ofexchanges founded byGoldman Sachs and Citadel,and south to the Nasdaqfamily of exchanges inCarteret. The New York

Stock Exchange furthercomplicated the story. Inearly2010,NYSEstillhaditscomputer servers in lowerManhattan, at 55 WaterStreet. (Theymoved them todistantMahwah,NewJersey,that August.) As it was lessthanamilefromBrad’sdesk,NYSE appeared to be thestock market closest to him;butRonan’smapsshowedtheincredibleindirectionofoptic

fiber in Manhattan. “To getfrom Liberty Plaza to Fifty-fiveWater Street, youmightgo through Brooklyn,” heexplained. “You can go fiftymilestogetfromMidtowntodowntown. To get from abuilding to a building acrossthe street you could travelfifteen miles.” It was a ten-minute walk from RBC’soffice atLibertyPlaza to theNew York Stock Exchange.

But from a computer’s pointofview,theNewYorkStockExchange was further fromRBC’sofficesthanCarteret.To Brad the maps

explained, among otherthings, why the market onBATS had proved soaccurate. The reason theywere always able to buy orsell100percentof theshareslisted on BATS was thatBATS was always the first

stock market to receive theirorders.News of their buyingandsellinghadn’thadtimetospread throughout themarketplace. “I was like,‘Holy shit, BATS is justclosest to us.’ It’s rightoutside the freaking tunnel.”InsideBATS,high-frequencytradingfirmswerewaitingfornews that they could use totradeon theotherexchanges.They obtained that news by

placing very small bids andoffers, typically for 100shares, forevery listedstock.Having gleaned that therewas a buyer or seller ofCompany X’s shares, theywouldraceaheadtotheotherexchanges and buy or sellaccordingly. (The race theyneededtowinwasnotaraceagainst the ordinary investor,who had no clue what washappeningtohim,butagainst

otherhigh-speedtraders.)TheordersrestingonBATSweretypically just the 100-shareminimum required for anordertobeatthefrontofanyprice queue, as their onlypurpose was to teaseinformation out of investors.The HFT firms posted thesetinyordersonBATS—ordersto buy or sell 100 shares ofbasically every stock tradedin the U.S. market—not

because they actuallywantedtobuyandsellthestocksbutbecause they wanted to findoutwhat investorswanted tobuy and sell before they didit.BATS,unsurprisingly,hadbeen created by high-frequencytraders.Thefunnythingwasthata

lot of what Ronan had seenand heard didn’t make sensetohim:Hedidn’tknowwhathe knew. Brad now helped

him to understand. Forinstance, Ronan had noticedthe HFT guys creatingelaborate tables of the time,measured inmicroseconds, ittookforastockmarketorderto travel from any givenbrokerage house to each ofthe exchanges. “Latencytables,” these were called.The times were subtlydifferent for every brokeragehouse—they depended upon

where the brokerage housephysically was located andwhichfibernetworksitleasedin New Jersey. These tablestook trouble to create andwere of obvious value tohigh-frequency traders, butRonanhadnoideawhy.Thiswas the first Brad had heardoflatencytables,butheknewexactly why they had beencreated: They enabled high-frequency traders to identify

brokers by the time theirorderstooktotravelfromoneexchange to the other. Onceyou had figured out whichbrokerwas behind any givenstockmarketorder,youcoulddiscern patterns in eachbroker’s behavior. If youknew which broker had justcomeintothemarketwithanorder to buy 1,000 shares ofIntel,youmightfurtherguesswhether those 1,000 shares

weretheentireorderorapartof a much larger order. Youmight also guess how thebroker might distribute theorder among the variousexchanges and how muchabove the current marketprice for Intel shares thebroker might be willing topay. The HFT guys didn’tneed perfect information tomake riskless profits; theyonlyneededtoskewtheodds

systematically in their favor.But, as Brad put it, “Whatyou’re looking for ultimatelyis large brokers who arebehavingidioticallywiththeircustomers’ orders.That’s therealgoldmine.”He also knew that Wall

Street brokers had a newincentive to behaveidiotically, because he hadhimself succumbed to thetemptation.WhenWallStreet

decided where to route theirclients’ stock market orders,they were now greatlyinfluencedbythenewsystemof kickbacks paid and feescharged to them by theexchanges: If a big WallStreetbrokerstoodtobepaidto send an order to buy10,000 shares of Intel toBATS but was charged tosend the same order to theNewYorkStockExchange,it

would program its routers tosend the customer’s order toBATS. The router, designedby human beings, took on alifeofitsown.Along with the trading

algorithms,therouterswereacriticalpieceoftechnologyinthe automated stockmarkets.Both are designed and builtby people who work for theWall Street broker. Both dothe thinking that people used

to do, but the intellectualtasks they perform aredifferent.Thealgorithmdoesits thinking first: It decideshow to slice up any givenorder. Say you want to buy100,000 shares of XYZCompany at no more than$25ashare,whenthemarketshowsa totalof2,000sharesoffered at $25. To simplyattempttobuy100,000sharesall at once would create

havocinthemarketanddrivethe price higher. Thealgorithm decides howmanyshares you buy,when to buythem, and the price to pay.For example, it may instructthe router to carve the100,000-share order intotwenty pieces, and to buy5,000 shares every fiveminutes, so long as the priceisnohigherthan$25.The router determines

where the order is sent. Forinstance, a router mightinstructtheordertogofirsttoaWallStreetfirm’sdarkpoolbefore going to theexchanges. Or it mightinstructtheordertogofirsttoany exchange that will paythe broker to trade, and onlythen to exchanges on whichthe brokerwill be compelledtopayto trade.(This isaso-called sequential cost-

effectiverouter.)Toillustratehow stupid routing can be,say you have told yourWallStreet broker—to whom youare paying a commission—thatyouwishtobuy100,000shares of Company XYZ at$25 and now, conveniently,there are 100,000 shares forsaleat$25,10,000oneachoftendifferentexchanges,allofwhichwill charge the brokerto trade on your behalf

(though far less than thecommissionyouhavepaidtohim). There are, however,another 100 shares for sale,also at $25, on the BATSexchange—which will paythe broker for the trade. Thesequential cost-effectiverouter will go first to BATSandbuy the100shares—andcause the other 100,000sharestovanishintothepawsof high-frequency traders (in

the bargain relieving thebroker of the obligation topay to trade). The high-frequency traders can thenturn around and sell thesharesofCompanyXYZatahigherprice,orholdontotheshares for a few secondsmore,whileyou,theinvestor,chase Company XYZ’sshares even higher. In eithercase,theresultisunappealingto the original buyer of

CompanyXYZ’sshares.That is but the most

obviousofmanyexamplesofrouting stupidity. Thecustomer (you, or someoneinvesting on your behalf) istypicallyentirelyoblivious tothe inner workings of bothalgorithms and routers: Evenifhedemandedtoknowhowhisorderwas routed, andhisbroker told him, he wouldnever be sure what was said

was true, as he has nosufficientlydetailedrecordofwhat shares traded andwhentheytraded.The brokers’ routers, like

bad poker players, all had aconspicuous tell. The tellmight be a glitch in theirmachinesratherthanatwitchof their facialmuscles, but itwas just as valuable to theHFTguysontheothersideofthetable.

Once Brad had explainedallofthistoRonan,hedidn’tneed to explain it again. “Itwas, ‘Oh shit, some of thethingsIoverheardnowmakemoresense,’”saidRonan.With Ronan’s help, the

RBCteamdesignedtheirownfiber network and turnedThorintoaproductthatcouldbesoldtoinvestors.Thesalespitch was absurdly simple:There is a new predator in

thefinancialmarkets.Hereishowheoperates,andwehavea weapon you can use todefend yourself against him.The argument about whetherRBC should leap into bedwith high-frequency tradersended. Brad’s new problemwas spreading the word ofwhathenowknewtotheU.S.investing public. Seeing howshockedpeoplewerebywhatRonan had to say, and how

interestedtheywereinit,andno longer needing Ronan topersuade his bosses thatsomething strange and newwasafoot,BraddecidedtosetRonanlooseonWallStreet’sbiggest customers. “Bradcallsmeinandsays,‘Whatifwe stop calling you Head ofHigh-Frequency TradingStrategy andmake youHeadof Electronic TradingStrategy?,’”saidRonan,who

had no idea what either titleactually meant. “I called mywife and said, ‘I think theyjustpromotedme.’”A few days later, Ronan

went with Brad to his firstWall Street meeting. “Rightbefore the meeting, Bradsays, ‘What areyougoing tosay? What have youprepared?’ I hadn’t preparedanything, so I said, ‘I’ll justwing it.’ ” He now had a

pretty good idea why Bradhadgivenhimanewjobtitle.“Myrolewastowalkaroundandsaytoclients,‘Don’tyouunderstand you’re beingfucked?’ ” The man on theother end of this firstextemporaneous presentation—thepresidentofa$9billionhedge fund—recalls theencounterthisway:“IknowIhaveathree-hundred-million-dollar problem on a nine-

billion-dollar hedge fund.”(That is, he knows that thecostofnotbeingabletotradeat the statedmarket prices iscosting him $300 million ayear.) “But I don’t knowexactly what the problem is.Ashe’stalking,I’msayingtomyself, RBC doesn’t evenknow what they are doing.And who are these guys?They aren’t traders. They’renot salesguys. And they’re

notquants.Sowhatarethey?Andthentheysaytheyhaveasolution to the world’sproblems. And you’re like:‘What? How on earth can Ieven trust you?’ And thenthey totally explain myproblem.” Between them,Brad and Ronan told thishedge fund manager all theyhad learned. They explained,in short, how theinformational value of

everything thisman didwithmoney was being auctionedby brokers and exchanges tohigh-frequency trading firmsso that they might exploithim. Thatwaswhy he had a$300millionproblemona$9billionfund.AfterBrad andRonan had

lefthisoffice,thepresidentofthisbighedgefund,whohadnever before thought ofhimself asprey, reconsidered

the financial markets. He satathisdeskwatchingbothhispersonal online brokerageaccount and his $1,800-a-month Bloomberg terminal.In his private brokerageaccount he set out to buy anexchange-traded fund (ETF)comprised of Chineseconstructioncompanies.Overseveral hours hewatched theprice of the fund on hisBloomberg terminal. It was

midnight in China, nothingwas happening, and theETF’spricedidn’tbudge.Hethen clicked the Buy buttonon his online brokerageaccount screen, and thepriceon the Bloomberg screenjumped. Most people whoused online brokerageaccounts didn’t haveBloomberg terminals thatenabled them to monitor themarket in something close to

real time. Most investorsnever would know whathappened in themarket afterthey pressed the Buy button.“I hadn’t even hit Execute,”saysthehedgefundpresident.“I hadn’t done anything butput in a ticker symbol and aquantity to buy. And themarket popped.” Then, afterhe had bought his ETF at ahigher price than originallylisted, the hedge fund

president received aconfirmation saying that thetrade had been executed byCitadel Derivatives. Citadelwas one of the biggest high-frequency trading firms.“AndIwondered,Whyismyonline broker sending mytradestoCitadel?”Brad had observed and

encouraged a lot of WallStreetcareers,but,ashesaid,“I’dneverseenanyone’sstar

rise as quickly as Ronan’sdid.Hejusttookoff.”Ronan,for his part, couldn’t quitebelieve how ordinary thepeople on Wall Street were.“It’s a whole industry ofbullshit,” he said. The firstthingthatstruckRonanabouta lot of the big investors hemet was their insecurity.“Peopleinthisindustrydon’twant to admit they don’tknow something,” he said.

“Almost never do they say,‘No, I don’t know.Tellme.’I’d say, ‘Do you knowwhatco-location is?’ And they’dsay, ‘Oh yeah, I know aboutco-location.’ Then I’d say,‘You know, HFT now putstheir servers in the samebuilding with the exchange,as close as possible to theexchange’s matching engine,sotheygetmarketdatabeforeeveryone else.’ And people

are like, ‘What the fuck??!!That’s got to be illegal!’Wemetwithhundredsofpeople.And no one knew about it.”Hewasalsosurprisedtofindhowweddedtheyweretothebig Wall Street banks, evenwhen those banks failedthem. “In HFT there was noloyalty whatsoever,” he said.Over and over again,investors would tell Ronanand Brad how outraged they

were that thebigWallStreetfirmsthathandledtheirstockmarket orders had failed toprotect them from this newpredator. Yet they werewilling to give RBC only asmall percentage of theirtrades to execute. “This wasthe biggest confusion to meabout Wall Street,” saidRonan.“‘Wait,you’retellingmeyoucan’t payusbecauseyou need to pay all these

otherpeoplewhoaretryingtoscrewyou?’”MaybebecauseRonanwas

so unlike a Wall Streetperson, he was grantedspecialaccessandwasabletoget inside the heads of theWall Street people to whomhe spoke. “After that firstmeeting,Itoldhimtherewasno point in us even being inthesamemeeting,”saidBrad.“We needed to divide and

conquer.”By the end of 2010, Brad

andRonanbetweenthemmetwith roughly five hundredprofessional stock marketinvestors who controlled,among them, many trillionsof dollars in assets. Theynever created a PowerPoint;theyneverdidanythingmoreformal thansitdownand tellpeople everything they knewin plain English. Brad soon

realized that the mostsophisticated investors didn’tknow what was going on intheirownmarket.Notthebigmutual funds, Fidelity andVanguard.Notthebigmoneymanagement firms like T.Rowe Price and JanusCapital. Not even the mostsophisticated hedge funds.ThelegendaryinvestorDavidEinhorn, for instance, wasshocked; so was Dan Loeb,

anotherprominenthedgefundmanager. Bill Ackman ran afamous hedge fund, PershingSquare, that oftenmade bidsfor large chunks ofcompanies. In the two yearsbefore Brad turned up in hisoffice to explain what washappening, Ackman hadstarted to suspect that peoplemight be using theinformation about his tradesto tradeaheadofhim. “I felt

that there was a leak everytime,” says Ackman. “Ithought maybe it was theprime broker. It wasn’t thekindofleakthatIthought.”Asalesman Brad hired at RBCfrom Merrill Lynch to helphim market Thor recalls onebig investor calling to say,“Youknow,IthoughtIknewwhat I did for a living butapparentlynot,becauseIhadnoideathiswasgoingon.”

Then came the so-calledflash crash. At 2:45 onMay6, 2010, for no obviousreason, the market fell sixhundred points in a fewminutes.Afewminuteslater,likeadrunktryingtopretendhe hadn’t just knocked overthe fishbowl and killed thepet goldfish, it bounced rightback up to where it wasbefore. If you weren’twatching closely you could

have missed the entire event—unless, of course, you hadplacedordersinthemarkettobuy or sell certain stocks.Shares ofProcter&Gamble,for instance, tradedaslowasa penny and as high as$100,000. Twenty thousanddifferent trades happened atstock prices more than 60percent removed from theprices of those stocks justmomentsbefore.Fivemonths

later, the SEC published areport blaming the entirefiasco on a single large sellorder,ofstockmarketfuturescontracts, mistakenly placedonanexchangeinChicagobyan obscure Kansas Citymutualfund.That explanation could

only be true by accident,because the stock marketregulatorsdidnotpossesstheinformation they needed to

understandthestockmarkets.The unit of tradingwas nowthe microsecond, but therecordskeptbytheexchangeswere by the second. Therewere one millionmicroseconds in a second. Itwas as if, back in the 1920s,the only stock market dataavailable was a crudeaggregation of all tradesmadeduringthedecade.Youcould see that at some point

in that era there had been astock market crash. Youcould see nothing about theeventsonandaroundOctober29,1929.ThefirstthingBradnoticed as he read the SECreporton the flash crashwasits old-fashioned sense oftime. “I did a search of thereport for the word‘minute,’ ” said Brad. “I goteighty-seven hits. I thensearchedfor‘second’andgot

sixty-three hits. I thensearched for ‘millisecond’and got four hits—none ofthem actually relevant.Finally, I searched for‘microsecond’ and got zerohits.”Hereadthereportonceand then never looked at itagain.“Onceyougeta senseof the speed with whichthings are happening, yourealize that explanations likethis—someone hitting a

button—are not right,” hesaid. “You want to see asingle time-stamped sheet ofevery trade. To see whatfollowedfromwhat.Notonlydoesitnotexist,itcan’texist,ascurrentlyconfigured.”No one could say for sure

whatcausedtheflashcrash—for the same reason no onecould prove that high-frequency traderswere front-runningtheordersofordinary

investors. The data didn’texist. But Brad sensed thatthe investment communitywas not persuaded by theSEC’sexplanationandbytheassurances of the stockexchanges that all was wellinside them. A lot of themasked the same question hewas asking himself: Isn’tthereamuchdeeperquestionof how this one snowballcaused a deadly avalanche?

He watched the mostsophisticated investorsrespond after DuncanNiederauer, the CEO of theNew York Stock Exchange,embarkedonagoodwilltour,thepurposeofwhichseemedtobetoexplainwhytheNewYork Stock Exchange hadnothing to do with the flashcrash. “That’s when a lightwentoff,”saidDannyMoses,of Seawolf Capital, a hedge

fund thatspecialized instockmarket investments. He hadheard Brad and Ronan’spitch. “Niederauer wassaying, ‘Hey, haveconfidence in us. It wasn’tus.’ Wait a minute: I neverthought it was you. Whyshould I be concerned that itwasyou?Itwaslikeyourkidwalks into your house andsays to you, ‘Dad, I didn’tdentyourcar.’Wait,there’sa

dentinmycar?”After the flash crash,Brad

no longer bothered to callinvestors to set up meetings.Hisphone rangoff thehook.“What the flash crash did,”saidBrad,“wasitopenedthebuy side’s willingness tounderstand what was goingon. Because their bossesstarted asking questions.Whichmeant that our tellingthetruth,andexplainingit to

them,fitperfectly.”A few months later, in

September 2010, anotherstrange, albeit more obscure,market event occurred, thistime in theChicago suburbs.A sleepy stock exchangecalled the CBSX, whichtraded just a tiny fraction oftotal stock market volume,announced that it was goingto invert the usual system offees and kickbacks. It was

now going to pay people to“take” liquidity and chargepeople to “make” it. Onceagain, this struck Brad asbizarre: Who would makemarketsonexchanges if theyhad topay todo it?But thenthe CBSX exploded withactivity.Overthenextseveralweeks, for example, ithandled a third of the totalvolumeofthesharestradedinSirius, the satellite radio

company. Brad knew thatSiriuswasafavoritestockofHFT firms—but he couldn’tunderstand why it wassuddenly trading in hugevolume in Chicago.Obviously, when they sawthey could be paid to “take”on the CBSX, the big WallStreet brokers all respondedby reprogramming theirrouters so that theircustomers’ orders were sent

totheCBSX.Butwhowasonthe other side of their trades,paying more than ever hadbeenpaidfortheprivilege?That’s when Ronan told

Brad about a new companycalled Spread Networks.SpreadNetworks,asitturnedout,hadtriedtohireRonantosell its precious line to high-frequency traders. They’dwalked Ronan through theirastonishing tunneling project

and their business plans. “Itold them they were fuckingbananas,” saidRonan. “Theysaid they were going to selltwohundredofthesethings.Icameupwithalistoftwenty-eight firms who wouldpotentially buy the line. Plusthey were charging ten pointsix million dollars up frontfor five years’ worth ofservice, and they wanted topaymetwelvegrandforeach

one I sold. Which is just aninsult.Youmightaswellaskme to blow you while I’mdoingit.”Ronan mentioned this

unpleasant experience toBrad, who naturally said,“You’retellingmethisnow?”Ronan explained that hehadn’t been able to mentionSpreadbeforebecausehehadsigned a non-disclosureagreementwiththecompany.

The agreement had expiredthat day, and so now hewasfreetodisclosenotonlywhatSpread had done but forwhom they had done it: notjust HFT firms like Knightand Citadel but also the bigWall Street banks—MorganStanley,GoldmanSachs, andothers. “You couldn’t provewhat these guys were doingwas a big deal, because theywere so guarded about how

much money they weremaking,”saidBrad.“Butyoucould see how big a deal itwasbyhowmuchtheyspent.And now the banks wereinvolved. I thought, Oh shit,this isn’t just HFT shops.This is industry-wide. It’ssystemic.”Ronan offered an

explanationforwhathad justhappened on the CBSX:SpreadNetworks had flipped

itsswitchandturneditselfonjusttwoweeksearlier.CBSXthen inverted its pricing. Byinverting its pricing—bypaying brokers to executecustomers’ trades for whichthey would normally becharged a fee—the exchangeenticed the brokers to sendtheircustomers’orderstotheCBSX so that they might befront-runback toNewJerseyby high-frequency traders

using Spread Networks. Theinformation that high-frequency traders gleanedfromtradingwithinvestorsinChicago they could use backinthemarketsinNewJersey.ItwasnowverymuchworthittothemtopaytheCBSXto“make” liquidity. It wasexactly the game they hadplayed onBATS, of enticingbrokers to reveal theircustomers’ intentions so that

they might exploit themelsewhere. But racing acustomer order fromWeehawkentootherpointsinNew Jersey was hardcompared to racing it fromChicago on Spread’s newline.Spread was another piece

of what was becoming afantasticallyelaboratepuzzle.The team Brad wasassembling at RBC didn’t

have all the pieces to thepuzzle—not yet—but theyhad more of them thananyone else willing to talkopenly on the subject. Thereactionsofinvestorstowhatthey already knew theyconsidered as simply morepieces of the puzzle. Everynow and then—perhaps 5percent of the time—Brad orRonan met some investorwho didn’t care to know

about the puzzle, someonewhodidn’twant tohear theirstory. Whenever Bradreturned from one of thesemeetings, he’d discover thatthe person to whom he hadjust spoken depended, oneway or another, on therevenues flowing to high-frequencytraders.Everynowand again—maybe another 5percentofthetime—theymetwith an investor who was

completely terrified. “Theyknew so little, and they’d beso scared inside their ownfirms that they’d rather themeeting never happened,”said Brad. But most of thehundreds of big-timeinvestors with whom Bradand Ronan spoke had thesame reaction as T. RowePrice’s Mike Gitlin: Theyknew something was verywrong, but they didn’t know

what,andnowthattheyknewthey were outraged. “Bradwas the honest broker,” saidGitlin. “I don’t know howmanyknewit,buthewastheonly guy who would say it.Hewassaying,‘I’mhereandI’m watching it and we’re apartytoitandthewholethingisrigged.’Heexposedpeoplewho were bad actors, and alot of people in this industryare afraid to do that.Hewas

saying, ‘This is justoffensive.’ ” Vincent Daniel,theheadstrategistatSeawolf,putitanotherway.Hetookalonglookatthisunlikelypair—aCanadianAsianguyfromthisbanknoonecaredabout,and this Irish guy who wasdoing a fair impression of aDublin handyman—who hadjust told him the mostincredible true story he hadever heard, and said, “Your

biggest competitiveadvantage is that you don’twanttofuckme.”Trust on Wall Street was

still—just—possible. The biginvestors who trusted Bradbegan to share whateverinformation they could gettheir hands on from theirother brokers—informationBradwasnevermeanttosee.For instance, severaldemandedtoknowfromtheir

other Wall Street brokerswhatpercentageofthetradesexecutedontheirbehalfwereexecuted inside the brokers’dark pools. These dark poolscontained the murkiestfinancial incentives in thenew stock market. GoldmanSachs and Credit Suisse ranthe most prominent darkpools. But every brokeragefirm strongly encouragedinvestorswhowanted to buy

orsellbigchunksofstocktodosointhatfirm’sdarkpool.In theory, the brokers weremeant to find the best pricefor their customers. If thecustomer wanted to buyshares in Chevron, and thebest price happened to be onthe New York StockExchange,thebrokerwasnotsupposed to stick thecustomer with a worse priceinsidetheirdarkpool.Butthe

dark pools were opaque.Their rules were notpublished. No outsider couldseewhatwentoninsidethem.Itwasentirelypossiblethatabroker’s own traders weretrading against the customersin the dark pool: Therewerenorulesagainstit.Andwhilethe brokers often protestedthattherewerenoconflictsofinterest inside their darkpools, all the dark pools

exhibited the same strangeproperty: A huge percentageof the customer orders sentinto a dark pool wereexecuted inside the pool.Brad knew this because ahandfuloftheworld’sbiggeststock market investors hadshared their informationwithhim—so that he might helpthem figure out what wasgoingon.It was hard to explain. A

broker was expected to findthe best possible price in themarket for his customer.TheGoldman Sachs dark pool—to take one example—wasless than 2 percent of theentire stock market. So whydid nearly 50 percent of thecustomer orders routed intoGoldman’s dark pool end upbeing executed inside thatpool—rather than out in thewider market? Most of the

brokers’ dark poolsconstitutedlessthan1percentof the entiremarket, and yetsomehowthosebrokersfoundthe best price for theircustomersbetween15and60percent of the time. (So-called rates of internalizationvariedfrombrokertobroker.)And because the dark poolwas not required to sayexactlywhen ithadexecutedatrade,andthebrokerdidnot

typically tell his investorswhereithadexecutedatrade,much less the marketconditions at the moment ofexecution, thecustomer livedin darkness. Even a giantinvestor like T. Rowe Pricesimplyhad to take itonfaiththat Goldman Sachs orMerrillLynchhadactedinitsinterest, despite the obviousfinancial incentivesnot to doso.AsMikeGitlinsaid,“It’s

just very hard to prove thatany broker-dealer is routingthe trades tosomeplaceotherthan theplace that isbest foryou.You couldn’t SEEwhatanygivenbrokerwasdoing.”If an investor as large as T.Rowe Price, which acted onbehalf of millions of smallinvestors, was unable toobtain from its stockbrokersthe information it needed todetermine if the brokers had

acted in their interest, whatchance did the little guyhave?In this environment, the

effect of trying to helpinvestors see what washappeningtotheirmoneywasrevolutionary. The RoyalBank of Canada had neverbeen anything more than themosttrivialplayerintheU.S.stock market. At the end of2010,Bradsawareportfrom

Greenwich Associates, thefirm used by Wall Streetbanks to evaluate theirstanding in relation to theirpeers. Greenwich Associatesinterviews the investors whouseWallStreet’sservicesandprivately reports theirfindings to the Wall Streetfirms. In2009,RBChad—atnumber 19—been far downGreenwich Associates’ stockmarket rankings. At the end

of2010,afteronlysixmonthsof Thor, RBC was rankednumber 1. GreenwichAssociatescalledRBCtoaskwhat on earth was going onwithinthebank.Inthehistoryof their rankings, they said,they had never seen a firmjumpmorethanthreespots.At the same time, this

movement spawned by BradKatsuyama’s unhappinesswithWallStreetwas starting

to feel less like a businessthan a cause. Brad was noradical.Asheputit,“There’sa difference betweenchoosing a crusade andhavingitthrustonyou.”He’dnever really thought all thatmuch about how he fit intothe bigger picture, andcertainly never consideredhimself a character upon astage. He’d never run forstudent council. He’d never

had anything to do withpolitics. “It’s always seemedtomethatthethingsyouneedtodotoinfluencechangehadto dowith glad-handing,” hesaid. “It just felt so phony.”This didn’t feel phony. Thisfeltlikeasituationinwhichaperson, through hisimmediate actions, mightchange the world. After all,he was now educating theworld’s biggest money

managers about the innerworkingsofthestockmarket,which strongly suggested tohimthatnooneelseonWallStreet was willing to teachthem how their investmentdollars were being abused.The more he understood theinner workings of thefinancialsystem,thebetterhemight inform the investors,big and small, who werebeing abused by that system.

And the more pressure theymight bring to bear on thesystemtochange.Thedeepproblemwiththe

system was a kind of moralinertia. So long as it servedthe narrow self-interests ofeveryone inside it,nooneontheinsidewouldeverseektochange it, no matter howcorrupt or sinister it became—though even to use wordslike “corrupt” and “sinister”

made serious peopleuncomfortable, and so Bradavoided them. Maybe hisbiggest concern, when hespoke to investors, was thathe’d be seen as just anothernutwithaconspiracy theory.One of the compliments thatmadehimhappiestwaswhena big investor said, “ThankGod, finally there’s someonewho knows something abouthigh-frequency trading who

isn’t an Area 51 guy.”Because he wasn’t a radical,it took him awhile to figureoutthatfateandcircumstancehad created for him adramatic role, which he wasobligedtoplay.Onenightheactually turned to Ashley,now his wife, and said, “Itfeels like I’m an expert insomethingthatbadlyneedstobe changed. I think there’sonly a few people in the

world who can do anythingabout this. If I don’t dosomething right now—me,Brad Katsuyama—there’s noonetocall.”

CHAPTERFOUR

TRACKINGTHE

PREDATOR

By the end of 2010 they’dbuilt a marketable weapon.The weapon promised todefend investors in the U.S.stock market from whatappearedtobeanewkindofmarket predator. About thatpredator they knewsurprisinglylittle.ApartfromRonan, Brad knew no onefrominsidetheworldofhigh-frequency trading. He had

only a vague idea of thatworld’s reach, or its politicalinfluence. From Ronan heknew that the HFT firmsenjoyed special relationshipswith the public stockexchanges, but he knewnothing about their dealingswith the big Wall Streetbanks tasked with guardingthe interests of investors.Then again, many of thepeoplewhoworkedinsidethe

Wall Street banks seemed tohaveonly thefaintest ideaofwhat thosebankswereupto.IfyouworkedforabigWallStreet bank, the easiest wayto find out what other bankswere up to was to seek outtheir employees who werelooking for new jobs andinterview them. In the wakeofthefinancialcrisis,thetoo-big-to-fail endofWallStreetwasinturmoil,andBradwas

able to talk to people who,justafewyearsbefore,wouldnever have consideredworking for the Royal Bankof Canada. By the time hewas finished picking theircollective brains, he hadspoken to more than ahundred employees at too-big-to-fail banks but hiredonly about thirty-five ofthem.“Theyallwantedjobs,”he said. “It’s not that they

wouldn’t tell me. It’s thatthey didn’t know how theirown electronic systemsworked.”Thethreadrunningthrough

all these people, even theoneshedidn’thire,wastheirfear and distrust of thesystem. John Schwall was acurious case in point.Schwall’s father had been afirefighter on Staten Island,like his father before him.

“Every male on my father’sside is a fireman,” Schwallsaid. “I wanted to dosomething more.” Moremeant getting a master’s inengineering from theStevensInstitute of Technology, inHoboken,NewJersey. In thelate 1990s he took a job atBancofAmericaSecurities,*where he rose to a positionwith an important-soundingtitle: Head of New Products.

Hisjobdescriptionwasmoreglamorous than his job. JohnSchwall was the guy behindthe scenes who handled theboring details, likemanagingrelations between the traderson the floor and the techgeeks who built stuff forthem, or ensuring that thebank complied with newstock market regulations. Heroutinely ranked in the top 1percent of all employees in

BancofAmerica’sreviewsofitspersonnel,buthisstatusinaWall Street bank was akinto head butler to a Britishupper-class family. To thegrunts in the back office hemighthaveseemedlikeabigshot, but to the traders whomadethemoneyhedidnot.Whatever frustration this

caused him he buried.Givenan excuse to feel loyalty forhis company, he seized it.

September 11, 2001, forinstance. Schwall’s deskwasin the North Tower of theWorld Trade Center, on theeighty-first floor. By sheerfluke he had been late towork thatmorning—the onlyday in 2001 hewould reportlate to work—and he’dwatched the first plane hit,thirteenfloorsabovehisdesk,fromthewindowofadistantbus.Severalofhiscolleagues

died that day, and so hadsome Staten Island firemenhe’d known. Schwall seldomspoke of the event, butprivatelyhebelievedthat,hadhebeenathisdeskwhen theplane hit, his instinct wouldhavebeen togoup the stairsrather than down them. Theguilt he felt for not havingbeen on hand to helpsomehow became, in hismind, a debt he owed to his

colleagues and to hisemployer. Which is to saythat Schwall wanted to feeltoward a Wall Street bankwhat a fireman is meant tofeel toward his company. “Ithought I’d be at Banc ofAmericaforever,”hesaid.Then came the financial

crisis, and, in 2008, theacquisition, by Bank ofAmerica, of a collapsingMerrill Lynch. What

happened next upendedSchwall’sworldview.MerrillLynch had been among themost prolific creators of thevery worst subprimemortgage bonds. Had theybeen left to themercy of themarket—had Bank ofAmericanotsavedthem—theMerrill Lynch people wouldhave been tossed out on thestreet. Instead, right beforetheir acquisition, they

awarded themselves massivebonuses that Bank ofAmericawounduphaving topay. “It was incrediblyunfair,”saidSchwall.“Itwasincrediblyunjust.Mystockinthis company I helped tobuildfornineyearsgoesintotheshitter,andtheseassholespay themselves recordbonuses. It was a fuckingcrime.” Even moreincredibly, theMerrill Lynch

peopleendedup inchargeofBank of America’s equitydivision and set about firingmostofthepeopleinit.Alotof those people had beengood, loyal employeesof thebank.“WallStreet iscorrupt,I decided,” said Schwallafterwards. “There is nocorporate loyalty toemployees.”Schwallwasoneofthefew

BancofAmericapeoplewho

kept his job: Merrill Lynchhadnoonetoreplacehim.Hehid his true feelings, but heno longer trusted hisemployer.Andhesensed,forthe first time in his career,thathisemployerdidnottrusthim.Onedayhesenthimselfan email from his personalaccount to his work account—he was helping out somefriendswhohadbeenfiredbythe bank and who wanted to

start a small brokerage firm.His boss called him to askhim about it. What the hellaretheydoingmonitoringmyincoming emails? Schwallwondered.His ability to monitor his

superiors exceeded theirabilitytomonitorhim,andhebegan to do it. “Therewas alot of unspoken animosity,”he said. He noticed theexplosion of trading activity

inside of Merrill Lynch’sdark pool fueled by high-frequency traders. He sawthat Merrill Lynch created anew revenue line, to accountfor the money paid to themby high-frequency tradingfirmsforaccesstotheMerrillLynch dark pool.He noticedthattheguywhohadbuilttheMerrill Lynch electronictrading platform was one ofthehighest-paidpeople inall

of Merrill Lynch—and he’dnevertheless quit to create acompany that would cater toHFTfirms.HenoticedletterssentonbankletterheadtotheSecurities and ExchangeCommission arguing againstfurther stock marketregulation. He saved one inwhich the bank’s lawyerswrote that “despitenumerouschanges in recent years inboth market structure and

participant behavior, theequity market is functioningwell today.” One day heheardarumorthattheMerrillpeople had assigned ananalysttoproduceareporttoprove that Merrill’s stockmarketcustomerswerebetteroff because of whateverhappened inside Merrill’sdark pool. There wasapparently some controversyaround this report. Schwall

filedthatrumorawayforlateruse.Schwallwantedtothinkof

himselfasaguywholivedbya few simple principles, agood soldier. After thefinancial crisis he was morelike theResentful Butler. Hehad a taste for askingcomplicated questions, andfor tracking the answers intowhatever rabbit hole theymight lead him. He had, in

short,anobsessivestreak.It wasn’t until after he’d

hired Schwall away fromBankofAmericatoworkforRBC that Brad noticed thisside of Schwall. He shouldhave seen it before, simplyfrom Schwall’s chosen roleon Wall Street: productmanager.Aproductmanager,to be any good, had to beobsessive. The role had beenspawned by the widespread

belief that traders didn’tknowhowtotalktocomputergeeks and that computergeeks did not respondrationallytobig,hairytradershollering at them. A productmanager stood between thetwogroups,tosortoutwhichof the things the traderswanted that were the mostimportant and how best tobuild them. For instance, anRBC stock market trader

mightdemandabuttononhisscreen that said “Thor,”which he could hit when hewanted Thor to execute hisordertobuystock.Todesignthat button might requiretwenty pages of mind-numbingly detailedspecifications. That’s whereSchwall came in. “He goesinto details that no one elsewillgointo,becauseforsomereasonthat’swhathelikesto

do,”saidBrad.The first hint that

Schwall’s obsession withdetailmighttakeasharpturninto some private cul-de-saccame in company meetings.“He’d go off on completetangents,” said Brad. “Semi-related but outer space–typestuff.”AnotherwayBradsawhow Schwall’s mind workedwas in a fight that Schwallpicked not long after he

startedworking atRBC.Thebankhaddeclinedanoffertoserve as a lead sponsor for acharity called Wings OverWallStreet.WingsOverWallStreet raised money tocombat amyotrophic lateralsclerosis (ALS)—LouGehrig’sdisease.Inresponse,and without explaining why,Schwall blasted a system-wide email explaining theimportance of ALS research

and encouraging all RBCemployees to get behindWingsOverWallStreet.TheRBC executives who hadmade the original decisionunderstandably saw thisrogueemail as apolitical actintended to undermine theirauthority. For no apparentreason,Schwallhadalienateda bunch of important peoplewho had the power to firehim.

Brad now found himselfbetween his new, extremelyvaluable employee and a topRBC executive who wantedhis scalp. When pressed,Schwall finally explained toBrad thathismotherhad justdiedofALS.“Andhehadn’tthought to mention it,” saidBrad. “He’d spent yearstrying to figure out how tohelp hismother.The fact hismother died of the disease

would have won theargument, and he nevermentions it.Hesaid itwouldhave been underhanded andunprincipled.” Schwall’sproblem wasn’t anuncharming taste forcorporate politics but acharming ineptitude atplaying them, Brad decided.(“Anyonewhowaspoliticallyastuteneverwouldhavedonethis.”) He nevertheless

stumbled into politics oftenenough and played thembadly enough that Bradfinally came upwith a namefor the resulting mess: aSchwalling.“ASchwallingiswhen he does somethingunintentionally idiotic thatmakeshim lookstupid,” saidBrad.All Schwall would say is,

“I just sortofget crazy fromtime to time.” He’d become

obsessedwithsomething,andhis obsessions sent him on atriptoaplacefromwhichthejourney’s origin could nolonger be glimpsed. Theresult was a lot of activitywithoutanobviousmotive.Thor had triggered

Schwall’s private process.Thor, and what it impliedabout the U.S. financialsystem, became Schwall’sgreatest obsession. Before

Brad explained to him howThor worked and why,Schwallhadn’t thought twiceabouttheU.S.stockmarkets.After he met Brad, he wascertain that themarket at theheart of capitalism wasrigged. “As soon as yourealizethis,”hesaid,“assoonasyourealizethatyouarenotable to execute your ordersbecause someoneelse is ableto identify what you are

tryingtodoandraceaheadofyou to the other exchanges,it’sover,”hesaid.“Itchangesyourmind.”Hestewedonthesituation; the longer hestewed, the angrier hebecame. “It really just pissedmeoff,”hesaid.“Thatpeopleset out this way to makemoney from everyone else’sretirement account. I knewwho was being screwed,peoplelikemymomandpop,

and I became hell-bent onfiguring out who was doingthe screwing.” Hereconsidered what he’d seenat Merrill Lynch after theyhad taken over Bank ofAmerica’s stock tradingdepartment.He hunted downtheanalystwhohaddonethecontroversial analysis ofMerrill’s dark pool, forinstance.Theanalysttoldhimthat he had found that the

dark pool was actuallycosting the customers (whileprofiting Merrill Lynch), butthat management did notwanttohearit.“Theykeptontelling him to change hisreport,” said Schwall. “Hewasbasicallytoldthathehadtofindadifferentwaytodoitto get the answer theyneeded.”Early one Monday

morning, in the summer of

2011, Brad had a call fromSchwall. “Hesaid, ‘Hey, I’mnot coming in today,’ ”recalls Brad. “And I said,‘What’s going on?’ He justsaid, ‘Trust me.’ Then hedisappeared.”ThepreviousnightSchwall

had gone out into hisbackyard,with nothing but acigar,achair,andhisiPad.“Ihad the belief that somepeople were perpetuating a

fraud.When you think HFT,whatdoyouthink?Youthinknothing. You don’t have aperson. You don’t have aface. You think a computer.But there are specific peoplebehind this.”He’d started byGoogling“front-running”and“Wall Street” and “scandal.”What he was looking for, atfirst, was the cause of theproblem Thor had solved:How was it legal for a

handfulofinsiderstooperateat faster speeds than the restof the market and, in effect,stealfrominvestors?Hesoonhad his answer: RegulationNational Market System.Passed by the SEC in 2005but not implemented until2007,RegNMS,asitbecameknown, required brokers tofindthebestmarketpricesforthe investors theyrepresented. The regulation

hadbeen inspiredbychargesof front-running made in2004 against two dozenspecialistson thefloorof theold New York StockExchange—a charge thespecialistssettledbypayinga$241millionfine.Up till then the various

brokers who handledinvestors’stockmarketordershad been held to the loosestandard of “best execution.”

What that meant in practicewas subject to interpretation.If youwanted to buy 10,000shares ofMicrosoft at $30 ashare, and the broker wentinto themarket and saw thatthere were only 100 sharesoffered at $30, he mightchoose not to buy thosehundredsharesandwaituntilmore sellers turned up. Hehad the discretion not tospookthemarket,andtoplay

your hand on your behalf assmartlyashecould.Afterthebrokers abused the trustimplicit in that discretiononce too often, thegovernment took thediscretion away. Reg NMSreplaced the loose notion ofbest execution with the tightlegal one of “best price.” Todefine best price, Reg NMSrelied on the concept of theNationalBestBid andOffer,

known as the NBBO. If aninvestorwishedtobuy10,000shares ofMicrosoft, and 100shares were offered on theBATS exchange at $30 ashare, while the full 10,000listed on the other twelveexchanges were offered at$30.01, his broker wasrequired to purchase the 100shares on Bats at $30 beforemoving on to the otherexchanges. “It mandated

routing to more exchangesthan you might otherwisehave togo to,” saidSchwall.“And so it created moreopportunities for people tofront-run you.” Theregulation also made it fareasier for high-frequencytraders to predict wherebrokers would send theircustomers’ orders, as theymust send them first to theexchangethatofferedthebest

marketprice.Thatwouldhavebeenfine

but for the manner in whichthe best market price wascalculated. The new lawrequired a mechanism fortaking the measure of theentire market—for creatingthe National Best Bid andOffer—by compiling all thebids and offers for all U.S.stocks in one place. Thatplace, inside some computer,

was called the SecuritiesInformation Processor,which, because there is nosuch thing onWall Street astoo many acronyms, becameknown as the SIP. Thethirteen stock markets pipedtheir prices into the SIP, andtheSIPcalculatedtheNBBO.The SIP was the picture ofthe U.S. stock market mostinvestorssaw.Like a lot of regulations,

RegNMSwas well-meaningand sensible. If everyone onWall Street abided by therule’s spirit, the rule wouldhave established a newfairness in the U.S. stockmarket. The rule, however,containedaloophole:Itfailedto specify the speed of theSIP. To gather and organizethe stock prices from all theexchanges took milliseconds.It took milliseconds more to

disseminate thosecalculations. The technologyused to perform thesecalculations was old andslow, and the exchangesapparently had little interestinimprovingit.Therewasnorule against high-frequencytraders setting up computersinside the exchanges andbuilding their own, muchfaster,bettercaredforversionof the SIP. That’s exactly

whatthey’ddone,sowellthatthere were times when thegap between the high-frequencytraders’viewofthemarket and that of ordinaryinvestors could be twenty-fivemilliseconds,ortwicethetime it now took to travelfrom New York to Chicagoandbackagain.RegNMSwas intended to

createequalityofopportunityin the U.S. stock market.

Instead it institutionalized amoreperniciousinequality.Asmall class of insiders withthe resources to create speedwerenowallowedtopreviewthemarketandtradeonwhattheyhadseen.Thus—for example—the

SIP might suggest to theordinary investor in AppleInc.thatthestockwastradingat 400–400.01. The investorwould then give his broker

hisorder tobuy1,000sharesat the market price, or$400.01. The infinitesimalperiod of time between themoment the order wassubmitted and themoment itwasexecutedwasgoldtothetraders with fasterconnections.Howmuchgolddependedontwovariables:a)the gap in time between thepublic SIP and the privateones and b) how much

Apple’s stock price bouncedaround.Thebiggerthegapintime, the greater the chancethat Apple’s stock pricewould have moved; and themore likely that a fast tradercould stick an investor withan old price. That’s whyvolatility was so valuable tohigh-frequency traders: Itcreated new prices for fasttraders to see first and toexploit. It wouldn’t matter if

some people in the markethad an early glimpse ofApple’s price if the price ofApple’ssharesnevermoved.Apple’sstockmovedalot,

of course. In a paperpublishedinFebruary2013,ateam of researchers at theUniversity of California,Berkeley,showedthattheSIPprice of Apple stock and theprice seen by traders withfaster channels of market

information differed 55,000times in a single day. Thatmeant that therewere55,000timesadayahigh-frequencytrader could exploit the SIP-generated ignorance of thewider market. Fifty-fivethousand times a day, hemightbuyApplesharesatanoutdated price, then turnaround and sell them at thenew, higher price, exploitingthe ignorance of the slower-

footed investor on either endof his trades. And that wasonly themostobviouswayahigh-frequency trader mightuse his advance view of themarkettomakemoney.Schwallalreadyknewalot

about the boring nitty-grittydetails of Reg NMS, as hehad been in charge ofimplementing the new rulefor the whole of Bank ofAmerica. He’d seen to the

bank’sneedtobuildso-calledsmartorderroutersthatcouldfigure out which exchangehad the official best price ofany given stock (the NBBO)and send the customers’orders to that exchange. BycomplyingwithRegNMS,henow understood, the smartorder routerssimplymarchedinvestors into various trapslaid for them by high-frequency traders. “At that

point I just got very, verypissed off,” he said. “Thatthey are ripping off theretirement savings of theentire country throughsystematic fraud and peopledon’tevenrealizeit.Thatjustdrives me up the fuckingwall.”His anger expressed itself

in a search for greater detail.Whenhe saw thatRegNMShad been created to correct

for themarket manipulationsof the old NYSE specialists,hewantedtoknow:Howhadthat corruption come about?He began another search.HediscoveredthattheNewYorkStock Exchange specialistshad been exploiting aloophole in some earlierregulation—which of coursejustledSchwalltoask:Whatevent had led the SEC tocreate that regulation? Many

hours later he’d clawed hisway back to the 1987 stockmarket crash, which, as itturned out, gave rise to thefirst, albeit crude, form ofhigh-frequency trading.During the 1987 crash,WallStreet brokers, to avoidhaving to buy stock, hadstopped answering theirphones, and small investorswere unable to enter theirorders into the market. In

response, the governmentregulators had mandated thecreation of an electronicSmall Order ExecutionSystemsothatthelittleguy’sorder could be sent into themarketwiththepressofakeyon a computer keyboard,without a stockbroker firsttaking it from him on thephone. Because a computerwas able to transmit tradesmust faster than humans, the

system was soon gamed bysmart traders, for purposeshavingnothingtodowiththelittle guy.† At which pointSchwall naturally asked:From whence came theregulation that had madebrokers feel comfortable notansweringtheirphonesinthemidst of the 1987 stockmarketcrash?As it turns out, when you

Google “front-running” and

“Wall Street” and “scandal,”and you are hell-bent onfollowing the search to itsconclusion, the journeycannot be finished in anevening. At five o’clockMonday morning Schwallfinally went back inside hishouse.Hesleptfortwohours,then rose and called Brad totell himhewasn’t coming towork. Then he set off for aStaten Island branch of the

New York Public Library.“There was quite a bit ofvengeance on my mind,” hesaid.As a high school juniorSchwall had beenNewYorkCity’swrestling champion inthe 119-pound division.“He’s the nicest guy in theworldmostofthetime,”saidBrad. “But then sometimeshe’s not.” A streak of angerran through him, and exactlywhere it came from Schwall

could not say, but he knewperfectly well what triggeredit: injustice. “If I can fixsomething and fuck thesepeople who are fucking therestofthiscountry,I’mgoingtodoit,”hesaid.Thetriggerfor his most recent burst offeeling was Thor, but if youhadaskedhimonWednesdaymorning why he was stilldigging around the StatenIslandlibraryinsteadofgoing

to work, Schwall wouldn’thave thought to mentionThor. Instead he would havesaid, “I am trying tounderstand the origins ofevery form of front-runningin the history of the UnitedStates.”Several days later he’d

worked his way back to thelate1800s.TheentirehistoryofWall Street was the storyofscandals,itnowseemedto

him, linked together tail totrunk like circus elephants.Every systemic marketinjustice arose from someloophole in a regulationcreated to correct some priorinjustice.“Nomatterwhattheregulators did, some otherintermediary found a way toreact, so there would beanother form of front-running,” he said. When hewasdoneintheStatenIsland

library he returned to work,as if there was nothingunusual at all about theproduct manager havingturned himself into a privateeye. He’d learned severalimportant things, he told hiscolleagues. First, there wasnothing new about thebehavior they were at warwith: The U.S. financialmarkets had always beeneither corrupt or about to be

corrupted. Second, there waszero chance that the problemwould be solved by financialregulators; or, rather, theregulators might solve thenarrow problem of front-running in the stock marketby high-frequency traders,butwhatevertheydidtosolvetheproblemwouldcreateyetanother opportunity forfinancial intermediaries tomake money at the expense

ofinvestors.Schwall’s final point was

more aspiration than insight.For the first time in WallStreethistory, the technologyexisted that eliminatedentirelytheneedforfinancialintermediaries. Buyers andsellers in the U.S. stockmarket were now able toconnect with each otherwithout any need of a thirdparty. “The way that the

technology had evolved gavemetheconvictionthatwehadauniqueopportunitytosolvetheproblem,”hesaid.“Therewas no longer any need forany human intervention.” Iftheywere going to somehoweliminate the Wall Streetmiddlemen who hadflourished for centuries, theyneeded to enlarge the frameof the picture they werecreating.“Iwassoconcerned

that we were talking aboutwhat we were doing as asolution to high-frequencytrading,” he said. “It wasbiggerthanthat.Thegoalhadto be to eliminate anyunnecessaryintermediation.”

BRAD FOUND IT odd that hisproduct manager had set offto investigate the history of

WallStreetscandal—itwasabit like an offensive linemanchoosing to skip practice toinfiltrate theopposing team’slocker room. But Schwall’ssidecareerasaprivateeye,atleast at first, struck him as aharmless digression, of apiece with Schwall’stendency in meetings to gooff on tangents. “Once hegetsononeofthesebentsit’sbetterjusttolethimgo,”said

Brad. “That’s just himworking eighteen-hour daysinstead of fourteen-hourdays.”Besides, they now had far

bigger problems. By themiddle of 2011, Thor’slimitationswerevisible. “Wehad this meteoric rise in ourbusiness the first year andthenitflatlines,”saidBrad.Inan open market, whencustomerswereofferedanew

and better product, theyditched their old product forit.Wall Street banksweren’tsubject to the usual openmarket forces. Investors paidWallStreetbanksforallsortsof reasons: for research, tokeep them sweet, to getprivate access to corporateexecutives,orsimplybecausetheyhadalwaysdoneso.Theway that they paid themwasto give them their trades to

execute—that is, theybelieved they needed toallocate some very largepercentage of their trades tothe big Wall Street bankssimply to maintain existingrelations with them. RBC’sclients were now routinelycalling tosay,“Hey,we loveusing Thor, but there is onlysomuch businesswe can dowithyoubecausewehave topay Goldman Sachs and

MorganStanley.”TheRoyalBankofCanada

was running away with thetitle of Wall Street’s mostpopularbrokerbypeddlingatoolwhoseonlypurposewasto protect investors from therest of Wall Street. Theinvestors refused to draw theobvious conclusion that theyshould have a lot less to dowith the rest of Wall Street.RBC had become the

number-one-ratedstockbroker in America andyet was still only the ninthbest paid: They would neverattract more than a tinyfraction of America’s stockmarket trades, and thatfraction would never beenoughtochangethesystem.AguyRonanknewatthebighigh-frequency trading shopCitadel called him one dayand put the matter in a

nutshell: I know what you’redoing. It’s genius. Andthere’s nothing we can doaboutit.Butyouareonlytwopercentofthemarket.Ontopofthat,thebigWall

Street banks, seeing RBC’ssuccess, were seeking toundermine it or at least topretend to replicate it. “Thetechpeopleatotherfirmsarecalling me and saying, ‘Iwant to do Thor. How does

Thorwork?’” recalledAllenZhang. The business peopleatthebankswerenowcallingRonan and Rob and offeringthem multiples of what theyearned at RBC to leave. Thewhole of Wall Street hadbeeninsomethinglikeatwo-year hiring freeze, and yetthese big banks weresuggesting to Ronan—whohad spent the past fifteenyearsunabletogethisfootin

the door of any bank—thatthey’d pay him as much as$1.5 million to join them.Headhunters called Brad andtold him that, if he waswilling to leave RBC for acompetitor, the opening bidwas $3 million a year,guaranteed. Just to keep histeam in place,Brad arrangedfor RBC to create a pool ofmoneyandset itaside:If theguys hung around for three

years, they would be handedthe money and would windup being paid somethingcloser to their market value.RBCagreedtodoit,probablybecauseBrad did not ask fora piece of the action himselfandcontinuedtoworkforfarlessthanhecouldhavemadeelsewhere.The bank’s marketing

departmentproposedtoBrad,as a way to get some media

attention for Thor, that heapply for a Wall StreetJournal TechnologyInnovation Award. Brad hadneverheardoftheWallStreetJournal’s TechnologyInnovation Awards, but hethought thathemightusetheWallStreetJournaltotelltheworld just how corrupt theU.S. stock market hadbecome. His bosses at RBC,when they got wind of his

plans,wantedhimtoattendalot of meetings—to discusswhathemightsaytotheWallStreet Journal. Theyworriedabout their relationshipswithother Wall Street banks andwith the public exchanges.“They didn’t want to ruffleanyone’s feathers,” saysBrad. “Therewas not a lot Icouldn’tsayinasmallclosedforum, but they didn’t wantme saying it openly.” He

soonrealizedthat,whileRBCwouldallowhimtoapplyforawards, it would not let himdescribe publicly what Thorhad inadvertently exposed:the manner in which HFTfirms front-ran ordinaryinvestors; the conflict ofinterestthatbrokershadwhenthey were being paid by theexchangestorouteorders;theconflict of interest theexchanges had when they

were being paid a billiondollars a year by HFT firmsfor faster access to marketdata; the implications of anexchange paying brokers to“take” liquidity; that WallStreethadfoundawaytobillinvestors without showingthem the bill. “I had abouteightthingsIwantedtosaytothe Journal,” said Brad. “Bythe time I got through allthese meetings, there was

nothing to say. I was onlyallowedtosayoneofthem—that we had found a way torouteorderssotheyarrivedatthe exchangessimultaneously.”Thatwastheproblemwith

being RBC nice: It renderedyouincapableofgoingtowarwith nasty. Before Brad saidanything at all to the WallStreet Journal, RBC’s uppermanagement felt theyneeded

to inform theU.S. regulatorsof what little he planned tosay. They asked Brad toprepare a report on Thor forthe SEC and then flewthemselves down fromCanada to join him in a bigmeeting with the SEC’sDivision of Trading andMarkets staff. “It was moreaboutnotwantingthemtobeembarrassed about notknowing about Thor than it

was us thinking they weregoing to do something aboutit,”Bradsaid.Hehadnoideawhat a meeting at the SECwas supposed to be like andprepared as if he weretestifying before Congress.As he read straight from thedocumenthehadwritten, thepeople around the tablelistened,stoned-faced.“Iwasscared shitless,” he said.When he was finished, an

SEC staffer said, What youaredoing isnot fair tohigh-frequencytraders.You’renotletting them get out of theway.Excuseme?saidBrad.The SEC staffer argued

that it was unfair that high-frequency traders couldn’tpostphonybidsandoffersonthe exchanges to extractinformation from actualinvestorswithout running the

risk of having to stand bythem. Itwasunfair thatThorforced them to honor themarkets they claimed to bemaking. Brad just looked atthe guy: He was a youngIndianquant.Then a second staffer, a

much older guy, raised hishand and said, If they don’twant to be on the offer theyshouldn’tbethereatall.A lively argument ensued,

withtheyoungerSECstafferstaking the side of high-frequency trading and theolderhalftakingBrad’spoint.“There was no clearconsensus,”saidBrad.“Butitgave me a sense that theyweren’t going to be doinganything anytime soon.”‡After the meeting, RBCconducted a study, neverreleased publicly, in whichtheyfoundthatmorethantwo

hundred SEC staffers since2007 had left theirgovernment jobs to work forhigh-frequency trading firmsor the firms that lobbiedWashington on their behalf.Some of these people hadplayed central roles indeciding how, or evenwhether, to regulate high-frequency trading. Forinstance, in June 2010, theassociate director of the

SEC’s Division of TradingandMarkets,ElizabethKing,hadquit theSECtoworkforGetco. The SEC, like thepublicstockexchanges,hadakind of equity stake in thefuture revenues of high-frequencytraders.The argument in favor of

high-frequency traders hadbeaten the argument againstthemtotheU.S.regulators.Itran as follows: Natural

investorsinstocks,thepeoplewho supply capital tocompanies, can’t find eachother. The buyers and sellersofanygivenstockdon’tshowup in themarket at the sametime, so they needed anintermediary to bridge thegap, to buy from the sellerand to sell to the buyer. Thefully computerized marketmovedtoofastforahumantointercede in it, and so the

high-frequency traders hadsteppedintodothejob.Theirimportance could be inferredfromtheiractivity: In2005aquarter of all trades in thepublic stock markets weremadebyHFTfirms;by2008that number had risen to 65percent. Their new marketdominance—so the argumentwent—wasasignofprogress,not just necessary but goodfor investors. Back when

human beings sat in themiddle of the stock market,the spreads between the bidsand the offers of any givenstock were a sixteenth of apercentage point. Now thatcomputers did the job, thespread, at least in the moreactively traded stocks, wastypically a penny, or one-hundredthof1percent.That,said the supporters of high-frequency trading, was

evidence that more HFTmeantmoreliquidity.The arguments against the

high-frequency tradershadn’tspread nearly so quickly—atany rate, Brad didn’t hearthem from the SEC. Adistinction cried out to bemade, between “tradingactivity” and “liquidity.” Anew trader could leap into amarket and trade franticallyinside it without adding

anything of value to it.Imagine, for instance, thatsomeonepassedarule,intheU.S. stock market as it iscurrently configured, thatrequired every stock markettradetobefront-runbyafirmcalled Scalpers Inc. Underthis rule, each timeyouwentto buy 1,000 shares ofMicrosoft, Scalpers Inc.would be informed,whereuponitwouldsetoffto

buy1,000sharesofMicrosoftoffered in the market and,without taking the risk ofowning thestockforevenaninstant, sell it to you at ahigher price. Scalpers Inc. isprohibited from taking theslightestmarket risk;when itbuys, it has the seller firmlyin hand; when it sells, it hasthebuyer inhand; andat theend of every trading day, itwillhavenopositionatallin

the stock market. ScalpersInc. trades for the solepurpose of interfering withtrading that would havehappened without it. Inbuying from every seller andselling to every buyer, itwinds up: a) doubling thetradesinthemarketplaceandb)beingexactly50percentofthatboomingvolume.Itaddsnothing to the market but atthe same time might be

mistaken for the centralplayerinthatmarket.This state of affairs, as it

happens, resembles theUnited States stock marketafter the passage of RegNMS. From 2006 to 2008,high-frequency traders’ shareof total U.S. stock markettrading doubled, from 26percent to52percent—and ithas never fallen below 50percent since then. The total

numberoftradesmadeinthestock market also spikeddramatically,fromroughly10million per day in 2006 tojust over 20 million per dayin2009.“Liquidity” was one of

those words Wall Streetpeople threw around whentheywanted the conversationto end, and for brains to godead, and for all questioningtocease.Alotofpeopleused

itasasynonymfor“activity”or“volumeoftrading,”butitobviously needed to meanmore than that, as activitycould be manufactured in amarket simply by addingmore front-runners to it. Toget at a useful understandingof liquidity and the likelyeffects of high-frequencytradingonit,onemightbetterbegin by studying the effecton investors’ willingness to

trade once they sense thatthey are being front-run bythisnewfront-runningentity.Brad himself had felt theeffect: When the market asdisplayed on his screensbecame illusory, he becamelesswillingtotakeriskinthatmarket—to provide liquidity.He could only assume thatevery other risk-takingintermediary—every otheruseful market participant—

must have felt exactly thesameway.TheargumentforHFTwas

that it provided liquidity, butwhat did this mean? “HFTfirms go home flat everynight,” said Brad. “Theydon’ttakepositions.Theyarebridging an amount of timebetween buyers and sellersthat’s so small that no oneeven knows it exists.” Afterthemarketwascomputerized

and decimalized, in 2000,spreads in the market hadnarrowed—that much wastrue. Part of that narrowingwould have happenedanyway,with the automationof the stock market, whichmade iteasier to tradestockspricedindecimalsratherthanin fractions. Part of thatnarrowing was an illusion:What appeared to be thespread was not actually the

spread.Theminuteyouwentto buy or sell at the statedmarket price, the pricemoved. What Scalpers Inc.did was to hide an entirelynew sort of activity behindthe mask of an old mentalmodel—in which the guywho “makes markets” isnecessarilytakingmarketriskandproviding“liquidity.”ButScalpers Inc. took nomarketrisk.§

In spirit Scalpers Inc. wasless a market enabler than aweird sort ofmarket burden.Financial intermediation is atax on capital; it’s the tollpaid by both the peoplewhohave it and the people whoput it to productive use.Reducethetaxandtherestofthe economy benefits.Technology should have ledtoa reduction in this tax; theability of investors to find

eachotherwithoutthehelpofsome human broker mighthave eliminated the taxaltogether. Instead this newbeastroseupinthemiddleofthe market and the taxincreased—by billions ofdollars. Or had it? Tomeasure the cost to theeconomy of Scalpers Inc.,you needed to know howmuch money it made. Thatwas not possible. The new

intermediarieswere too goodat keeping their profitssecret.¶ Secrecy might havebeenthesignaturetraitoftheentities who now sat at themiddle of the stock market:You had to guess what theyweremaking fromwhat theyspent to make it. Investorswho eyeballed the situationdid not find reason for hope.“There used to be this guycalledVinnywhoworkedon

the floor of the stockexchange,” said one biginvestor who had observedthe market for a long time.“After the markets closedVinny would get into hisCadillac and drive out to hisbig house in Long Island.Now there is the guy calledVladimirwhogetsintohisjetand flies to his estate inAspen for the weekend. Iused to worry a little about

Vinny. Now I worry a lotaboutVladimir.”Apart from taking some

largesumofmoneyoutofthemarket, and without takingriskoraddinganythingofuseto that market, Scalpers Inc.had other, less intendedconsequences. Scalpers Inc.inserteditself intothemiddleofthestockmarketnotjustasan unnecessary middlemanbut as a middleman with

incentives to introducedysfunction into the stockmarket. Scalpers Inc. wasincentivized, for instance, tomakethemarketasvolatileaspossible. The value of itsabilitytobuyMicrosoftfromyouat$30ashareandtoholdthe shares for a fewmicroseconds—knowing that,even if the Microsoft shareprice began to fall, it couldturn around and sell the

shares at $30.01—wasdetermined by how likely itwas that Microsoft’s shareprice, in those magicalmicroseconds, would rise inprice. The more volatileMicrosoft’s share price, thehigherMicrosoft’sstockpricemight move during thosemicroseconds, and the moreScalpersInc.wouldbeabletoscalp. One might argue thatintermediaries have always

profited from marketvolatility, but that is notreallytrue.Theoldspecialistson the New York Stockexchange, for instance,because theywere somewhatobliged to buy in a fallingmarket and to sell in a risingone, often found that theirworst days were the mostvolatiledays.Theythrivedintimesofrelativestability.Another incentive of

Scalpers Inc. is to fragmentthe marketplace: The moresitesatwhichthesamestockschanged hands, the moreopportunities to front-runinvestors from one site toanother. The bosses atScalpers Inc. would thusencourage new exchanges toopen, and would alsoencourage them to placethemselves at some distancefromeachother.ScalpersInc.

alsohadaverycleardesiretomaximize the differencebetween the speed of theirprivate view of the marketand the view afforded thewider public market. Themore time that Scalpers Inc.couldsitwithsomeinvestor’sstock market order, thegreater the chance that theprice might move in theinterim. Thus an earnestemployee of Scalpers Inc.

wouldlookforwayseithertoslow down the public’sinformationortospeeduphisown.The final new incentive

introduced by Scalpers Inc.wasperhapsthemostbizarre.The easiest way for ScalpersInc.toextracttheinformationit needed to front-run otherinvestors was to trade withthem.Attimesitwaspossibleto extract the necessary

informationwithouthavingtocommit to a trade. That’swhat the “flash order”scandalhadbeenabout:high-frequency traders beingallowed by the exchanges tosee other people’s ordersbefore anyone else, withoutany obligation to tradeagainst them. But for themost part, if you wanted tofind out what some biginvestorwasabouttodo,you

needed to do a little bit of itwith him. For instance, tofind out that, say, T. RowePricewantedtobuy5millionshares of Google Inc., youneededtosellsomeGoogletoT. Rowe Price. That initialmarket contact between anyinvestor and Scalpers Inc.was like thebait ina trap—alossleader.ForScalpersInc.,thegoalwastospendaslittleas possible to acquire the

necessary information—tomake those initial trades, thebait,assmallaspossible.To an astonishing degree,

since the implementation ofRegNMS, theU.S. financialmarketshadevolved toservethe narrow interests ofScalpers Inc. Since the mid-2000s, the average trade sizein theU.S. stockmarket hadplummeted, the markets hadfragmented, and the gap in

timebetweenthepublicviewof the markets and the viewofhigh-frequencytradershadwidened. The rise of high-frequency trading had beenaccompaniedalsobyariseinstockmarket volatility—overandabovetheturmoilcausedby the 2008 financial crisis.The price volatility withineach trading day in the U.S.stock market between 2010and 2013 was nearly 40

percent higher than thevolatility between 2004 and2006, for instance. Therewere days in 2011 in whichvolatility was higher than inthemost volatile days of thedot-combubble.Thefinancialcrisisbrought

with it a great deal of stockmarket volatility; perhapspeoplejustassumedthattherewas supposed to be anunusual amount of drama in

the stock market evermore.But then the financial crisisabated and the dramaremained.Therewasnogoodexplanationforthis,butBradnowhadaglimmerofone.Ithad to do with the way afront-runner operates. Afront-runner sells you ahundredsharesofsomestockto discover that you are abuyer and then turns aroundand buys everything else in

sight, causing the stock topophigher(ortheopposite,ifyou happen to be a seller).The Royal Bank of Canadahadtestedtheeffectsonstockmarket volatility of usingThor, which stymied front-runners, rather than thestandard order routers usedbyWallStreet,whichdidnot.The sequential cost-effectiverouter responded to thekickbacks and fees of the

various exchanges and wentto those exchanges first thatpaid them themost to do so.The spray router—which, asits name suggests, justsprayed the market and tookwhateverstockwasavailable,ortriedto—didnotmakeanyeffort to compel a stockmarket order to arrive at thedifferent exchangessimultaneously.Every router,when it bought stock, tended

todrivethepriceofthatstocka bit higher. But when thestock had settled—say, tenseconds later—it settleddifferently with each router.The sequential cost-effectiverouter caused the share priceto remain higher than thespray router did, and thesprayroutercausedittomovehigherthanThordid.“Ihaveno scientific evidence,” saidBrad. “This is purely a

theory. But with Thor theHFTfirmsaretryingtocovertheirlosses.I’mshortwhenIdon’twanttobe,soIneedtobuy to cover, quickly.” Theother two routers enabledHFT to front-run, so theywound up being long thestock. “[With] the other two,HFT is in a position to tradearound a winning position,”said Brad, “and they can dowhatevertheycandotoforce

the stock even higher.” (Orlower, if the investor whotriggered the activity is aseller.) They had, in thoseprivileged microseconds, therecklessabandonofgamblersplayingwithhousemoney.Thenewchoppiness in the

public U.S. stock marketswas spreading to otherfinancial markets, as they,too,embracedhigh-frequencytraders. Itwaswhat investors

mostnoticed:Theywere lessand less able to buy and sellbigchunksofstockinagulp.Their frustration with thepublic stock exchanges hadled thebigWallStreetbanksto create private exchanges:dark pools.By themiddle of2011, roughly 30 percent ofall stock market tradesoccurred off the publicexchanges, most of them indark pools. The appeal of

these dark pools—said theWall Street banks—was thatinvestors could expose theirbig stock market orderswithoutfearthat thoseorderswouldbeexploited.

WHAT BOTHERED RICH Gates,at least at first, was the toneof the pitch he was hearingfrom the big Wall Street

banks. All through 2008 and2009 theywouldcometohisoffice and tell him why heneeded their algorithms todefend himself in the stockmarket. This algo is like atiger that lurks in the woodsand waits for the prey andthen jumps on it. Or: Thisalgoislikeananacondainatree. The algos had nameslike Ambush and Nighthawkand Raider and Dark Attack

andSumo.CitihadonecalledDagger, Deutsche Bank hadSlicer, andCredit Suisse hadone named Guerrilla, whichcame,inthebank’sflip-chartpresentation,withamenacingdrawing of Che Guevarawearingaberetandscowling.Whatthehellwasthatabout?Their very namesmadeRichGates wary; he also didn’tlike how loudly the brokersselling them told him they’d

come to protect him. Protecthim fromwhat?Why did heneedprotection?Fromwhomdid he need to be protected?“I’mimmediatelyskepticalofpeople saying they arelookingoutformyinterests,”Gates said. “Especially onWallStreet.”Gates ran a mutual fund,

TFS Capital, that he hadcreated in 1997 with friendsfrom the University of

Virginia.Helikedtothinkofhimselfasahick,butintruthhe was a keenly analyticalmath geek in the perfectlypleasant Philadelphia suburbofWestChester.Hemanagednearly$2billionbelongingto35,000 small investors butstill positioned himself, evenin his own mind, as anindustryoutsider.Hebelievedthat mutual funds were lessoften exercises in smart

money management than increepy marketing, and thatmany of the people who ranmutualfundsshouldbedoingsomething else with theirlives.Back in 2007, tomakethis point, he dug out of astack of league tablesAmerica’s worst-performingmutual fund: the PhoenixMarket Neutral Fund. Overthepriordecade,Gates’sfirmhad earned its investors

returnsof10percentperyear.Over that same period, thePhoenixMarketNeutralFundhadlost.09percentayearforits investors—the investorswould have been better offhoppingoverthefenceofthepresident of the PhoenixMarketNeutral Fund’s homeandburyingthemoneyinhisbackyard.Gateswrotealetterto the Phoenix presidentsaying, in effect, You are so

obviously inept at managingmoneythatyoucoulddoyourinvestors a favor by turningover all of your assets tomeand letting me run them foryou. The president failed toreply.The machismo of Wall

Street’salgorithms,combinedwith what struck Gates as alot of nonsensical talk aboutthe need for trading speed,stirred his naturally

suspicious mind. “I justnoticed a lot of bullshit,” hesaid. He and his colleaguesdevised a test to see if therewas anything in this newstockmarkettofear.Thetest,specifically,wouldshowhimif, when he entered an orderintooneofWallStreet’sdarkpools, he wound up gettingripped off by some unseenpredator. He started byidentifying stocks that didn’t

trade very often. ChipotleMexican Grill, for instance.HesentinanordertoasingleWall Street dark pool to buythat stock at the “mid-market” price. Say, forexample, that the shares ofChipotle Mexican Grill weretrading at 100–100.10. Gateswouldsubmithisbidtobuyathousand shares of Chipotleat $100.05. There it wouldnormally just sit until some

otherinvestorcamealongandlowered his price from$100.10 to $100.05. Gatesdidn’twaitforthattohappen.Instead, a few seconds later,hesentasecondordertooneof the public exchanges, tosellChipotleat$100.01.What should have

happened next was that hisorder in thedarkpoolshouldhave been filled at $100.01,the official newbest price in

the market. He should havebeenabletobuyfromhimselfthe shares he was selling at$100.01. But that’s not whathappened. Instead, before hecould blink his eye, he hadmade two trades. He hadbought Chipotle fromsomeone inside the WallStreet dark pool at $100.05andsoldittosomeoneelseonthe public exchange for$100.01.He’dlost4centsby,

in effect, trading withhimself. Only he hadn’ttraded with himself; somethird party had obviouslyusedthesellorderhehadsentto the public exchange toexploit the buy order he hadsenttothedarkpool.Gates and his colleagues

wound up making hundredsof such tests, with their ownmoney,inseveralWallStreetdarkpools.Inthefirsthalfof

2010therewasonlyoneWallStreet firm in whose darkpool the test came backpositive: Goldman Sachs. Inthe Goldman dark pool,SigmaX,hegot rippedoffabitmorethanhalfthetimeheran the test. AsGates tradedin lightly traded stocks, andhigh-frequency trading firmswere overwhelminglyinterested in heavily tradedones, these tests would have

been vastly more likely togenerate false negatives thanfalsepositives.Still,hewasabit surprised that Goldman,andonlyGoldman,seemedtobe running a pool thatallowed someone else tofront-run his orders to thepublic stock exchanges. HecalledhisbrokeratGoldman.“He said itwasn’t fair,” saidGates,“becauseitwasn’tjustthem. He said, ‘It’s

happening all over. It’s notjustus.’”Gates was dutifully

shocked. “When I first sawthe results of these tests, Ithought:Thisobviouslyisnotright.As far ashecould tell,no one seemedmuch to carethat 35,000 small investorscould be so exposed topredationinsideWallStreet’smost prominent bank. “I’mamazed thatpeopledon’task

thequestions,”hesaid.“Thattheydon’tdigdeeper.Ifsomeschmuck in West Chester,PA,canfigureitout,I’vegotto believe other people did,too.”Outraged,Gatescalledareporter he knew at theWallStreet Journal. The reportercametoseeGates’s testsandseemed interested, but twomonthslatertherewasstillnopiece in the Journal—andGatessensedthattheremight

never be. (Among otherthings, the reporter wasuncomfortable mentioningGoldmanSachsbyname.)Atwhich point Gates noticedthat the Dodd-Frank WallStreet Reform and CustomerProtection Act, soon to bepassed, contained a whistle-blower provision. “I’m like,‘Holy crap, I’m trying to outthisanyway.IfIcangetpaid,too—great.’”

Thepeoplewhoworkedinthe SEC’s Division ofTrading and Markets wereactually great—nothing likewhat the public imagined.They were smart and askedgood questions and evenspotted small mistakes inGates’s presentation, whichhe appreciated—though, aswith Brad Katsuyama, theygave him no idea how theymight respond to the

informationhe’dgiven them.They wondered, shrewdly,exactly who was ripping offinvestors in Goldman’s darkpool. “Theywanted to knowif Goldman Sachs’s propgroup was on the other sideof the trade,” said Gates. Hehadnoanswerforthat.“Theydon’t tell you who took theother side of the trade,” hesaid. All he knew was thathe’d been ripped off, in

exactly the way you mightexpecttoberippedoff,whenyou can’t see the markettradinginrealtimeandotherscan.Andthat,atleastforafew

months, was that. “After Iblewthewhistle, I laid low,”Gates said. “I just wanted tofocusonourbusiness.Idon’tget off throwing bombs.”Then came the flash crash,andtheWallStreetJournal’s

interest was rekindled. Thepaper published a piece onRich Gates’s tests—withoutmentioning Goldman Sachsbyname.“Ithinkit’sgoingtoset the world on fire,” saidGates.“Itdidn’tdoanything.TherearefifteencommentsatthebottomofthepieceontheWeb, and all of them areRussian mail order brides.”But the piece led a personclose to both the BATS

exchangeandCreditSuissetogetintouchwithGateswithasuggestion: Run your testsagain, specifically on theBATS exchange and theCreditSuissedarkpoolcalledCrossfinder. Just to see.Toward the end of 2010,Gates ran another round oftests.Sure enough, he was able

to get himself ripped off, inexactly the samewayhehad

been ripped off in theGoldman Sachs dark pool—on the BATS exchange, andinside the Credit Suisse darkpool, and in some otherplaces, too. At GoldmanSachs, however, the testswere now negative. “Whenwe did it the first time,” hesaid, “it worked at Goldmanbut nowhere else. When wedid it six months later itdidn’t work at Goldman, but

itworkedeverywhereelse.”

IN MAY 2011, the small teamBrad had created—Schwall,Ronan,RobPark,acoupleofothers—sat around a table inBrad’s office, surrounded bythe applications of pastwinners of the Wall StreetJournal’s TechnologyInnovation Awards. As it

turned out, RBC’smarketingdepartment had informedthem of the awards the daybefore submissions were due—sotheywerescramblingtofigureoutinwhichofseveralcategoriestheybelonged,andhowtomakeThorsoundlife-changing.“Therewerepaperseverywhere,” said Rob. “Noone sounded like us. Therewere people who had, like,cured cancer.” “It was

stupid,” said Brad, “therewasn’tevenacategorytoputus into. I thinkwe ended upapplyingunderOther.”With the purposelessness

oftheexercisehangingintheair, Rob said, “I just had asickidea.”Rob’sideawastolicense the technology tooneof the exchanges. (Schwallhad patentedThor forRBC.)The linebetweenWallStreetbrokers and exchanges had

blurred. The big Wall Streetbanks now ran their ownprivate exchanges. The stockexchanges, for their part,weremakingabidtobecomebrokers.Thebiggeronesnowofferedaservicethatenabledbrokers to simply hand themtheir stock market orders,which theywould thenroute.To their own exchange, ofcourse,butalsotoothers.Theservice was used mainly by

small regional brokeragefirms that didn’t have theirown routers, but thisbrokerage-likeserviceopenedup, at least inRob’smind, anewpossibility.Ifjustoneoftheexchangeswashandedthetool for protecting investorsfrom market predators, thesmall brokers from aroundthe countrymight flock to it,and it might become themotherofallexchanges.

“Screw that,” said Brad.“Let’s just create our ownstockexchange.”“We just sat there for a

while,” said Rob. “Kind ofstaring at each other.Createyour own stock exchange.Whatdoesthatevenmean?”A few weeks later Brad

flew to Canada and sold hisbosses on the idea of anRBC-led stock exchange.Then, in the fall of 2011, he

canvassed a handful of theworld’s biggest moneymanagers (Janus Capital, T.Rowe Price, BlackRock,Wellington, SoutheasternAssetManagement)andsomeof its most influential hedgefund managers (DavidEinhorn,BillAckman,DanielLoeb).Theyallhadthesamereaction.They loved the ideaof a stock exchange thatprotectedinvestorsfromWall

Street’s predators. They alsothought that a new stockexchange, to be crediblyindependent of Wall Street,could not be created by aWallStreetbank.NotevenabankasniceasRBC.IfBradwanted to create the motherof all stock exchanges, hewould need to quit his jobanddoitonhisown.The challenges were

obvious. He’d need to find

money. He’d need topersuade a lot of highly paidpeople to quit their WallStreet jobs to work for tinyfractions of their currentsalaries—and possibly evensupply the capital to paythemselves to work. “I wasasking:CanIgetthepeopleIneed? How long can wesurvivewithout getting paid?Willoursignificantothersletus do this?” He also needed

to find out if the nine bigWall Street banks thatcontrolled nearly 70 percentof all stock market orders**would be willing to sendthose orders to a truly safeexchange. It would be farmore difficult to start anexchange premised onfairness if the banks thatcontrolled the vast majorityofthecustomers’orderswerecommittedtounfairness.

For a surprisingly longtime,Bradhad reserved finaljudgment about the biggestWallStreetbanks.“Iheldouta degree of hope that thepeople at [each] bank whohandled the clients’ orderswere removed from the propgroup,” he said. His hopesprang mainly from his ownexperience: At RBC, wherehehandledtheclients’orders,he barely knew the prop

traders andhadno ideawhattheyweredoing.Therewasareason for this:RBChadnotcreated a dark pool, becauseBradhadkilledtheidea.Still,he knew that each of the bigWallStreetbankshaditsowninternal politics, and thatthere were people in each ofthemwhowantedtoactinthelong-term interests of theirfirms and do the right thingby their customers.His hope

was that some of thesepeople, in some of theseplaces,hadpower.John Schwall’s private

investigations put an end tothathope.Bythefallof2011Schwall had becomesomething like a connoisseurof the uses of LinkedIn tofindstuffoutaboutpeopleinand around high-frequencytrading. He’d put a face onhigh-frequency trading, or

rather two faces. “I began toanticipate that certain peoplewere in on the game,” saidSchwall.“I’dconnecttothemso that I could see theirnetwork. There were maybetwenty-five guys I calledkingpins—the people whoactually knew what wasgoingon.”Attheverytopofthe food chain were a lot ofwhite guys in their fortieswhosecareerscouldbetraced

back, oneway or another, tothe early electronic stockexchanges born of theregulations passed after thecrash of 1987—Wall Streetguys who might have sometechnical background butwhose identity was moretrader than programminggeek.The new players in the

financial markets, thekingpins of the future who

had the capacity to reshapethose markets, were adifferent breed: the Chineseguy who had spent theprevious ten years inAmerican universities; theFrenchparticlephysicistfromFERMAT lab; the Russianaerospace engineer; theIndian PhD in electricalengineering.“Therewerejustthousands of these people,”saidSchwall.“Basicallyallof

themwith advanced degrees.I remember thinking tomyself how unfortunate itwas that so many engineerswere joining these firms toexploit investors rather thansolving public problems.”These highly trainedscientists and technicianstendedtobepulledontoWallStreet by the big banks andthen, after they’d learned theropes, tomove on to smaller

high-frequencytradingshops.They behavedmore like freeagents than employees of abig corporation. In theirLinkedIn profiles, forinstance, they revealed allsortsofinformationthattheiremployers almost certainlywould not want revealed.Here Schwall stumbled uponthe predator’sweakness:Theemployees of the big WallStreet banks felt no more

loyaltytowardthebanksthanthebanksfelttowardthem.The employees of Credit

Suisse offered the clearestexample.CreditSuisse’sdarkpool, Crossfinder, vied withGoldmanSachs’sSigmaXtobe Wall Street’s biggestprivate stock exchange.CreditSuisse’sbiggestsellingpoint to investors was that itput their interests first andprotectedthemfromwhatever

it was that high-frequencytraders were doing. Back inOctober 2009, the head ofAdvancedExecutionServices(AES) at Credit Suisse, DanMathisson, had testifiedbeforeaU.S.SenateBanking,Housing, and Urban AffairsCommittee at a hearing ondark pools. “The argumentthat dark pools are somehowpart of the high-frequencytrading debate simply does

not make sense,” he’d said.“High-frequency tradersmake their money bydigesting publicly availableinformation faster thanothers; dark pools hide orderinformationfromeveryone.”That, Schwall thought,

becauseBradhadexplaineditalltohim,wassimplywrong.Itwas true thatwhen, say, apension fund gave a WallStreet bank an order to buy

100,000 shares of Microsoft,and the Wall Street bankrouted the order to the darkpool,thewiderworldwasnotinformed. But that was justthe beginning of the story.The pension fund did notknow the rules of the darkpool, and could not see howthe buy order was handledinsideofit.Thepensionfundwouldnotbeable to say, forexample, whether the Wall

Street bank allowed its ownproprietarytraderstoknowofthebigbuyorder,or if thosetraders had used their (fasterthan the dark pool) marketconnections to front-run theorder on the publicexchanges. Even if the WallStreet bank resisted thetemptation to trade for itselfagainst its own customers,therewasvirtuallynochancetheyresistedthetemptationto

sellaccesstothedarkpooltohigh-frequency traders. TheWall Street banks did notdisclose which high-speedtrading firms had paid themfor special access to theirdarkpools,orhowmuchtheyhad paid, but selling thataccesswasstandardpractice.Raising,again,theobvious

question:Why would anyonepay for access to thecustomers’ orders inside a

WallStreetbank’sdarkpool?The straight answer was thata customer’s stock marketorder,insideadarkpool,wasfat and juicy prey.The orderwas typically large, and itsmovements were especiallypredictable:EachWallStreetbank had its own detectablepattern for handling orders.The order was also slow,because of the time it wasforced to spend inside the

dark pool before accessingthe wider market. As Bradhadput it, “You could front-runanorderinadarkpoolona bicycle.”The pension fundtrying to buy 100,000 sharesofMicrosoftcould,ofcourse,specify that the Wall Streetbanknottakeitsorderstothepublic exchanges at all butsimply rest it, hidden, insidethe dark pool. But an orderhidden inside a dark pool

wasn’tverywellhidden.Anydecent high-frequency traderwho had paid for a specialconnection to thepoolwouldping the pool with tiny buyandsellordersineverylistedstock, searching for activity.Once they’d discovered thebuyer of Microsoft, they’dsimply wait for the momentwhenMicrosoft ticked loweron the public exchanges andsell it to the pension fund in

the dark pool at the stale,higher “best” price (as RichGates’s tests haddemonstrated). It wasriskless, larcenous, and legal—madesobyRegNMS.ThewayBradhaddescribed it, itwas as if only one gamblerwere permitted to know thescores of last week’s NFLgames, with no one elseaware of his knowledge. Heplaces bets in the casino on

every game and waits forother gamblers to take theother side of those bets.There’s no guarantee thatanyonewilldoso;butiftheydo,he’scertaintowin.In his investigation of the

people who managed CreditSuisse’sdarkpool,oneofthefirst things Schwall noticedwas the guy in charge ofelectronic trading: JoshStampfli, who had joined

Credit Suisse after sevenyears spent working forBernie Madoff. (Madoff hadpioneered the idea of payingbrokers for the right toexecute the brokers’customers’ orders, whichshould have told peoplesomething but apparently didnot.) This, of course, onlyheightened Schwall’ssuspicions, and sent himdiggingaroundinoldarticles

intradejournalsaboutCreditSuisse’s dark pool.†† Therehe found references andallusions that made senseonly if Credit Suisse hadplanned, right from the start,to be deeply involved withhigh-frequency trading firms.For instance, inApril 2008aguynamedDmitriGalinov,adirector and the head ofliquidity strategy at CreditSuisse,hadtoldtheSecurities

Technology Monitor thatmany of Credit Suisse’s“clients”hadplacedcomputerservers in Weehawken, NewJersey, to be closer toCreditSuisse’s dark pool. The onlypeople who put servers nextto dark pools inWeehawkenwere Ronan’s old clients—the high-frequency tradingfirms. No stock marketinvestorwent tosuch lengthsto shave microseconds off

tradingtime.“Client,” to Credit Suisse,

appeared to Schwall to be acategory that included “high-frequency trading firms.”Schwall’s suspicion thatCredit Suisse wanted toservice HFT while notseeming to do so grew afterhe read an interview DanMathisson gave to the NewYork Times in November2009.

Q:Whoareyourclientsat CrossFinder [sic] andhow do they benefitfrom using a dark poolasopposed to justgoingthrough a broker andtradingontheexchange?

A: Our clients aremutual funds, pensionfunds, hedge funds andsomeotherlargebroker-dealers, so it is always

institutionalclients...

All the large high-frequency trading firms,Schwallknew,were“broker-dealers.” They had to be, togain the special access theyhad to the public stockexchanges.SoMathissonhadnot ruled out dealing withthem. The only reason hewould not explicitly rule outdealing with them, Schwall

assumed, was that he wasdealingwiththem.The LinkedIn searches

becameanewobsession.Theformer Madoff employee’sprofile led him to the peoplewho worked for the formerMadoff employee, who ledhim to the people whoworked for them, and so on.EvenasCreditSuissetriedtoappearas if ithadnothing todo with high-frequency

trading,itsemployeesbeggedto differ. Schwall dug outdozensofexamplesofCreditSuisse’s computerprogrammers boasting ontheirrésumésabout“buildinghigh-frequency tradingplatforms” and“implementing high-frequency trading strategy,”or of experience as a“quantitative traderonequityand equity derivatives: high-

frequency trading.” One guyexplained that he had“managed on-boarding of allhigh-frequency clients toCrossfinder.”Anothersaidhehad built the Credit SuisseCrossfinder dark pool andnow worked in high-frequency trading marketmaking. Credit Suisseclaimedthatitsdarkpoolhadnothing to do with high-frequency trading, and yet it

somehow employed, in andarounditsdarkpool,amotherlode of high-frequencytradingtalent.By the time he’d finished,

Schwall had built the entireCredit Suisse dark poolorganization chart. “He’s gotthese people charts,” saidBrad incredulously. “It’s likeoneofthoseFBIboards,withthe drug kingpins.” Lookingover Schwall’s charts on

Credit Suisse, the bank thatwent to the most trouble tosellitselfassafetoinvestors,Brad decided that the gamewas probably over inside allthebigWallStreetbanks.Allof them,onewayoranother,were probably using theunequal speeds in themarketto claim their share of theprey.Hefurtherassumedthatthe big Wall Street banksmusthavestumbleduponhis

solution to high-frequencyfront-running, andmust havechosen not to use it, becausethey had too great a stake inthe profits generated by thatfront-running. “It becamevery obvious to me why wewere the first to discoverThor, because we weren’t,”he said. “What thatmeant tomewasthat theproblemwasgoing to be much, muchharder to solve. It also told

mewhytheclientsweresointhe dark, because the clientsrely on brokers forinformation.” Creating anexchange designed to protectthe prey from the predatorwouldmeanstartingawaronWall Street—between thebanks and the investors theyclaimedtorepresent.Schwall’s private

investigationsalsorevealedtoBrad just how little the

technical people understoodof their role in the financialworld. “It’s not like you arebuilding a bridge connectingtwo pieces of land,” he said.“You can’t see the effects ofwhat you are doing.” Theopenness with which theCredit Suisse technologistsdescribed their activitiesmade him aware of a larger,almost charmingobliviousness. “I was totally

shockedwhenJohnstartedtopull out these résumés,” herecalled. “The banks hadadoptedapolicyofsayingaslittle as possible about whatthey were actually doing.They’d fire people for beingquoted in the newspaper, butin theirLinkedInpages thosesame people said whateverthey wanted.” From the waythe engineers described theirroles in the new financial

system,hecouldseethattheyhad no clue about theinjustices of that system. “Ittold me that these tech guyswere completely oblivious towhat theywereworkingon,”he said. “They were tyingthese things they wereworking on—helping thebanktomakemarketsintheirdark pools; buildingautomated systems for thebanktousewithitscustomers

—in away you neverwouldif you understood what thebanks were doing. It’s likesaying on your LinkedInprofile, ‘I have all the skillsof a robber and I know thisonehouseintimately.’”Schwall had started out

looking for the villains whowere committing crimesagainst the life savings ofordinary Americans, fullyaware of their own villainy.

Hewoundupfinding,mainly,abunchofpeoplewhohadnoidea of the meaning of theirown lives. In his searches,Schwall noticed somethingelse, thoughat first hedidn’tknow what to make of it: Asurprisingly large number ofthe people pulled in by thebigWallStreetbankstobuildthe technology for high-frequency trading wereRussians. “If you went to

LinkedInandlookedatoneofthese Russian guys, youwouldseehewaslinkedtoallthe other Russians,” saidSchwall. “I’d go to findDmitri and I’d also findMisha and Vladimir andTolstoy or whatever.” TheRussians came not fromfinance but from telecom,physics, medical research,university math departments,and a lot of other useful

fields. The big Wall Streetfirms had become machinesfor turning analyticallyminded Russians into high-frequency traders. Schwallfiled that fact away for later,as something perhaps worththinkingabout.

_____________* It is irritating to read about anAmerican bank that insists on callingitselfabanc.Thebancinthiscasewaspushed to do so, as the securities

divisionswithinAmericanbanks(here,Bank of America) are prohibited byregulators from referring to themselvesasbanks.† A year later, in 2012, Wall StreetJournal reporter Scott Pattersonwouldwrite an excellent history of the earlyelectronictraderscalledDarkPools.‡ “There’saculture in theSECofnotgetting into a dialogue with anyindividualwhocomesin,”saysastafferwho listened to Brad Katsuyama’spresentation. “They don’twant to giveany one person an unfair peek at theway the SEC thinks. But it’s a verydefensive culture. And there werepeople in the room who had written

some of the rules he was implicitlycriticizing.”§ Inearly2013,oneofthelargesthigh-frequency traders, Virtu Financial,publiclyboasted that in fiveandahalfyearsof tradingithadexperiencedjustone day when it hadn’t made money,andthatthelosswascausedby“humanerror.” In 2008, Dave Cummings, theCEO of a high-frequency trading firmcalledTradebot,tolduniversitystudentsthat his firm had gone four yearswithout a single day of trading losses.This sort of performance is possibleonly if you have a huge informationaladvantage.¶ A former employee of Citadel who

also once had top secret securityclearanceatthePentagonsays,“Togetinto the Pentagon and intomy area, ittooktwobadgeswipes.Onetogetintothe building and one to get into myarea.Guesshowmanybadgeswipes ittook me to get to my seat at Citadel?Five.”** Those nine banks, in order of their(fairly evenly distributed) 2011marketshare, from highest to lowest: CreditSuisse, Morgan Stanley, Bank ofAmerica, Merrill Lynch, GoldmanSachs, J.P. Morgan, Barclays, UBS,Citi,DeutscheBank.†† Stampflihasnotbeenchargedwithanywrongdoing.

CHAPTERFIVE

PUTTINGAFACEONHFT

Sergey Aleynikov wasn’tthe world’s most eagerimmigranttoAmerica,or,forthat matter, to Wall Street.He’d leftRussia in1990, theyear after the fall of theBerlin Wall, but more insadness than in hope. “WhenI was nineteen I haven’timaginedleavingit,”hesays.“I was very patriotic aboutRussia. I cried when

Brezhnevdied.And I alwayshatedEnglish.IthoughtIwascompletely incapable oflearning languages.” HisproblemwithRussiawasthatits government wouldn’tallow him to study what hewanted to study. He wasn’treligious in any conventionalsense, but he’d been born aJew,whichhadbeennotedonhis Russian passport toremind everyone of the fact.

As a Jew he expected to begiven especially difficultentranceexams touniversity,which, if he passed them,would grant him access tojust one of two Moscowuniversities that were moreaccepting of Jews, where hewould study whatever theauthorities permitted Jews tostudy.Math, in Serge’s case.He’d beenwilling to toleratethis stateofaffairs;however,

asithappened,he’dalsobeenborn to program computers.He hadn’t laid hands on acomputeruntil1986,whenhewasalreadysixteen.Thefirstthing he’d donewas towritea program: He instructed thecomputertodrawapictureofa sine wave. When thecomputer actually followedhis instructions, he washooked.Whathookedhim,hesaid, was “its detailed

orientation. The way itrequires an ability to see theproblem and tackle it fromdifferent angles. It’s not justlike chess, but like solving aparticular problem in chess.The more challengingproblem is not to play chessbuttowritethecodethatwillplay chess.” He found thatcoding engaged him not justintellectually but alsoemotionally. “Writing a

programislikegivingbirthtoa child,” he said. “It is acreation. Even though it istechnical, it is awork of art.You get this level ofsatisfaction.”He applied to switch his

major from mathematics tocomputer science, but theauthoritiesforbadeit.“Thatiswhat tippedme to accept theidea that perhaps Russia isnotthebestplaceforme,”he

says. “When they wouldn’tallow me to study computerscience.”He arrived in New York

City in1990andmoved intoa dorm room at the 92ndStreet Young Men’s andYoung Women’s HebrewAssociation, a sort of JewishYMCA. Two things shockedhimabouthisnewhome: thediversityofthepeopleonthestreetsandthefantasticrange

offoodsinthegrocerystores.He took photographs of therowsandrowsofsausagesinManhattan and mailed themto his mother in Moscow.“I’d never seen so manysausages,” he says. But oncehe’d marveled at theAmerican cornucopia, hestepped back from it all andwondered justhownecessaryall of this foodwas.He readbooks about fasting and the

effects of various highlyrestrictivediets.“Idecidedtolook at it a little bit furtherandaskwhatisbeneficialandwhat is not,” he said. In theend he became a finickyvegetarian. “I don’t think allthe energy you gain comesfrom food,”he says. “I thinkit comes from yourenvironment.”He’d come to America

withnomoneyatall, andno

real idea how to get it. Hetookacourseonhowtoapplyfor a job. “It was quitefrightening,” he says. “Ididn’t speak English, really,and a résumé was a totallyalien concept.” His firstinterviewer asked Serge totellhimabouthimself. “ToaRussian mentality,” saidSerge, “that question means‘Whereareyouborn?’ ‘Whoare your siblings?’ ” Serge

describedforthemanatgreatlengthhowhehadcomefromalonglineofJewishscholarsand academics—and nothingelse.“He tellsme Iwillhearfromhim again. I never do.”But he had an obvious talentfor programming computersandsoonfoundajobdoingit,for $8.75 an hour, in a NewJersey medical center. Fromthemedical center he landeda better job, in the Rutgers

University computer sciencedepartment, where, throughsome complicatedcombination of jobs andgrants,hewasable topursuea master’s degree. AfterRutgershe spent a fewyearsworking at Internet start-upsuntil, in 1998, he received ajob offer from a big NewJersey telecom companycalled IDT. For the nextdecadehedesignedcomputer

systemsandwrotethecodetoroutemillions of phone callseach day to the cheapestavailable phone lines. Whenhe joined thecompany ithadfive hundred employees; by2006 it had five thousand,and he was its startechnologist. That year aheadhunter called him andtoldhimthattherewasfiercenew demand on Wall Streetforhisparticularskill:writing

code that parsed hugeamounts of information atgreatspeed.Serge knew nothing about

Wall Street and was in noparticular rush to learn aboutit.Hissingular talentwasformaking computers go fast,buthisownmovementswereslow and deliberate. Theheadhunterpresseduponhima bunch of books aboutwriting software on Wall

Street, plus a primer on howto make it through a WallStreet job interview,and toldhim that, on Wall Street, hecould make a lot more thanthe $220,000 a year he wasmaking at the telecomcompany.Sergefeltflattered,and liked theheadhunter,buthereadthebooksanddecidedWall Street wasn’t for him.He enjoyed the technicalchallenges at the giant

telecomanddidn’treallyfeeltheneedtoearnmoremoney.A year later, in early 2007,the headhunter called himagain. By this time IDTwasin serious financial trouble;Sergewasbeginningtoworrythat the management wasrunningthecompanyintotheground.Hehadnosavingstospeakof.Hiswife,Elina,wascarryingtheir thirdchild,andthey’d need to buy a bigger

house. Serge agreed tointerviewwiththeWallStreetfirmthatespeciallywantedtomeethim:GoldmanSachs.At least on the surface,

SergeAleynikovhad thesortof life people are said tocome to America for. He’dmarried a pretty fellowRussian immigrant andstarted a family with her.They’d sold their two-bedroomCape-style house in

Clifton, New Jersey, andboughtabiggercolonial-styleoneinLittleFalls.Theyhadananny. They had a circle ofRussians they called theirfriends.Ontheotherhand,allSerge did was work, and hiswife had no real clue whatthat work involved; theyweren’tactuallyallthatcloseto each other. He didn’tencourage people to get toknow him well or exhibit a

great deal of interest ingettingtoknowthem.Hewasacquiringalotofpossessionsin which he had very littleinterest. The lawn in Cliftonwas a fair example of thegeneral problem. When he’dgone hunting for his firsthouse, he’d been enchantedbytheideaofhavinghisveryownlawn.InMoscowsuchathing was unheard of. Themomentheownedalawn,he

regretted it. (“A pain in thebutt to mow.”) A Russianwriter named Masha Leder,whoknew theAleynikovs aswell as anyone, thought ofSerge as an exceptionallyintellectually gifted butotherwise typical RussianJewish computerprogrammer, for whomtechnicalproblemsbecameanexcusenottoengagewiththemessy world around him.

“AllofSerge’slifewassomekindofmirage,”shesaid.“Oradream.Hewasnotawareofthings.He liked slender girlswho loved to dance. Hemarriedagirlandmanagedtohave three kids with herbefore he figures out hedoesn’t really know her. Hewas working his ass off andshe would spend the moneyhe was making. He wouldcome home and she would

cook him vegetarian dishes.Hewasserviced,basically.”And then Wall Street

called. Goldman Sachs putSerge through a series oftelephone interviews, thenbroughthiminforalongdayof face-to-face interviews.These he found extremelytense,evenabitweird.“Iwasnotusedtoseeingpeopleputso much energy intoevaluating other people,” he

said. One after another, adozen Goldman employeestriedtostumphimwithbrainteasers, computer puzzles,math problems, and evensome light physics. It musthave become clear toGoldman (it was to Serge)thatheknewmoreaboutmostof the things he was beingasked than his interviewersdid. At the end of the firstday, Goldman invited him

back for a second day. Hewent home and thought itover: Hewasn’t all that surehe wanted to work atGoldman Sachs. “But thenext morning I had acompetitivefeeling,”hesays.“I should conclude it and tryto pass it because it’s a bigchallenge.”He’dbeensurprisedtofind

thatinatleastonewayhefitin: More than half the

programmers at Goldmanwere Russians. Russians hadareputationforbeingthebestprogrammers onWall Street,and Serge thought he knewwhy:Theyhadbeenforcedtolearn to program computerswithout the luxuryofendlesscomputer time. Many yearslater, when he had plenty ofcomputer time, Serge stillwrote out new programs onpaperbeforetypingtheminto

themachine.“InRussia,timeon the computer wasmeasured in minutes,” hesaid. “When you write aprogram,youaregivenatinytime slot to make it work.Consequently we learned towrite the code in ways thatminimized the amount ofdebugging.Andsoyouhadtothinkaboutitalotbeforeyoucommitted it to paper. . . .The ready availability of

computer time creates thismode of working where youjust have an idea and type itandmaybeeraseit tentimes.Good Russian programmers,theytendtohavehadthatoneexperience at some time inthe past—the experience oflimited access to computertime.”He returned for another

round of Goldman’s grilling,whichendedintheofficeofa

senior high-frequency trader—anotherRussian,AlexanderDavidovich. The Goldmanmanaging director had justtwofinalquestionsforSerge,both designed to test hisabilitytosolveproblems.Thefirst: Is 3,599 a primenumber?Serge quickly saw that

there was something strangeabout3,599:Itwasverycloseto 3,600.He jotted down the

followingequations:

3599=(3600–1)=(60²–1²)=(60–1)(60+1)=59×61

3599=59×61

Notaprimenumber.The problem wasn’t that

difficult, but, asheput it, “itwas harder to solve the

problem when you areanticipated to solve itquickly.” Itmighthave takenhimaslongastwominutestofinish. The second questionthe Goldman managingdirector asked himwasmoreinvolved, and involving. HedescribedforSergearoom,arectangular box, and gavehimitsthreedimensions.“Hesays there is a spider on thefloor, and he gives me its

coordinates. There is also afly on the ceiling, and hegives me its coordinates aswell. Then he asked thequestion: Calculate theshortest distance the spidercantaketoreachthefly.”Thespider can’t fly or swing; itcan only walk on surfaces.The shortest path betweentwopointswasastraightline,andso,Sergefigured,itwasamatter of unfolding the box,

turning a three-dimensionalobjectintoatwo-dimensionalsurface, then using thePythagorean theorem tocalculate the distances. Thistook him several minutes toworkout;whenhewasdone,Davidovichofferedhimajobat Goldman Sachs. Hisstarting salary plus bonuscameto$270,000.

HE’D JOINED GOLDMAN at aninteresting moment in thehistory of both the firm andWall Street. By mid-2007Goldman’s bond tradingdepartment was aiding andabetting a global financialcrisis, most infamously byhelping the Greekgovernment to rig its booksand disguise its debt, and bydesigningsubprimemortgagesecurities to fail, so that they

mightmakemoneybybettingagainst them. At the sametime, Goldman’s equitiesdepartment was adapting toradical changes in the U.S.stock market—just as thatmarketwasabouttocrash.Aonce sleepy oligopolydominatedbyNasdaqandtheNew York Stock Exchangewas rapidly turning intosomething else. The thirteenpublic stock exchanges in

New Jersey were all tradingthesamestocks.Withinafewyears there would be morethan forty dark pools, twoofthem owned by GoldmanSachs, also trading the samestocks.The fragmentation of the

American stock market wasfueled, inpart,byRegNMS,which had also stimulated ahugeamountofstockmarkettrading. Much of the new

volumewasgeneratednotbyold-fashioned investors butby the extremely fastcomputers controlled by thehigh-frequency trading firms.Essentially, the more placesthereweretotradestocks,thegreater the opportunity therewas for high-frequencytraders to interposethemselves between buyerson one exchange and sellerson another. This was

perverse. The initial promiseof computer technology wasto remove the intermediaryfrom the financialmarket, orat leastreducetheamounthecouldscalpfromthatmarket.Therealityturnedouttobeawindfall for financialintermediaries—ofsomewhere between $10billionand$22billionayear,depending on whoseestimates you wanted to

believe. For Goldman Sachs,a financial intermediary, thatwasonlygoodnews.The bad news was that

Goldman Sachs wasn’t yetmaking much of the newmoney. At the end of 2008,theytoldtheirhigh-frequencytrading computerprogrammers that theirtrading unit had nettedroughly $300 million. Thatsame year, the high-

frequency trading division ofa single hedge fund, Citadel,made $1.2 billion. The HFTguyswerealreadyknownforhiding their profits, but alawsuitbetweenoneofthem,a Russian named MishaMalyshev, and his formeremployer, Citadel, revealedthat, in 2008, Malyshev hadbeenpaid$75millionincash.Rumors circulated—theyturnedouttobetrue—oftwo

guyswhohad leftKnight forCitadelandguaranteesof$20million a year each. Aheadhunter who sat in themiddleofthemarketandsawwhat firms were paying forgeek talent says, “Goldmanhad started to figure it out,buttheyreallyhadn’tfigureditout.Theyweren’ttopten.”The simple reason

Goldman wasn’t makingmuch of the big money now

being made in the stockmarket was that the stockmarket had become awar ofrobots,andGoldman’srobotswere slow. A lot of themoneymakingstrategieswereofthewinner-take-allvariety.When every player is tryingto do the same thing, theplayerwhogetsallthemoneyis the one whose computerscan take in data and spit outthe obvious response to it

first. In the various racesbeing run, Goldman wasseldomfirst.Thatiswhytheyhad sought out SergeAleynikov in the first place:to improve the speedof theirsystem. There were manyproblemswiththatsystem,inSerge’s view. It wasn’t somuch a system as anamalgamation. “The codedevelopmentpracticesatIDTwere much more organized

and up-to-date than atGoldman,”hesays.Goldmanhad bought the core of itssystemfifteenyearsearlierinthe acquisition of one of theearlyelectronictradingfirms,Hull Trading. The massiveamounts of old software(Sergeguessedthattheentireplatform had as many as 60million lines of code in it)andfifteenyearsoffixestoithad created the computer

equivalent of a giant rubber-band ball. When one of therubber bands popped, Sergewas expected to find it andfixit.GoldmanSachs often used

complexitytoadvantage.Thefirm designed complexsubprimemortgage securitiesthat others did notunderstand, for instance, andthen took advantage of theignorance they had

introduced into themarketplace. The automationof the stockmarketcreatedadifferent sort of complexity,with lots of unintendedconsequences. One smallexample: Goldman’s tradingon the Nasdaq exchange. In2007, Goldman owned the(unmarked) building closestto Nasdaq. The buildinghousedGoldman’sdarkpool.When Serge arrived, tens of

thousands of messages persecondwere flying back andforth between computersinside the two buildings.Proximity, he assumed, mustoffer Goldman Sachs someadvantage—after all, whyelse buy the building closesttotheexchange?Butwhenhelooked into it he found that,to cross the street fromGoldman toNasdaq, a signaltook5milliseconds,ornearly

as much time as it wouldtake, a couple of years later,for a signal to travel on thefastestnetworkfromChicagoto New York. “Thetheoreticallimit[ofsendingasignal] fromChicago toNewYork and back is somethinglikesevenmilliseconds,”saidSerge.“Everythingmorethanthat is the friction caused byman.” The friction could becausedbyphysicaldistance—

say, if the signal movingacross a street in Carterettraveled in something lessdirect than a straight line. Itcouldbecausedbycomputerhardware.Butitcouldalsobecaused by slow, clunkysoftware—and that wasGoldman’s problem. Theirhigh-frequency tradingplatform was designed, intypical Goldman style, as acentralized hub-and-spoke

system.Everysignalsentwasrequired to pass through themother ship in Manhattanbefore it went back out intothe marketplace. “But thelatency [the 5 milliseconds]wasn’t mainly due to thephysical distance,” saysSerge. “It was because thetraffic was going throughlayersandlayersofcorporateswitchingequipment.”Broadly speaking, there

were three problems Sergehadbeenhiredtosolve.Theycorresponded to the threestages of an electronic trade.Thefirstwastocreatetheso-called ticker plant, or thesoftware that translated thedata from the thirteen publicexchanges so that it couldbeviewed as a single stream.RegNMShadimposedonthebigbanksanewobligation:totake in the information from

all the exchanges in order toensure that they wereexecuting customers’ ordersat the official best marketprice—the NBBO. IfGoldman Sachs purchased500 shares of Intel at $20 ashareontheNewYorkStockExchange on behalf of acustomer without first takingthe100sharesofIntelofferedat $19.99 on the BATSexchange, they’d have

violated the regulation. Theeasiest and cheapest solutionfor the big banks to thisproblem was to use thecombineddatastreamcreatedby public exchanges—theSIP. Some of them did justthat. But to assuage theconcerns of their customersthattheSIPwastooslowandoffered themadatedviewofthe market, a few bankspromised to create a faster

data stream—but nothingthey created for customers’orders was as fast as whattheycreatedforthemselves.Serge had nothing to do

with anything used byGoldman’s customers. Hisjob was to build the systemthat Goldman Sachs’s ownproprietary traderswouldusein their activities—and itwent without saying that itneeded to be faster than

anything used by thecustomers.ThefirstandmostobviousthinghedidtomakeGoldman’s robots faster wasexactly what he had done atIDT to enable millions ofphone calls to find theircheapest route: Hedecentralized Goldman’ssystem. Rather than havesignals travel from thevariousexchangesbacktotheGoldman hub, he set up

separate mini–Goldman hubsinsideeachof theexchanges.To acquire the informationfor its private ticker plant,Goldman needed to place itscomputers as close aspossible to the exchange’smatching engine. Thesoftware that took the outputfromthetickerplantandusedittofigureoutsmarttradesinthe stock market was thesecond stage of the process:

Serge rewrote a lot of thatcode to make it run faster.The third stage was called“order entry.” As it sounds,thiswasthesoftwarethatsentthosetradesbackoutintothemarket to be executed.Sergeworkedonthat,too.Hedidn’tthink of it this way, but ineffecthewasbuildingahigh-frequencytradingfirmwithinGoldmanSachs.Thespeedhecreated for Goldman Sachs

could be used for manypurposes, of course. It couldbe used simply to executeGoldman’s prop traders’smartstrategiesasquicklyaspossible.ItcouldalsobeusedbyGoldman’sproptraderstotrade the slow-movingcustomer orders in their owndark pool against the widermarket.ThespeedSergegavethem could be used, forexample, to sell Chipotle

Mexican Grill to Rich Gatesat a high price in the darkpoolwhilebuyingitfromhimat a lower price on a publicexchange.Sergeactuallydidn’tknow

what the speed was beingused for by Goldman’s proptraders. As he worked, hebecame aware of a gulf inunderstanding betweenhimself and his employer.The people at Goldmanwith

whomhedealtunderstoodtheeffectsofwhathedidbutnottheir deep causes. No one atGoldman had a global viewof the firm’s computersoftware, for instance: Hefigured that out on the firstday,when they asked him tolook into the code base andfigure out how the differentcomponents talked to eachother.Indoingso,hesawthatthere was shockingly little

documentation leftbehindbythe people who had writtenthat code, and that no one atGoldman could explain it tohim. He, in turn, was notprivy to the commercialeffectsofhisactions—inpart,he sensed, because hissuperiorsdidnotwanthimtoknowthem.“Ithinkitisdoneintentionally,” he said. “Theless you know about howthey make the money, the

betteritisforthem.”But even if they had

wantedhimtoknowhowthemoney was made, it isunclear Serge would havecared to know. “I think theengineering problems aremuch more interesting thanthe business problems,” hesays. “Finance is just whogetsmoney.Does itwind upin the rightpocketor the leftpocket?Itjustsohappensthat

the companies that makemoneyarethecompanieslikeGoldman Sachs. You can’treallywininthatgameunlessyouareoneofthesepeople.”He understood thatGoldman’s quants wereforever dreaming up newtradingstrategies,intheformof algorithms, for his robotsto execute, and that thesetraders were meant to beextremely shrewd. He

grasped further that “all theiralgorithms are premised onsome sort of prediction—predicting something onesecond into the future.” Butyou needed only to observethe 2008 stock market crashfrom inside of GoldmanSachs, as Serge had, to seethatwhat seemed predictableoften was not. Day aftervolatile day in September2008, Goldman’s supposedly

brilliant traders were losingtens of millions of dollars.“All of the expectationsdidn’t work,” recalls Serge.“Theythoughttheycontrolledthe market, but it was anillusion. Everyone wouldcome into work and wereblown away by the fact thatthey couldn’t controlanythingatall....Financeisa gambling game for peoplewho enjoy gambling.” He

wasn’t a gambler by nature.Hepreferredthedeterministicworldofprogramming to thepseudo-deterministicworldofspeculation, and he neverfully grasped the connectionbetween his work and theGoldmantraders’.What Serge did know

about Goldman’s businesswasthatthefirm’spositioninthe world of high-frequencytrading was insecure. “The

traderswerealwaysafraidofthe small HFT shops,” as heput it. He was makingGoldman’s bulky, inefficientsystem faster, but he couldnever make it as fast as asystem built from scratch,without the burden of 60million lines of old codeunderneath it. Or a systemthat,tochangeitinanymajorway, did not require sixmeetings and signed

documents frominformational securityofficers. Goldman hunted inthe same jungle as the smallHFTfirms,butitcouldneverbe as quick or as nimble asthose firms: No big WallStreet bank could. The onlyadvantageabigbankenjoyedwasitsspecialrelationshiptothe prey: its customers. (Asthe head of one high-frequency trading firmput it,

“When one of these peoplefrom the banks interviewswith us for a job, he alwaystalks about how smart hisalgos are, but sooner or laterhe’ll tellyou thatwithouthiscustomer he can’t make anymoney.”)After a few months

working on the forty-secondflooratOneNewYorkPlaza,Sergecametotheconclusionthat thebest thing theycould

do with Goldman’s high-frequency trading platformwas to scrap it and build anew one from scratch. Hisbosses weren’t interested.“The business model ofGoldman Sachswas, if thereis an opportunity to makemoney right away, let’s dothat,” he says. “But if therewas something long-term,theyweren’t that interested.”Something would change in

the stock market—anexchange would introduce anew, complicated rule, forinstance—and that changewould create an immediateopportunity to make money.“They’d want to do itimmediately,” says Serge.“Butifyouthinkaboutit,it’sjust patching the existingsystem constantly. Theexisting code base becomesan elephant that’s difficult to

maintain.”That is how he spent the

vastmajorityofhistwoyearsat Goldman, patching theelephant. For their patchingmaterial he and the otherGoldman programmersresorted, every day, to opensource software—softwaredeveloped by collectives ofprogrammersandmadefreelyavailableontheInternet.Thetools and components they

used were not specificallydesigned for financialmarkets, but they could beadapted to repair Goldman’splumbing. He discovered, tohis surprise, that Goldmanhad a one-way relationshipwith open source. They tookhuge amounts of freesoftware off the Web, buttheydidnot return itafterhehad modified it, even whenhis modifications were very

slight and of general, ratherthan financial, use. “Once Itook some open sourcecomponents, repackagedthem to come up with acomponent thatwasnotevenused at Goldman Sachs,” hesays. “Itwasbasically awayto make two computers looklikeone,soifonewentdownthe other could jump in andperform the task.” He’dcreated a neat way for one

computer to behave as thestand-in for another. Hedescribed the pleasure of hisinnovation this way: “Itcreated something out ofchaos. When you createsomething out of chaos,essentially, you reduce theentropy in the world.” Hewent to his boss, a fellownamed Adam Schlesinger,andasked ifhecould releaseit back into open source, as

was his inclination. “He saidit was now Goldman’sproperty,” recalls Serge. “Hewasquitetense.”Open source was an idea

that depended oncollaboration and sharing,andSerge had a long historyof contributing to it. Hedidn’t fully understand howGoldman could think it wasokay to benefit so greatlyfrom the work of others and

then behave so selfishlytoward them. “You don’tcreate intellectual property,”he said. “You create aprogram that doessomething.” But from thenon, on instructions fromAdamSchlesinger,he treatedeverything on GoldmanSachs’sservers,evenifithadjust been transferred therefrom open source, asGoldman Sachs’s property.

(Later,athis trial,his lawyerflashed two pages ofcomputer code: the original,with its open source licenseontop,andareplica,withtheopen source license strippedoff and replaced by theGoldmanSachslicense.)The funny thing was that

Serge actually liked AdamSchles-inger,andmostof theother people he workedwithatGoldman.Helikedlessthe

environment the firm createdfor them to work in.“Everyonelivedfortheyear-end number,” he said. “Youget satisfied when the bonusis sizable and you get notsatisfied when the number isnot. Everything there is verypossessive.”Itmadenosenseto him the way people werepaid individually forachievements that wereessentially collective

achievements. “It was quitecompetitive. Everyone’stryingtoshowhowgoodtheirindividual contribution to theteam is. Because the teamdoesn’t get the bonus, theindividualdoes.”More to the point, he felt

that the environmentGoldman created for itsemployees did not encouragegood programming, becausegood programming required

collaboration. “Essentiallythere was very minimalconnectionsbetweenpeople,”he says. “In telecom youusually have some synergiesbetween people. Meetingswhen people exchange ideas.They aren’t under stress inthesameway.AtGoldmanitwas always, ‘Somecomponent is broken andwe’re losing money becauseof it. Fix it now.’ ” The

programmers assigned to fixthe code sat in cubicles andhardly spoke to one another.“When twopeoplewanted totalk they wouldn’t just do itoutonthefloor,”saysSerge.“Theywouldgotooneoftheoffices around the floor andclose the door. I never hadthat experience in telecomoracademia.”By the time the financial

crisis hit, Serge had a

reputation of which hehimselfwasunaware:Hewasknowntocorporate recruitersoutside Goldman as the bestprogrammer in the firm.“There were twenty guys onWall Street who could dowhatSergecoulddo,” saysaheadhunterwhorecruitsoftenfor high-frequency tradingfirms.“Andhewasoneofthebest, if not the best.”Goldman also had a

reputation in the market forprogramming talent—forkeeping its programmers inthe dark about their value tothe firm’s trading activities.The programmer types weredifferent from the tradertypes. The trader types werefar more alive to the biggerpicture,totheircontext.Theyknew their worth in themarketplace down to the lastpenny. They understood the

connection between whatthey did and how muchmoney was made, and theyweregoodatexaggeratingtheimportanceof the link.Sergewasn’t like that. He was alittle-pictureperson,anarrowproblem solver. “I think hedidn’t know his own value,”says the recruiter. “Hecompensated for beingnarrow by being good. Hewasthatgood.”

Givenhischaracterandhissituation, it’s hardlysurprising that the marketkeptfindingSergeAleynikovand telling him what he wasworth, rather than the otherway around. A few monthsintohisnewjob,headhunterswere calling him every otherweek. A year into his newjob, he had an offer fromUBS, the Swiss bank, and apromisetobumpuphissalary

to $400,000 a year. Sergedidn’t particularly want toleave Goldman Sachs just togo and work at another bigWallStreetfirm,andsowhenGoldmanofferedtomatchtheoffer, he stayed.But in early2009 he had another call,with a very different kind ofoffer: to create a tradingplatform from scratch for anewhedgefundrunbyMishaMalyshev.

The prospect of creating anew platform, rather thanconstantly patching an oldone, excited him. PlusMalyshevwaswilling to payhim more than a milliondollarsayeartodoit,andhesuggested that they mightevenopenanofficeforSergenearhishomeinNewJersey.Serge accepted the job offerand then told Goldman hewas leaving. “When I put in

the resignation letter,” hesaid, “everyone comes tomeone by one. The commonperception was that if theyhad the right opportunity toquitGoldman theywould dothat in no time.” Severalhintedtohimhowmuchtheywould like to join him at hisnew firm. His bosses askedhim what they could do topersuade him to stay. “Theyweretryingtopursuemeinto

this monetary discussion,”says Serge. “I told them itwasn’t themoney. Itwas thechancetobuildanewsystemfrom the ground up.” Hemissed his telecom workenvironment. “Whereas atIDT I was really seeing theresultsofmywork,hereyouhad this monstrous systemand you are patching it rightandleft.Nooneisgivingyouthe whole picture. I had a

feeling no one at Goldmanreallyknowshowitworksasa whole, and they are justuncomfortable admittingthat.”He agreed to hang around

forsixweeksandteachotherGoldman people everythinghe knew, so that they couldcontinue to find and fix thebrokenbandsintheirgiganticrubberball.Fourtimesinthecourse of that last month he

mailed himself source codehewasworkingon.Thefilescontainedalotofopensourcecodehehadworkedwith,andmodified, over the past twoyears,mingledwithcodethatwasn’t open source but wasobviously proprietary toGoldmanSachs.Hehoped todisentangle one from theother in case he needed toremind himself how he haddone what he had done with

the open source code; hemightneedtodoitagain.Hesent thesefiles thesamewayhe had sent himself filesnearly every week since hisfirst month on the job atGoldman. “No one had eversaid a word to me about it,”he says. He pulled up hisbrowser and typed into it thewords: “free subversionrepository.”Uppopped a listofplaces thatstoredcodefor

free and in a convenientfashion. He clicked the firstlink on the list. To find aplace to send the code tookabouteightseconds.Andthenhe did what he had alwaysdone since he’d first startedprogramming computers: Hedeleted his bash history—thecommands he had typed intohis own Goldman computerkeyboard. To access thecomputer,hewas required to

type his password. If hedidn’tdeletehisbashhistory,his password would be thereto see, for anyone who hadaccesstothesystem.It wasn’t an entirely

innocent act. “I knew thattheywouldn’tbehappyaboutit,”hesaid,becauseheknewtheir attitude was thatanything that happened to beonGoldman’sserverswasthewholly owned property of

Goldman Sachs—even whenSerge himself had taken thatcodefromopensource.Whenasked how he felt when hedid it, he says, “It felt likespeeding. Speeding in thecar.”

FOR MUCH OF the flight fromChicago he’d slept. Leavingthe plane, he noticed three

men in dark suits waiting inthe alcove of the Jetwayreserved for baby strollersand wheelchairs. Theyconfirmed his identity,explainedthattheywerefromthe FBI, handcuffed him,searched his pockets,removed his backpack, toldhimtoremaincalm,andthenwalledhimofffromtheotherpassengers. This last actwasno great feat. Serge was six

feet tall butweighed roughly140pounds:Tohidehimyouneeded only to turn himsideways.Heresistednoneofthese actions, but he wasgenuinely bewildered. Themen in black refused to tellhim his crime. He tried toguess it. His first guess wasthat they’dgottenhimmixedup with some other SergeyAleynikov. Next it occurredtohimthathisnewemployer,

Misha Malyshev, then beingsued by Citadel, might havedone something shady.Wrong on both counts. Itwasn’t until the plane hademptied and they’d escortedhimintoNewarkAirport thatthey told him his crime:stealing computer codeownedbyGoldmanSachs.Theagent in chargeof the

case,MichaelMcSwain,wasnew to law enforcement.

Oddly enough, he’d spenttwelve years, until 2007,working as a currency traderon the Chicago MercantileExchange.Heandotherslikehim had been put out ofbusinessbySergeandpeoplelike him—or, more exactly,by the computers that hadreplaced the traders on thefloors of every U.S.exchange. It wasn’t anaccident that McSwain’s

career on Wall Street endedthe same year that Serge’sbegan.McSwain marched Serge

into a black town car anddrovehimtotheFBIbuildingin lower Manhattan. Aftermakingashowofstashinghisgun,McSwainledhimintoatiny interrogation room,handcuffed him to a rod onthe wall, and, finally, readhimhisMirandarights.Then

he explained what he knew,or thoughtheknew: InApril2009 Serge had accepted ajob at a new high-frequencytrading shop, TezaTechnologies, but hadremained atGoldman for thenext six weeks. BetweenearlyApril andJune5,whenSergeleftGoldmanforgood,he sent himself, through theso-called subversionrepository, 32 megabytes of

source code fromGoldman’shigh-frequency stock tradingsystem. McSwain clearlyfound it damning that thewebsite Serge used wascalled a subversionrepository, and that itwas inGermany.He also seemed tothink it significant thatSergehadusedasitenotblockedbyGoldman Sachs, even afterSerge tried to explain to himthat Goldman did not block

any sites used by itsprogrammers but merelyblocked its employees fromporn sites and social mediasites and suchlike. Finally,theFBI agentwanted him toadmit that he had erased hisbash history. Serge tried toexplainwhyhealwayserasedhis bash history, butMcSwain had no interest inhis story. “Thewayhedid itseemed nefarious,” the FBI

agentwouldlatertestify.All of which was true, as

far as it went, but, to Serge,that didn’t seem very far. “Ithought it was like, crazy,really,” he says. “He wasstringing these computerterms together in ways thatmade no sense. He didn’tseemtoknowanythingabouthigh-frequency trading orsource code.” For instance,Serge had no idea where the

subversion repository wasphysicallylocated.Itwasjusta place on the Internet usedby developers to store thecode they were working on.“The whole point of theInternet is to abstract thephysicallocationoftheserverfrom its logical address,” hesaid. To Serge, McSwainsoundedlikeamanrepeatingphrases that he’d heard fromothersbutthattohimactually

meant nothing. “There is agameinRussiacalledBrokenPhone,” he said—a variationon the American gameTelephone. “It felt like hewasplayingthat.”What Serge did not yet

knowwas that Goldman haddiscovered his downloads—of what appeared to be thecode they used for theirproprietary high-speed stockmarket trading—just a few

days earlier, even thoughSerge had sent himself thefirst batch of code monthsago.They’dcalledtheFBIinhaste and had put McSwainthrough what amounted to acrash course in high-frequency trading andcomputer programming.McSwain later conceded thathe didn’t seek outindependent expert advice tostudy the code Serge

Aleynikovhad taken,orseektofindoutwhyhemighthavetaken it. “I relied onstatements from Goldmanemployees,” he said. He hadno idea himself of the valueof the stolen code(“representatives fromGoldman told me it waswortha lotofmoney”),or ifanyof itwasactuallyall thatspecial (“representatives ofGoldman Sachs told us there

were trade secrets in thecode”). The agent noted thatthe Goldman files were onboth the personal computerandthethumbdrivethathe’dtaken from Serge at NewarkAirport, but he failed to notethat the files remainedunopened. (If they were soimportant, why hadn’t Sergelooked at them in the monthsince he’d left Goldman?)The FBI’s investigation

before the arrest consisted ofGoldman explaining someextremely complicated stufftoMcSwain that he admittedhedidnotfullyunderstand—buttrustedthatGoldmandid.Forty-eight hours afterGoldman called the FBI,McSwain arrested Serge.ThustheonlyGoldmanSachsemployeearrestedbytheFBIintheaftermathofafinancialcrisis Goldman had done so

much to fuel was theemployeeGoldmanaskedtheFBItoarrest.On the night of his arrest,

Sergewaivedhisrighttocalla lawyer.He called hiswife,told her what had happened,and said that a bunchofFBIagents were on the way totheir home to seize theircomputers, and to please letthemin,althoughtheyhadnosearch warrant. Then he sat

down and politely tried toclearuptheconfusionof thisFBI agent who had arrestedhimwithoutanarrestwarrant.“How could he figure out ifthis was a theft if he didn’tunderstandwhatwas taken?”he recalls having askedhimself. What he’d done, inhisview,wastrivial;whathestood accused of—violatingboththeEconomicEspionageAct and the National Stolen

Property Act—did not soundtrivialat all.Still,he thoughtthat if the agent understoodhowcomputersand thehigh-frequency trading businessactually worked, he’dapologize and drop the case.“ThereasonIwasexplainingit to him was to show thatthere was nothing there,” hesaid.“Hewascompletelynotinterested in the content ofwhat I am saying. He just

keptsayingtome,‘Ifyoutellmeeverything,I’lltalktothejudge and he’ll go easy onyou.’ It appeared they had averystrongbiasfromtheverybeginning. They had goalsthey wanted to fulfill. Onewas to obtain an immediateconfession.”The chief obstacle to the

FBI’s ability to extract hisconfession, oddly, wasn’tSerge’s willingness to

provideitbutitsownagent’signorance of the behavior towhich Serge was attemptingto confess. “In the writtenstatement he was makingsome very obviousmistakes,computer terms and so on,”recalledSerge.“Iwassaying,‘You know, this is notcorrect.’ ” Serge patientlywalked the agent through hisactions. At 1:43 in themorning on July 4, after five

hoursofdiscussion,McSwainsentagiddyone-lineemailtothe U.S. Attorney’s office:“Holy crap he signed aconfession.”Two minutes later, he

dispatched Serge to a cell inthe Metropolitan DetentionCenter. The prosecutor,Assistant U.S. AttorneyJoseph Facciponti, arguedthat Serge Aleynikov shouldbe denied bail. The Russian

computer programmer had inhispossessioncomputercodethat could be used “tomanipulate markets in unfairways.” The confession Sergehad signed, scarred byphrases crossed out andrewritten by the FBI agent,later would be presented byprosecutors to a jury as thework of a thief who wasbeing cautious, even tricky,with his words. “That’s not

what happened,” said Serge.“The document was beingcrafted by someone with noprevious expertise in thematter.”SergeyAleynikov’s signed

confession was the lastanyone heard from him, atleast directly.He declined tospeaktoreportersortestifyathis trial. He had a haltingmanner, a funny accent, abeard, and a physique that

looked as if it had beenpainted by El Greco: In alineup of people chosenrandomlyfromthestreets,hewastheguymostlikelytobeidentifiedas theRussianspy,or a character from theoriginal episodes of StarTrek.Intechnicaldiscussionshe had a tendency to speakwith extreme precision,whichwasgreatwhenhewasdealing with fellow experts

but mind-numbing to a layaudience.InthecourtofU.S.public opinion, he wasn’twellsuitedtodefendhimself,and so, on the advice of hisattorney, he didn’t. He kepthis longsilenceevenafterhewas sentenced, without thepossibility of parole, to eightyearsinafederalprison.

CHAPTERSIX

HOWTOTAKEBILLIONS

FROMWALLSTREET

Ronan didn’t intend to tellhis father exactly how muchmoney hemade, or anythingelse that sounded likeboasting, but he wanted himto know he needn’t worryabouthissonanylonger.ForChristmas, in 2011, he’d flyback to Ireland, as he didevery year, only this yearhe’d travel toward aconversation. He felt no

particular attachment to theplace.“Idon’tbelongthereatall,”hesaid.“There’sfuckingfat kids everywhere.When Iwasgrowinguptherewasnofat kids. It’s lost its charm.”Hemissedhisfamily,nothingmore. When he arrived attheir house in the Dublinsuburbs,hisparentswouldbewaiting with a list of theirstuff that needed to berepaired or reprogrammed.

After he’d rebooted theircomputer, or recaptured theirsatellitesignal,he’dsitdownwith themandhave this talk.“American parents get intotheir fuckingkids’business,”said Ronan. “In Ireland theydon’t. They mind their ownfucking business.”His fatherstillhadnoclearideawhathedid for a living, or, for thatmatter,whyabigWallStreetbank would find him useful.

“He didn’t think I was afucking teller or something.ButifIsaidtomydad,‘I’matrader,’ he’d say, ‘What thefuck do you know abouttrading?’ ” His life was hislife, theirs was theirs. “Mymom and dad, I know theylove me. It’s just Irish love.And I just kindawanted himto know I was legit in thisbusiness. It was semi to sethimatease.Ididn’twanthim

to think I was putting thefamilyinjeopardy.”Ireland’s economy had

collapsed three years earlier,under the weight of a lot ofAmerican-style financialmachinations and bad advicefrom American financiers.Many of Ronan’s childhoodfriendswerestilloutofwork.It didn’t seem like the besttime to be taking a risk. JustdaysbeforeRonanwastofly

back to Ireland, however,Brad Katsuyama had pulledhimintoameetingwithJohnSchwall and Rob Park. Bradhadwantedtoknow,ifheleftRBC to create a new stockexchange, who might leavewithhim.They’d taken turnsanswering thesamequestion:You in? On some level,Ronancouldnotbelievewhathewashearingashelistenedtothesoundofhisownvoice:

He’d spent his entire careertrying to get a job on WallStreet,andnowthathefinallyhad one, the guy who hadgiven it to him was askinghim to throw it away. Onanother level, the questionanswered itself. “Too muchwas riding on me,” he said.“AndIfelt likeIowedBrad.Hewastheonewhogavemeachance. I trustedhim:He’snotafuckingidiot.”

By the end of 2011, therewas something else onRonan’smind,too.He’dnowseen Wall Street from theinside.Itwasn’taspersuasiveto him as he had expected ittobe. “It’s like if I stayhereI’ll become full of shit,” hesaid.They were all very much

in;whattheywereinforwasless clear. Until they foundsomeone willing to pay for

the building of a new stockexchange, they couldn’t verywell quit their jobs to do it.Ronan’scommitmenttoBradwas less a promise ofimmediate action than apromissorynote tobecashedatsomepointintheindefinitefuture. But they did have agoal:torestorefairnesstotheU.S. stock market—for thefirst time in Wall Streethistory, perhaps, to

institutionalize fairness. Andthey had a rough idea: todeployThor as the backboneofastrangenewkindofstockexchange, to which brokerscould send stock marketorders so that Thor mightroute them to all the otherexchanges. And yet none ofthem, least of all Ronan,believed that Thor alonecould change the stockmarket, mainly because they

doubted that the bigbrokerage firms would handover their most valuablecommodity (their customers’stock market orders) to anythird party to execute. Theyalso suspected that otherforms of unfairness plaguedthe market, problems thatThor didn’t begin to address.“I give what we have rightnow a ten percent chance ofworking,” Ronan told his

colleagues.“Butwiththefourof us I give us a seventypercent chance of figuring itout.”Afterhe leftBrad’soffice,

Ronan realized that the talkhe wanted to have with hisfather had changed: Heneeded his father’s advice.He’d already taken one bigrisk, when he had quit atelecom job in which he’dmade nearly half a million a

yearforaWallStreetjobthatpaidhimathirdofthat.Ithadpanned out: RBC had justhandedhimabonusofnearlya million bucks and wasaskinghimifhewouldliketorunthemorelucrativehalfoftheir stock market tradingoperation. (“They told me Icould name my price.”) Ashis plane dipped toward theIrish coast, he wanted toknow if he was out of his

mind to quit his $910,000-a-year job for one that paid$2,000amonth—money thatwould quite possibly be paidto him out of funds hehimself invested in the newcompany. His father mightnot care to know the details,buthe’dgrasp thegistofhispredicament.“Iwantedtoaskhim: ‘Is there a time whenyou stop rolling the dice?’ Ididn’tknow ifRBCwas that

time.”Butwhenhefinallysathis father down, Ronanrealized he couldn’t explaineven the gist of hispredicament unless heconfessed the size of hisbonus. “When I was tellinghim I’d made nine hundredand ten thousand dollars heabout had a fucking heartattack,”saidRonan.“Imean,hedoubledoverinhischair.”At length his father

recovered, then looked up athis son and said, “Youknowwhat,Ro, your risks seem tohavepaidoffsofar.Whythefucknot?”RonanlandedbackinNew

YorkonTuesday, January3,2012, turned on hisBlackBerry, andwatched thenew messages flood in. Thefirst was from Brad,announcing his resignationfrom the Royal Bank of

Canada. As Ronan laterrecalled the moment, “Thenexttenmessagessaid,‘Holyshit, Brad Katsuyama justfucking resigned.’ ” RonanknewthatRBC’sbossesupinCanada had been refusing,artfully, to deal with Brad’sinsistence that it would bebetter for all concerned if henot only quit the bank topursue an idea he hadconceived while working for

thebankbutalsotookseveralof the bank’s most valuableemployees with him. Thebosses in Canada clearlydidn’t like the sound of anypart of this. They assumedthat if they stalled for time,Brad would come to hissenses. What kind of WallStreet trader quits a secure$2-million-plus-a-year job tostart a risky business—abusinessforwhichhedoesn’t

have even the financialbacking?At baggage claim, Ronan

reached Brad by phone. “Ijustwantedtoaskhim:‘Whatthefuckisgoingon?’”Bradtold him, in surprisingly fewwords: He was tired of allthese supposedly importantpeople who ran thissupposedly important banknodding politely when hetried to speak to them about

something that was far, farmore important than any oneperson or any one bank.“They were thinking he’dnever do it,” said Ronan.“And hewas like, ‘Oh yeah,motherfucker?’ And he didit!”WhenRonanrangoff,hethought:Well,he’spushedmeallin.

BRAD GOT TO work around6:30everymorning.Thatfirstmorning after the Christmasbreak, he went to hisimmediate superior and toldhim that he was done. Thenhewenttohisdeskandwroteone email to Ronan, RobPark, and John Schwall, andanother to three senior guysinCanada.Fiveminuteslaterhis phone rang. It wasCanada, outraged. What the

hellareyoudoing?askedthesenior manager on the otherendof the line.You can’t dothis. To which Brad said: Ijustdid.He left the bank with

nothing—no paper, no code,no certainty that anyonewould actually follow himout,andnoteven,asitturnedout, a clear idea for abusiness. Like everyone elseinthestockmarket,Bradhad

received a jolt when he readthat a Goldman Sachs high-frequency programmer hadgone to jail for mailinghimself computer code.Goldman’s sensitivityconfirmed his suspicion that,around 2009, the big WallStreet banks, previouslydistracted by the financialcrisis, had finally woken upto the value of the customerorders inside their own dark

pools. They were using fearand intimidation to controlthe technologists who,ultimately, could exploit thatvalue; and the culture offinance suddenly wasbecoming more closed andsecretive—which was sayingsomething. The people whonow did what Ronan hadonce done for the big banksand HFT firms, for instance,would not be allowed to see

and hear all that Ronan hadbeenallowedtoseeandhear.And the banks were nowusing the legal system tomake itharder for theirmoretechnicalemployees to leave.“I said to Rob, ‘No fuckingaround,’”recalledBrad.“Hesaid, ‘Don’t worry. There’snothingI’dwanttotakefromhereanyway.’”They’d be starting fresh.

They could use the insights

aboutthestockmarketgainedfrom Thor, but Thor itselfbelonged to the Royal Bankof Canada. Their mainadvantage—their onlysustainable advantage—wasthat investors trusted them.The investors on thereceivingendofWallStreet’ssales pitches were not, bynature, trusting; or, if theywere trustingbynature, theirnatures were reshaped by

their environment. People onWallStreetweresimplypaidtoomuchtolieanddissembleand obfuscate, and so everytrusting feeling in thefinancial markets simply hadto be followed by a trailingdoubt.SomethingaboutBradhad led investors to lowertheir guard and to trust him.Whatever that was, it wassufficiently powerful that agroup of people who ran

some of the world’s biggestmutual funds and hedgefunds, and who controlledroughlyonethirdoftheentireUnited States stock market,petitioned his superiors atRBC, after he had quit, toallowhimtoleave,sothathemight restore trust to thefinancial markets on agranderscale.And yet—even as he

walkedawayfrommillionsof

Wall Street dollars—someofthese very people raisedquestions about his motives.He needed $10million or soto hire the peoplewho couldhelp him to design his newstockmarket,andtowritethecomputercode thatwouldbethe basis for that market.He’d hoped—assumed, even—that these big investorswould supply him with thecapitaltobuildthenewstock

exchange, but eight of everytenpitchmeetingsbeganwithsome version of the samequestion:“Whyareyoudoingthis?Whyareyouattackingasystemthathasmadeyourichand will make you evenricher if you just go alongwith it?”Asone investorputit, behind Brad’s back, “Ihave a question about Brad:Have you figured out whyhe’splayingRobinHood?”

Brad’s first answer to thatquestion was the thing he’dtold himself: The stockmarket had becomegrotesquelyunjust,andbadlyneeded to be changed, andhe’d come to see that, if hedidn’t do it, no one elsewould.“Thatdidn’tsitwell,”herecalled.“They’djustsay,‘That sounds like completebullshit.’ The first couple oftimes it happened, it really

bothered me.” Then he gotover it. If this new stockexchange flourished, itsfounders stood to makemoney—maybe a lot ofmoney.Hewasn’tamonk;hesimplydidn’tfeelanyneedtomake great sums of money.But he noticed, weirdly, thatwhen he stressed how muchmoney he himself mightmake from the new stockexchange, potential investors

in his new business warmedto him—and so he started tostress how much money hemight make. “We had asayingthatseemedtoappeaseeveryone when they askedwhy we are doing this,” hesaid. “We are long-termgreedy. That worked verywell. . . . It always got abetter response out of themthanmyfirstanswer.”He spent six months

running around New Yorkfaking greed he didn’t reallyfeel, to put money people atease. It was maddening: Hecouldn’t get the people whoshouldgivehimmoneytodoso, and he couldn’t take themoney from the people whowantedtogiveit tohim.Justabout all of the big WallStreetbankseitheraskedhimoutright if they might buy astake in his exchange or

wanted at least to beconsidered as possibleinvestors.Butifhetooktheirmoney, his stock exchangewould lose both itsindependence and itscredibilitywithinvestors.HisfriendsandfamilyinTorontoalso all wanted to invest inhis new company. Theypresented a different issue.TwohoursafterBradhad letthemknow,viaemail,thathe

was pounding the pavementto raise money for a newstockmarket,theyponiedup,collectively, $1.5 million.Some of these people couldaffordtotakeriskswiththeirmoney, but some had nomore than a few thousanddollars in savings. Before heallowed them to invest,Bradinsisted that they send himbankstatementstoprovethatthey could afford to lose

whatever they invested.“Your brother has neverfailedatanythinghehaseverdone,”oneoldfriendwrotetoBrad’s older brother, Craig,to explain why the newbusiness wasn’t at all risky,andtoaskhimtointercedeonhis behalf and overruleBrad’s decision not to takehismoney.What he needed was for

thebigstockmarketinvestors

who had said they wantedhim to quit RBC to fix thestock market—that is, themutual funds, pension funds,andhedgefunds—toputtheirmoney where their mouthwas.Theyofferedallsortsofexcuses why they couldn’thelp: They weren’t designedto invest in start-ups; theinvestmentmanagers thoughtit was a great idea, but thecompliance arm simply

wasn’t equipped to evaluateBrad;andsoon.“Theamountofmoneywewereaskingforwas so small that it was toomuchofapain in theass forthem to figure out how togiveittous,”saidBrad.Theyall wanted him to build hisexchange; they all hoped tobenefit from that exchange;buttheyallalsoassumedthatsomeone else would supplythecapitaltodoit.Manyhad

good excuses—itwas indeedoutsidethemissionofagiantpension fund to invest instart-ups. Still, it wasdisappointing. “They’re likeone of those fucking friendswhosayhe’llbackyouupina fight and they don’t doanything,” said Ronan, afterone long and frustrating dayof begging for capital.“You’re on the ground,bloody,andonlythendothey

jumpinandthrowapunch.”Some of them were like

that;butnotallof them.Thegiant mutual fund managerCapital Group pledged toinvest—on the condition thattheyweren’ttheloneinvestorbut part of a consortium; sodid another, BrandesInvestment Partners. Andtherewereseveralthatvoiceda sound objection: ThebusinessBradwaspitchingto

themwasafoggyproposition—a stock exchange thatexisted mainly to route theirstockmarketorders toall theother exchanges.Howwouldthat work? Thor had workedgreat, but why did Bradimagine that the predatorswho operated with suchabandononAmerica’spublicand private exchangeswouldnotadapt to it?AndwhydidhethinkWallStreet’sbiggest

banks would subcontract therouting of their stockmarketorders to his new exchange?Because it was “fair”? Thebanks’ salesmen ran aroundevery day selling the banks’own routers. They weren’tgoing to turn on a dime andsay, “Oh yeah, we’ve beenpaid huge sums ofmoney tosellyououttohigh-frequencytraders, but nowwe’re goingto give all the stock market

orders to Brad, so we can’tsellyououtanylonger.”Brad didn’t fully

understand the enterprise heneeded to create until themarket forced him to, by notgivinghimthecapitalfor theenterprise he thought hewanted to create. Fullerunderstanding arrived inAugust 2012, in a meetingwithDavidEinhorn,whoranthe hedge fund Greenlight

Capital. After listening toBrad’s pitch, Einhorn askedhim a simple question:Whyaren’tweall just picking thesame exchange? Why didn’tinvestorsorganizethemselvesto sponsor a single stockexchange entrusted withguarding their interests andprotecting them from WallStreet predators? There’dnever been any collectivepressurebroughtbyinvestors

onthebigbankstoroutetheirstock market orders to anyone exchange, but that wasonly because there was nogood reason to prefer oneexchange over another: Thefifty or so places on whichstocks were traded were alldesigned by financialintermediaries, for financialintermediaries. “It was soobvious it was almostembarrassing,” said Brad.

“That should have been ourpitch: not that we shouldroute the orders using Thorbut [that] we should createtheoneplaceinvestorswouldchoose to go.” That is, theyshouldn’t simply seek todefend investors on theexisting stock exchanges.They should seek to put allthe other exchanges out ofbusiness.By mid-December he’d

sewn up $9.4 million fromnine different big moneymanagers.* Six months laterhe’d raise $15 million fromfour new investors. Themoney Brad needed that hedidn’t get he kicked inhimself:By January1, 2013,he’d put his life savings ontheline.At the same time, hewent

looking for people: softwaredevelopers and hardware

engineers and networkengineerstobuildthesystem,the operations people to runit, and the salespeople toexplain it toWall Street. Hehad no trouble attractingpeople who knew him—justthe opposite. A shockinglylarge number of people he’dworked with at RBCapparently felt the urge toentrusthimwiththeircareers.Several dozen people had

hintedthat they’dliketojoinhim anddowhatever hewasdoing.He foundhimself in aseries of bizarreconversations, in which hetried to explain why theywere better off being paidhundreds of thousands ofdollarsayeartoworkatabigWall Street bank than takingaflieronanewbusinessthathadneitheraclearplannorapenny of financing. Still,

people followed. AllenZhang, the Golden Goosehimself,got firedforsendingRBC’s computer code tohimself and instantly turnedupatBrad’sfrontdoor.BillyZhao was made redundantafter he automated acomplicated task sowell thatthebanknolongerneededhishelp to do it: He came onboard, too. But Brad neededpeoplewhodidn’tknowhim,

and who knew things he didnot know. He needed,especially,peoplewithadeepunderstanding of high-frequency trading and stockexchanges. And the firstperson he found was DonBollerman.

WHAT EVERYONE NOTICEDabout Don Bollerman—even

if theydidn’tquiteput it thisway—was how badly hewantednottobesurprisedbyhis own life. On top of that,he’d grown up in the Bronxand carried with him aresistance to sentiment. Herippedthefiltersoffcigarettesbefore he smoked them. Heweighed a hundred poundsmore than he should andignored entreaties from hiscolleaguestoexerciseortake

care of himself. “I’m gonnadieyounganyway,”he’dsay.His finer feelings he treatedmuch the way he treated hisbody, with somethingapproaching disdain. “Muchis made of a kind heart,” hesaid. “I’m more of a feed-yourself-or-diekindofguy.”Toeliminatethepossibility

of surprise required not thatDon’s life be especiallyunsurprising but that he

control his feelings aboutwhatever surprise itproduced. How much hewished to manage theseemotionscouldbeseenwhenthey were at their leastmanageable. On September11, 2001, Don worked at asmall new electronic stockexchangeonthetwelfthfloorof 100 Broadway, fivehundred yards from theWorld Trade Center. He’d

arrivedatseventhatmorning.Before the stock marketopened, he heard a bump,which sounded as if it hadcome from upstairs. “Whatwethoughtisthatitwasguysmovingheavyequipment,”hesaid. “Five minutes later it’ssnowing office memos.” Heandhiscolleagueswenttothewindow and heard the newson the office TV about theplane hitting one of the

towers. “I thought it was anattack right away,” he said,and so he was less shockedthan his colleagues by whathappened next. They had adirect view of the TwinTowers, across the TrinityChurch graveyard, over thetop of the American StockExchange. The second planehit.“Ifelttheheatonmyfacethrough the window. Youopen the barbecue and your

facefeelslikeitpullsback—that feeling,” he said. Theydiscussedwhether the towerswere tall enough to reachthem if one fell over. Thenthe first tower fell. “That’swhen we ran for thestaircase.” By the time theygot to the sixth floor, Doncouldn’tseehishandsinfrontof his face. Once outside, inthe blizzard, he headed east.Hewalked alone andmatter-

of-factly up Third Avenueand then across the bridgeover theHarlemRiver to hisapartment in the Bronx,sixteen miles in all. Whatstuckoutinhismindfromtheday was how, when hearrived in Harlem, somewomen were waiting outsidetheir homes with fruit juicefor him to drink. “That onecaughtinmythroat,”hesaid.He added quickly, “Actually,

I feel like a bit of a pussy,thatitgottomethatway.”Theattack,andtheensuing

marketconvulsions,killedoffthe new electronic stockexchange thatemployedhim.Don, who had thought thatthe business was probablygoing to die anyway, wentback to NYU to finish hiscollegedegree,andthenontoa career at the Nasdaq stockexchange.Sevenyearsin,his

job was to deal witheverything that happenedafteratradeoccurred,buthisspecific role was lessimportant than his generalunderstanding—both RonanandSchwallthoughtthatDonBollerman knewbreathtakinglymoreabouttheinner workings of the stockexchanges than anyone theyhad ever met. He’d beenprivytojustabouteverything

thathappened insideNasdaq,andbroughtanunderstandingnot just of what had gonewrongbuthowitmightbesetright.What had gone wrong, in

Don’s view, wasn’t all thatsurprising or complicated. Ithadtodowithhumannature,and the power of incentives.The rise of high-frequencytrading—and its ability togainanedgeontherestofthe

market—had created anopportunity for newexchanges, like BATS andDirect Edge. By giving HFTwhat it wanted (speed, inrelation to the rest of themarket;complexityonlyHFTunderstood; and payment tobrokers for their customers’orders, so that HFT hadsomething to trade against),thenewstockexchangeshadstolenmarket share from the

old stock exchanges. Doncouldn’tspeakforNYSE,buthe had watched NasdaqrespondbygivingHFTfirmswhat they asked for—andthen figuring out how tocharge them for it. “It wasalmost like you couldn’t doanything about it,” he said.“Wedidall this speed, and Idon’t think we fullyunderstoodwhatitwasbeingused for. We just thought,

The new rules caused peopletohaveanewexperienceandthen new wants and needs.”Nasdaq had become a publiccompanyin2005,ayearafterDon had joined it. It hadearnings targets tohit; itwasincentivized to makedecisions, and to makechanges in the nature of theexchange, with a focus ontheir short-termconsequences.“It’shardtobe

forward-thinking when thewhole of corporate Americais about the next quarter’searnings,”saidDon.“Itwentfrom ‘Is this good for themarket?’ to ‘Is this bad forthe market?’ And then itslides to: ‘Can we get thisthrough the SEC?’ Thedemoninthispartofthestoryisexpediency.”Bylate2011,when Bollerman quit his job(“I felt there was a lack of

leadership”), more than two-thirds of Nasdaq’s revenuesderived, one way or another,from high-frequency tradingfirms.Don wasn’t shocked or

even all that disturbed bywhat had happened, or, if hewas, he disguised hisfeelings. The facts of WallStreet life were inherentlybrutal,inhisview.Therewasnothing that he couldn’t

imagine someone on WallStreet doing. He was fullyawarethatthehigh-frequencytraders were preying oninvestors, and that theexchanges and brokers werebeingpaidtohelpthemtodoit.He refused to feelmorallyoutraged or self-righteousaboutanyof it. “Iwouldaskthe question, ‘On thesavannah,are thehyenasandthevultures thebadguys?’ ”

hesaid.“Wehaveaboomincarcassesonthesavannah.Sowhat?It’snottheirfault.Theopportunity is there.” ToDon’s way of thinking, youwere never going to changehuman nature—though youmight alter the environmentin which it expressed itself.Or maybe that’s just whatDonwantedtobelieve.“He’skindoflikethemobguywhocrieseverynowandthenafter

ahit,”saidBrad,whothoughtthatDonwasexactlythesortof person he needed. Bradwasn’t inthemarketforself-righteousness, or for peoplewho defined themselves bytheir fine moral sentiment.“Disillusion isn’t a usefulemotion,” he said. “I needsoldiers.”Donwasasoldier.

THEIR NEW EXCHANGE neededa name. They called it theInvestors Exchange, whichwoundupbeing shortened toIEX.† Its goal was not toexterminate the hyenas andthevulturesbut,moresubtly,to eliminate the opportunityfor the kill. To do that, theyneededtofigureoutthewaysthat the financial ecosystemfavored predators over theirprey. Enter the Puzzle

Masters.Back in2008,when it had

firstoccurredtoBradthatthestock market had become ablack box whose innerworkings eluded ordinaryhuman understanding, he’dgone looking fortechnologically gifted peoplewhomighthelphimopenthebox and understand itscontents. He’d started withRobPark;withlessprecision,

hegatheredothers.Onewasatwenty-year-old Stanfordjunior named Dan Aisen,whose résumé Braddiscovered in a pile at RBC.Thelinethat leaptoutathimwas“WinneroftheMicrosoftCollege Puzzle Challenge.”Every year, Microsoftsponsored this one-day, ten-hour national brain-twistingmarathon. It attractedthousandsofyoungmathand

computer science types.Aisen and three friends hadcompeted, in 2007, againstonethousandotherteamsandhad won the whole thing.“It’s kind of a mix ofcryptography, ciphers, andSudoku,” explained Aisen.The solution to each puzzleoffered clues to the otherpuzzles; to be really good atit, a person needed not onlytechnicalskillbutexceptional

pattern recognition. “There’ssome element of mechanicalwork, and some element of‘aha!’”saidAisen.BradhadgivenAisenbotha jobandanickname, thePuzzleMaster,soon shortened, by RBC’straders, to Puz. Puz was oneofthepeoplewhohadhelpedhimcreateThor.Puz’s peculiar ability to

solve puzzles was suddenlyevenmore relevant. Creating

anewstockexchangeisabitlike creating a casino: Itscreator needs to ensure thatthe casino cannot in someway be exploitable by thepatrons. Or, at worst, heneeds to know exactly howhis system might beexploited, so that he mightmonitor the exploitation—asa casino monitors cardcounting at the blackjacktables. “You are designing a

system,” said Puz, “and youdon’t want the system to begameable.” The trouble withthestockmarket—withallofthe public and privateexchanges—was that theywere fantastically gameable,andhadbeengamed: firstbyclever guys in small shopsand then by prop traders atthe big Wall Street banks.That was the problem, Puzthought. From the point of

view of the mostsophisticated traders, thestock market wasn’t amechanism for channelingcapital to productiveenterprise but a puzzle to besolved. “Investing shouldn’tbe about gaming a system,”he said. “It should be aboutsomethingelse.”Thesimplestwaytodesign

a stock exchange that couldnotbegamedwas tohire the

verypeoplebestabletogameit,andencouragethemtotaketheir best shots. Brad didn’tknow any other nationalpuzzle champions, but Puzdid. The first person hementioned was his formerStanford teammate FrancisChung. Francis worked as atrader at a high-frequencytrading firm but didn’t likehis job. Brad invited him infor a job interview. Francis

turnedup—andjustsatthere.Brad gazed across a table:

The young man was round-faced and shy and sweet-natured but essentiallynoninteractive.“Why are you good at

solvingpuzzles?”Bradaskedhim.Francis thought about itamoment.“I’m not sure how good I

am,”saidFrancis.“Youjustwonthenational

puzzle-solvingchampionship!”Francis thought about that

somemore.“Yeah,Iguess,”hesaid.Brad had done a lot of

these interviews withtechnologistswhose skills hecould not judge.He left it toRob to figure out if theycouldactuallywritecode.Hejust wanted to know whatkind of people they were.

“I’mjustlookingforthetypeof people who won’t getalong here,” said Brad.“Typically, it’s because theway they describe theirexperience, and the thingsthey say, are very self-serving. ‘I don’t get enoughcredit forwhat Ido,’or ‘I’moverlooked.’ It’s all aboutme. They’re obsessed withtitles and other things thatdon’tmatter.I try tofindout

how they work with otherpeople. If they don’t knowsomething,what do they do?I look for sponges, learners.”WithFrancishehadno idea.Every question elicited somechoked reply. Desperate toget something, anything, outof him, Brad finally asked,“All right, just tellme:Whatdo you like to do?” Francisthoughtaboutit.“I like to dance,” he said.

Then he went completelysilent.AfterFrancishadleft,Brad

hunted down Puz. “Are yousure this is the guy?” heasked.“Trustme,”saidPuz.It took roughly six weeks

forFrancistogetcomfortableenough tospeakup.Oncehedid, he wouldn’t shut up. Itwas Francis who wouldeventually take all the rules

theycreatedfortheexchangeand translate them into step-by-step instructions for acomputer to follow. Francisalone had the entire logic ofthenewexchangeinhishead.Francis fought more thananyone for, as he put it,“makingthesystemsosimplethere is nothing to game.”And it was Francis whomBollerman dubbed TheSpoiler, because every time

the other guys thought theyhad figured something out,Francis would step in andshow them some loophole intheir logic. “The level towhich the kid will worry aproblem is what reallyseparates him,” said DonBollerman, “without anyprior concern for whosetheory he’s going to upset—includinghisown.”Theonlyproblemwith the

Puzzle Masters was thatneither of them had everworked inside a stockexchange.Bollermanbroughtin a guy from Nasdaq,Constantine Sokoloff, whohad helped to build theexchange’s matching engine.“The Puzzle Masters neededaguide,andConstantinewasthat guide,” said Brad.Constantine was alsoRussian,bornand raised ina

small town on the VolgaRiver.Hehada theoryaboutwhy so many Russians hadwound up inside high-frequency trading. The oldSoviet educational systemchanneled people away fromthehumanitiesand intomathand science. The old Sovietculture also left its formercitizens oddly prepared forWall Street in the earlytwenty-first century. The

Soviet-controlled economywashorribleandcomplicatedbut riddled with loopholes.Everything was scarce;everythingwas also gettable,if you knew how to get it.“We had this system forseventy years,” saidConstantine. “People learn toworkaround the system.Themoreyoucultivate a classofpeople who know how towork around the system, the

more people you will havewhoknowhowtodo itwell.All of the Soviet Union forseventy years were peoplewho are skilled at workingaround the system.” Thepopulation was thus wellsuited to exploit megatrendsin both computers and theUnited States financialmarkets.After the fall of theBerlinWall,alotofRussiansfled to the United States

without a lot ofEnglish; onewaytomakealivingwithouthaving to converse with thelocals was to program theircomputers. “I know peoplewho never programmedcomputers butwhen they gethere they say they arecomputerprogrammers,”saidConstantine. A Russian alsotended to be quicker thanmost to see holes built intothe U.S. stock exchanges,

even if those holes wereunintentional,becausehehadbeenraisedbyparents,inturnraised by their own parents,togameaflawedsystem.The role of the Puzzle

Masterswastoensurethatthenew stock exchange did notcontain aspects of a puzzle.Thatithadnoprobleminsideits gears that could be“solved.” To begin, theylisted the features of the

existing stock exchanges andpickedthemapart.Aspectsofthe existing stock exchangesobviously incentivized badbehavior. Rebates, forinstance: The maker-takersystemof feesandkickbacksused by all of the exchangeswas simply a method forpaying the big Wall Streetbanks to screw the investorswhose interests they weremeant to guard. The rebates

were the bait in the high-frequencytraders’flashtraps.Themovingpartsofthetrapswereordertypes.Ordertypes—like “market” and“limit”—exist so that thepersonwhosubmitstheorderto buy or sell stock retainssome control over his orderafter it has entered themarketplace.‡ They are anacknowledgment that theinvestor cannot be physically

present on the exchange tomicromanage his situation.Order types also exist, lessobviously, so that the personwhoisbuyingorsellingstockcanembed,inasinglesimpleinstruction, a lot of other,smallerinstructions.The old order types were

simple and straightforwardandmainlysensible.Theneworder types that accompaniedthe explosion of high-

frequency trading werenothing like them, either indetail or spirit.When, in thesummer of 2012, the PuzzleMasters gathered with BradandDonandRonanandRoband Schwall in a room tothink about them, thereweremaybe one hundred fiftydifferent order types. Whatpurposedideachserve?Howmighteachbeused?TheNewYork Stock Exchange had

created an order type thatensured that the trader whouseditwouldtradeonlyiftheorderon theothersideofhiswas smaller than his ownorder; the purpose seemed tobe to prevent a high-frequency trader frombuyinga small number of sharesfrom an investor who wasabout to crush the marketwithahugesale.DirectEdgecreatedanordertypethat,for

even more complicatedreasons, allowed the high-frequency trading firm towithdraw 50 percent of itsorder the instant someonetried to act on it. All of theexchanges offered somethingcalled a Post-Only order. APost-Only order to buy 100shares of Procter & Gambleat$80asharesays,“Iwanttobuy a hundred shares ofProcter & Gamble at eighty

dollars a share, but only if Iamonthepassivesideof thetrade, where I can collect arebate from the exchange.”As if that weren’t squirrelyenough, the Post-Only ordertype now had many evenmore dubious permutations.TheHideNotSlideorder,forinstance. With a Hide NotSlideorder, ahigh-frequencytrader—forwhoelsecouldorwould use such a thing?—

would say, for example, “Iwanttobuyahundredsharesof P&G at a limit of eightydollars and three cents ashare, Post-Only, Hide NotSlide.”One of the joys of the

Puzzle Masters was theirability to figure out what onearth that meant. Thedescriptions of single ordertypesfiledwiththeSECoftenwentonfortwentypages,and

wereinthemselvespuzzles—written in a language barelyresembling English andseemingly designed tobewilder anyone who daredto read them. “I consideredmyselfasomewhatexpertonmarket structure,” said Brad.“But I needed a PuzzleMaster with me to fullyunderstandwhatthefuckanyofitmeans.”AHideNotSlideorder—it

was just one of maybe fiftysuch problems the PuzzleMasters solved—worked asfollows: The trader said hewaswillingtobuythesharesat a price ($80.03)above thecurrent offering price($80.02), but only if he wason the passive side of thetrade,wherehewouldbepaida rebate. He did this notbecausehewantedtobuytheshares.Hedidthisincasean

actual buyer of stock—a realinvestor,channelingcapitaltoproductive enterprise—camealong and bought all thesharesofferedat$80.02.Thehigh-frequency trader’s HideNot Slide order thenestablishedhimasfirstinlineto purchase P&G shares if asubsequentinvestorcameintothe market to sell thoseshares. This was the caseeven if the investorwho had

bought the shares at $80.02expressed furtherdemand forthem at the higher price. AHide Not Slide order was away for a high-frequencytrader tocut in line,aheadofthe peoplewho’d created thelineinthefirstplace,andtakethe kickbacks paid towhoever happened to be atthefrontoftheline.The Puzzle Masters spent

days working through the

manyordertypes.Allofthemhad one thing in common:Theyweredesignedtocreatean edge for HFT at theexpense of investors. “We’dalwaysask,‘Whatisthepointof that order, if you want totrade?’”saidBrad.“Mostoftheordertypesweredesignedto not trade, or at least todiscourage trading. [With]every rock we turned over,we found a disadvantage for

the person who was actuallytheretotrade.”Theirpurposewas to hardwire into theexchange’sbraintheinterestsofhigh-frequency traders—attheexpenseofeveryonewhowasn’t a high-frequencytrader. And the high-frequency traders wanted toobtain information, ascheaply and risklessly aspossible, about the behaviorand intentions of stock

market investors. That iswhy, though theymade onlyhalf of all trades in the U.S.stock market, they submittedmore than 99 percent of theorders: Their orders were atool for divining informationabout ordinary investors.“The PuzzleMasters showedme the length the exchangeswere willing to go to—tosatisfy a goal that wasn’ttheirs,”saidBrad.

The Puzzle Masters mightnot have thought of it thisway at first, but in trying todesign their exchange so thatinvestors who came to itwouldremainsafefromhigh-frequency traders, they werealso divining the ways inwhich high-frequency tradersstalked their prey. As theyworked through the ordertypes, they created ataxonomy of predatory

behavior in the stockmarket.Broadlyspeaking,itappearedas if there were threeactivities that led to a vastamount of grotesquely unfairtrading. The first they called“electronic front-running”—seeing an investor trying todo something in one placeand racing him to the next.(WhathadhappenedtoBrad,whenhetradedatRBC.)Thesecond they called “rebate

arbitrage”—using the newcomplexity to game theseizingofwhateverkickbacksthe exchange offeredwithoutactually providing theliquidity that the kickbackwas presumably meant toentice. The third, andprobably by far the mostwidespread,theycalled“slowmarket arbitrage.” Thisoccurred when a high-frequency trader was able to

see the price of a stockchangeononeexchange,andpick off orders sitting onother exchanges, before theexchangeswereabletoreact.Say, for instance, themarketfor P&G shares is 80–80.01,and buyers and sellers sit onboth sides on all of theexchanges. A big sellercomes in on the NYSE andknocks the price down to79.98–79.99. High-frequency

traders buy on NYSE at$79.99 and sell on all theother exchanges at $80,before the market officiallychanges. This happened allday,everyday,andgeneratedmorebillionsofdollarsayearthan the other strategiescombined.All three predatory

strategiesdependedonspeed,and to speed the PuzzleMastersturnedtheirattention,

oncetheyweredonewiththeordertypes.Theyweretryingto create a safe place, whereevery dollar stood the samechance.Howtodothat,whena handful of people in themarket would always befaster than everyone else?They couldn’t very wellprohibit high-frequencytraders from trading on theexchange—an exchangeneeded tooffer fairaccess to

all broker-dealers. And,anyway, it wasn’t high-frequency trading in itselfthatwaspernicious;itwasitspredations. It wasn’tnecessary to eliminate high-frequencytraders;allthatwasneeded was to eliminate theunfair advantages they had,gained by speed andcomplexity. Rob Park put itbest: “Let’s say you knowsomething before everyone

else. You are in a privilegedstate.Eliminatingthepositionof privilege is impossible—some people always will getthe information first. Somepeoplewillalwaysgetitlast.You can’t stop it. What youcan control is how manymoves they can make tomonetizeit.”The obvious starting point

was to prohibit high-frequency traders fromdoing

whattheyhaddoneonalltheotherexchanges—co-locatinginside them, and getting theinformation about whateverhappenedonthoseexchangesbefore everyone else.§ Thathelped,but itdidnotentirelysolve the problem: High-frequency traders wouldalwaysbefasteratprocessingtheinformationtheyacquiredfromany exchange, and theywould always be faster than

anyone else to exploit thatinformation on otherexchanges. This newexchange would be requiredboth to execute trades onitselfandtoroute,totheotherexchanges, the orders it wasunabletoexecute.ThePuzzleMasterswanted to encouragebig orders, and larger-sizedtrades, so that honestinvestors with a lot of stockto sell might collide with

honest investors who had alot of stock to buy, withoutthe intercession of HFT. Ifsome big pension fund cametoIEXtobuyamillionsharesof P&G and found only100,000 for sale there, itwould be exposed to somehigh-frequency traderfiguring out that its demandfor P&G shares wasunsatisfied. The PuzzleMasters wanted to be sure

thattheycouldbeatanyHFTfirm to the supply of P&Gstockontheotherexchanges.They entertained all sorts

of ideas about how to solvethe speed problem. “We hadprofessors coming throughhere constantly,” said Brad.For instance, one professorsuggested a “randomizeddelay.”Everyordersubmittedto the new stock exchangewould be assigned, at

random,sometimelagbeforeit entered the market. Themarket information somehigh-frequency traderobtained with his 100-sharesell order, the sole intentionof whichwas to uncover theexistence of a big buyer,might thus move so slowlythat itwouldproveofnouseto him. An order wouldbecome,likealotteryticket,amatterofchance.ThePuzzle

Masters instantly spotted theproblem: Any decent HFTfirm would simply buy hugenumbersoflotterytickets—toincrease its chances of beingthe 100-share sell order thatcollidedwiththemassivebuyorder. “Someone will justfloodthemarketwithorders,”said Francis. “You end upmassively increasing quotetrafficforeverymove.”It was Brad who had the

crude first idea: Everyone isfighting to get in as close tothe exchange as possible.Why not push them as faraway as possible? Putourselves at a distance, butdon’tletanyoneelsebethere.In designing the exchange,theyneeded toconsiderwhatthe regulatorswould tolerate;they couldn’t just dowhatever they wanted. Bradkept a close eye onwhat the

regulators already hadapproved, and paid specialattentionwhentheNewYorkStock Exchange won theSEC’s approval for thestrangethingtheyhaddoneinMahwah. They’d built this400,000-square-foot fortressinthemiddleofnowhere,andthey planned to sell, to high-frequency traders, access totheir matching engine. Butthe moment they announced

their plans, high-frequencytradingfirmsbegantobuyuplandsurroundingthefort—sothat they might be near theNYSE matching engine,withoutpayingtheNYSEfortheprivilege.Inresponse,theNYSE somehow persuadedthe SEC to let them make arule for themselves: Anybanks or brokers or HFTfirms that did not buy(expensive) space inside the

fort would be allowed toconnect to the NYSE in oneof two places: Newark, NewJersey, or Manhattan. Thetime required to move asignal from those places toMahwah undermined HFTstrategies; and so the banksand brokers and HFT firmswere all forced to buy spaceinside the fort from theNYSE. Brad thought: Whynot create the distance that

underminesHFT’sstrategies,without selling high-frequencytraderstherighttoput their computers in thesamebuilding?“Therewasaprecedent: They’d let NYSEdoit,”Bradsaid.“Unlesstheregulators said, ‘You mustallow co-location,’ ” they’dhavetoletIEXforbidit.The idea was to establish

the IEX computer thatmatched buyers and sellers

(the matching engine) atsome meaningful distancefrom the place tradersconnected to IEX (called the“point of presence”), and torequire anyone who wantedto trade to connect to theexchange at that point ofpresence.Ifyouplacedeveryparticipant in the market farenough away from theexchange, you couldeliminate most, and maybe

all,of theadvantagescreatedby speed. Their matchingengine, they already knew,would be located inWeehawken, New Jersey(they’d been offered cheapspace in a data center). Theonly question was:Where toput the point of presence?“Let’s put it in Nebraska,”someone said, but they allknew it would be harder togetthealreadyreluctantWall

Street banks to connect totheirmarket if thebankshadto send people to Omaha todo it. Actually, though, itwasn’t necessary for anyoneto move to Nebraska. Thedelayneededonly tobe longenough for IEX, once it hadexecuted some part of acustomer’sbuyorder, tobeatHFT in a race to any othershares available in themarketplaceatthesameprice

—that is, to preventelectronic front-running. Itneeded to be long enough,also, for IEX, each time ashare price moved on anyexchange, to process thechange, and to move theprices of any orders restingon it, so that they didn’t getpicked off—in the way, say,that Rich Gates had beenpicked off, when he ran histests to determine if he was

being ripped off inside thedark pools run by the bigWallStreetbanks.(Thatis,toprevent “slow marketarbitrage.”) The necessarydelay turned out to be 320microseconds; that was thetimeittookthem,intheworstcase, to send a signal to theexchange farthest from them,theNYSEinMahwah.Justtobesure,theyroundeditupto350microseconds.

The new stock exchangealso cut off the food sourcefor all identifiable predators.Brad, when he was a trader,hadbeencheatedbecausehisorders had arrived first atBATS,whereHFT guys hadpickeduphissignalandracedhim to the other exchanges.ThefiberroutesthroughNewJerseythatRonanhandpickedwere chosen so that an ordersent from IEX to the other

exchangesarrivedat themallat precisely the same time.(He thus achieved withhardware what Thor hadachievedwithsoftware.)RichGates had gotten himselfpicked off in theWall Streetdark pools because the darkpools had not moved fastenough to re-price his order.The slow movement of thedarkpools’priceshadmadeitpossible for ahigh-frequency

trader (or the Wall Streetbanks’owntraders)toexploitthe orders inside it—legally.To prevent the same thingfromhappeningon theirnewexchange, IEX needed to beextremely fast—much fasterthan anyother exchange. (Atthe same time that theywereslowing down everyone whotradedontheirexchange,theywere speeding themselvesup.) To “see” the prices on

the other stock exchanges,IEX didn’t use the SIP orsomephony improvement onthe SIP but instead createdtheir own private, HFT-likepictures of the entire stockmarket. Ronan had scouredNew Jersey for paths fromtheir computers inWeehawken to all the otherexchanges;thereturnedouttobe thousands of them. “Weused the fastest subterranean

routes,” saidRonan. “All thefiberweusedwascreatedbyHFT for HFT. One hundredpercent of it.” The 350-microsecond delay workedlikeaheadstartinafootrace.Itensured that IEXwouldbefaster to see and react to thewider market than even thefastest high-frequency trader,thus preventing investors’orders from being abused bychangesinthatmarket.Inthe

bargain, it prevented high-frequency traders—whowould inevitably try to puttheir computers nearer thaneveryone else’s to IEX’s inWeehawken—fromsubmitting their orders ontoIEX more quickly thaneveryoneelse.To create the 350-

microsecond delay, theyneeded to keep the newexchangeroughly thirty-eight

miles from the place thebrokers were allowed toconnecttotheexchange.Thatwas a problem. Having cutoneverygooddealtoputtheexchange in Weehawken,theywereofferedanother: toestablish the point ofpresence in a data center inSecaucus, New Jersey. Thetwo data centers were lessthan ten miles apart, andalready populated by other

stock exchanges and all thehigh-frequency traders.(“We’regoing into the lion’sden,” said Ronan.) A brightidea came from a newemployee, James Cape, whohad just joined themfromanHFT firm: Coil the fiber.Instead of running straightfiberbetween the twoplaces,coilthirty-eightmilesoffiberandstickit inacompartmentthe size of a shoebox to

simulate the effects of thedistance. And that’s whatthey did. The informationflowing between IEX and allthe players on it would thusgo round and round, inthousands of tiny circles,inside the magic shoebox.From the high-frequencytraders’pointofview, itwasas if they’dbeenbanished toWestBabylon,NewYork.Creating fairness was

remarkably simple. Theywould not sell to any onetraderor investor the right toputhiscomputersnext to theexchange,orspecialaccesstodatafromtheexchange.Theywould pay no kickbacks tobrokers or banks that sentorders;instead,they’dchargeboth sides of any trade thesame amount: nine one-hundredthsofacentpershare(known as 9 “mils”). They’d

allow just three order types:market, limit, and Mid-PointPeg, which meant that theinvestor’s order rested inbetween the current bid andoffer of any stock. If theshares of Procter & Gamblewere quoted in the widermarket at 80–80.02 (you canbuyat$80.02orsellat$80),aMid-PointPegorderwouldtrade only at $80.01. “It’skind of like the fair price,”

saidBrad.Finally,toensurethattheir

own incentives remained asclosely aligned as they couldbewiththoseofstockmarketinvestors, the new exchangedid not allow anyone whocould trade directly on it toown any piece of it: Itsowners were all ordinaryinvestorswho needed first tohandtheirorderstobrokers.The design of the new

stockexchangewassuchthatitwouldyieldallsortsofnewinformation about the innerworkings of the U.S. stockmarket—and, indeed, theentire financial system. Forinstance, it did not ban butwelcomed high-frequencytraders who wished to tradeon it. If high-frequencytraders performed a valuableservice in the financialmarkets, they should still do

so, after their unfairadvantages had beeneliminated. Once the newstock exchange opened forbusiness, IEXwould be ableto see how much of whatHFT did was useful simplyby watching what, ifanything, high-frequencytraders did on the newexchange, where predationwasnot possible.ThePuzzleMasters’ only question was

whether, in theirdesign, theyhad accounted for everypossible form of marketpredation. That was the onethingeventheydidnotknow:whether they had missedsomething.

THE HIDDEN PASSAGES andtrapdoors that riddled theexchanges enabled a handful

ofplayerstoexploiteveryoneelse; the latter didn’tunderstandthat thegamehadbeen designed precisely forthe former. As Brad put it,“It’s likeyourunthiscasino,andyouneedtogetplayersinto attract other players. YouinviteafewplayersintostartagameofTexasHold’embytelling them that the deckdoesn’t have any jacks orqueens in it, and that you

won’t tell the other peoplewhocometoplaywiththem.How do you get people intothe casino? You pay thebrokers to bring them there.”By the summer of 2013, theworld’s financial marketswere designed to maximizethe number of collisionsbetween ordinary investorsand high-frequency traders—at the expense of ordinaryinvestors, and for the benefit

of high-frequency traders,exchanges,WallStreetbanks,and online brokerage firms.Around those collisions anentireecosystemhadarisen.Brad had heard many

firsthand accounts about thenatureofthatecosystem.Onecame from a man namedChrisNagy,who,until2012,had been responsible forselling theorder flowforTDAmeritrade. Every year,

people from banks and high-frequency trading firmswould fly to Omaha, whereTD Ameritrade was based,and negotiate with Nagy.“Mostof thedeals tendtobehandshakedeals,”Nagy said.“Yougoouttoasteakdinner.‘We’ll pay you two cents ashare. Everything is good.’ ”Thenegotiationswerealwaysdoneface-to-face,becausenooneinvolvedwantedtoleave

a paper trail. “The paymentfor the order flow is as off-the-record as possible,” saidNagy. “They never have anemail or even a phone call.Youhad to flydowntomeetwith us.” For its part, TDAmeritrade was required topublish how much per sharethey were making from thepractice but not the totalamounts, which were buriedonitsincomestatementsona

linelabeled“OtherRevenue.”“So you can see the income,butyoucan’tseethedeals.”In his years selling order

flow, Nagy noticed a coupleof things—and he relatedthem both to Brad and histeam when he came to visitthemtofindoutwhyhekepthearing about this strangenew thing called IEX. Thefirst was that the marketcomplexity created by Reg

NMS—the rapid growth inthenumberof stockmarkets,andinhigh-frequencytrading—raised the value of a stockmarket customer’s order. “Itcaused the value of our flowto triple, a least,”Nagy said.The other thing he couldn’thelp but notice was that notall of the online brokersappreciatedthevalueofwhatthey were selling. TDAmeritrade was able to sell

the right to execute itscustomers’ orders to high-frequency trading firms forhundreds of millions a year.The bigger Charles Schwab,whose order flow was evenmore valuable than TDAmeritrade’s, had sold itsflowtoUBSbackin2005,inan eight-year deal, for only$285 million. (UBS chargedthe high-frequency tradingfirm Citadel some

undisclosed sum to executeSchwab’s trades.) “Schwableft at least a billion dollarson the table,” Nagy said. Alotof thepeople selling theircustomers’ orders, it seemedto Nagy, had no idea of thevalue of the information theorders contained. Even hewas unsure; the only way toknow would be to find outhow much money high-frequency traders were

making by trading againstslow-footed individualinvestors.“I’vetriedovertheyears [to find out howmuchmoney was being made byhigh-frequency trading],”Nagy said. “The marketmakers are always reluctantto share their performance.”What Nagy did know wasthat the simple retail stockmarket order was, from thepoint of view of high-

frequency traders, easy kill.“Whose order flow is themost valuable?” he said.“Yours and mine. We don’thave black boxes. We don’thave algos. Our quotes arelate to the market—a fullsecondbehind.”¶High-frequency traders

sought to trade as often aspossible with ordinaryinvestors, who had slowerconnections. They were able

todosobecausetheinvestorsthemselves had only thefaintest clue of what washappening to them, and alsobecause the investors, evenbig, sophisticated ones, hadnoabilitytocontroltheirownorders. When, say, FidelityInvestments sent a big stockmarket order to Bank ofAmerica, Bank of Americatreatedthatorderasitsown—and behaved as if it, not

Fidelity, owned theinformation associated withthatorder.Thesamewastruewhen an individual investorbought stock through anonline broker. The momenthe pressed the Buy icon onhis screen, the business wasout of his hands, and theinformation about hisintentionsbelonged,ineffect,to E*Trade, or TDAmeritradeorSchwab.

But the role in this of thenine big Wall Street banksthat controlled 70 percent ofall stock market orders wasmore complicated than therole played by TDAmeritrade. The Wall Streetbankscontrollednotonly theorders, and the informationalvalue of those orders, butdark pools in which thoseorders might be executed.The banks took different

approaches to milking thevalue of their customers’orders.Allof them tended tosend the orders first to theirown dark pools beforeroutingthemouttothewidermarket. Inside the dark pool,the bank could trade againsttheordersthemselves;ortheycould sell special access tothe dark pool to high-frequencytraders.Eitherway,the value of the customers’

orders was monetized—bythe bigWall Street bank, forthe big Wall Street bank. Ifthe bank was unable toexecute a stockmarket orderinitsowndarkpool,thebankdirectedthatorderfirsttotheexchange that paid thebiggest kickback for it—when the kickback wassimplythebaitforsomeflashtrap.If thePuzzleMasterswere

right, and the design of IEXeliminated the advantage ofspeed, IEXwould reduce thevalue of investors’ stockmarket orders to zero. If theorders couldn’t be exploitedonthisnewexchange—iftheinformation they containedwas worthless—who wouldpay for the right to executethem? The big Wall Streetbanks and online brokerscharged by investors with

routingstockmarketorderstoIEXwould surrender billionsof dollars in revenues in theprocess. And that, aseveryone involvedunderstood, wouldn’t happenwithoutafight.One afternoon during the

summer of 2013, a fewmonths before the exchangeplanned toopenforbusiness,Brad called a meeting tofigure out how to make the

big Wall Street banks feelwatched. IEX had raisedmore capital and hired morepeopleandmovedtoabiggerroom,onthethirtiethfloorof7WorldTradeCenter.Therestillwasno separateplace tomeet, however, so theygatheredinacornerofthebigroom, where a whiteboardmet a window that offered aspectacular view of the 9/11memorial. Don leaned with

his back against thewindow,along with Ronan, Schwall,and Rob Park, while Bradstood in front of thewhiteboard and took awhiteboard marker out of abin. The twenty or so otheremployees of IEX remainedat their desks in the room,pretending that nothing washappening.Then Matt Trudeau

appeared and joined in.Matt

was the only person in theroomwhohadeveropenedabrand-new stock exchange,and so he tended to beincluded in every businessdiscussion. Oddly enough,among themhewas least,bynature, a businessman. He’dentered college to major inpaintingandthen,decidinghelackedthetalenttomakeitasa painter, and thinking hemight make it as an

academic,hadmovedintotheanthropology department. Hedidn’t become ananthropologist, either. Aftercollege he’d found workadjusting auto insuranceclaims—ajobhejudgedtobeamongtheworld’smostsoul-sucking.One day on a lunchbreak,henoticeda televisionswitched on to CNBC andwondered, “Why are theretwo separate ticker tapes?”

He began to study the stockmarket. Five years later, inthe mid-2000s, he wasopening new,American-stylestock exchanges in foreigncountriesforacompanywiththe mystifying name Chi-XGlobal. (“It was marketinggone awry,” he said. “Wespentthefirstfifteenminutesof every meeting trying toexplain our name.”) He’dbeen one part businessman

and one part missionary: Hemet with officials of variousgovernments, wrote whitepapers, and sat on panels toextol thevirtuesofAmericanfinancial markets. Afteropening Chi-X Canada, he’dadvised firms trying to openstock exchanges inSingapore, Tokyo, Australia,Hong Kong, and London.“Did I think I was doingGod’s work?” he said later.

“No. But I did think marketefficiency was somethingimportantfortheeconomy.”AshespreadtheAmerican

financial gospel, he couldn’thelp but notice a pattern: Anew exchange would open,andnothingwouldhappenonit—until the high-frequencytradersshowedup,stucktheircomputers beside theexchange’s matching engine,and turned the exchange

around. Then he began tohearthings—thatsomeoftheHFT guys might be shady,that stock exchanges hadglitches built into them thatHFT could use to exploitordinary investors. Hecouldn’t point to specificwrongdoing, but he felt lessandlesseasyabouthisroleinthe universe. In 2010, Chi-Xpromoted him to a big newjob,GlobalHeadofProduct;

butbeforehe took the jobhecame across an Internet postby Sal Arnuk and JosephSaluzzi.** The post showed,infinedetail,howdataaboutinvestors’ orders provided tohigh-frequencytradersbytwoof the public exchanges,BATS and Nasdaq, helpedHFT discern investors’trading intentions. Mostinvestors, Arnuk and Saluzziwrote, “haveno idea that the

privatetradeinformationtheyare entrusting to the marketcenters is being made publicby the exchanges. Theexchanges are not makingthis clear to their clients, butinstead are activelybroadcasting the informationto theHFTs inorder tocourttheirorder flow.”“Itwas thefirstcredibleevidenceofBigFoot,” said Matt. He dugaround on his own and saw

thattheglitchesatBATSandNasdaq that queered themarketforthebenefitofHFTweren’t flukes but symptomsof a systemic problem, andthat“manyotherlittlemarketquirks were there that werepotentiallybeingexploited.”Hewastheninanawkward

position: that of a publicspokesman for the newAmerican-style stock marketwho doubted the integrity of

thatmarket.“I’matthepointwhere I no longer feel I canauthentically defend high-frequency trading,” he said.“I look at us exporting ourbusiness model to all thesedifferent countries and Ithink, It’s like exporting adisease.” He was thirty-fouryearsold,andmarried,withaone-year-old child. Chi-Xwas paying him more than$400,000 a year. And yet,

with no idea what he wasgoing to do to earn a living,heupandquit.“Idon’twantto say I’m an idealist,” hesaid.“Butyouhavealimitedamountoftimeonthisplanet.I don’t want to be twentyyears fromnow and thinkingI hadn’t lived my life in awayIcouldbeproudof.”Hekicked around for the betterpart of a year before hethought tocallRonan,whom

he’d met when Ronan camethroughtoruncablesforHFTinside his Canadianexchange. In October 2012they met for coffee at theMcDonald’s near LibertyPlaza, and Ronan explainedhe’d just leftRBC to open anew stock exchange. “Myfirst reaction was, I feel sobad for the guy,” said Matt.“He’s just destroyed hisfuture. They’re just doomed.

Then, afterwards, I askedmyself,‘Whatcausesabunchofpeoplemakingamillionayeartoquit?’”Hecamebackin November and askedRonan some more questionsabout this new exchange. InDecember,Bradhiredhim.Standing in front of the

whiteboard, Brad nowreviewed the problem athand: It was unusual for aninvestortodirecthisbrokerto

send his order to oneexchange, but that is whatinvestors were preparing todo with IEX. But theseinvestors had no way ofdeterminingiftheWallStreetbrokers followed theirinstructions and actually senttheorders toIEX.Thereportinvestors typically receivedfrom their brokers—theTransactionCostAnalysis,orTCA—was useless, so

sloppily and inconsistentlycompiled as to be beyondanalysis. Some of it cametime-stamped to the second;some, time-stamped in tenthsof microseconds. None of ittoldyouwhichexchangeyoutraded on. As a result, therewasnoway todetermine thecontextofanytransaction,theevent immediately before itand the one immediatelyafter.Ifyoudidn’tevenknow

the order of the trades in thestock market, you couldhardly determine if you hadtraded at a fair price. “It’s aPandora’s box ofridiculousness,” said Brad.“Justgettingananswertothequestion:‘WheredidItrade?’Itisn’treallypossible.”“What if they [investors]

sendustheirtradeordersandwecheck them to see if theyever got here?” asked Rob

Parksensibly.“We can’t,” said Don. “It

violates our confidentialityagreementwithbrokers.”True. An investor might

hand Bank of America anorder and ask the Bank ofAmericabroker to route it toIEX.The investormightalsoask that IEX be permitted toinform him of the outcome.And yet Bank of Americamight refuse,onprinciple, to

allow IEX to inform theinvestor that they hadfollowedhis instructions—onthe grounds that doing sowould reveal Bank ofAmerica’ssecrets!“Whycan’twejustpublish

what happened?” askedRonan.“It’s the banks’

information,”saidDon.“We can’t publish what

happened to an investor’s

trade becausewhat happenedto the investor is GoldmanSachs’s information?”Ronanwasincredulous—butthenheknew lessabout this than theothers.“Correct.”“Whatcan theydo tous if

wedoit—shutusdown?”“Probablyjustaslaponthe

wrist the first time,” saidDon.Brad wondered aloud if it

was possible to create amechanism through whichinvestors might be informed,in real time, where theirbrokers sent their stockmarket orders. “Like asecurity camera,” he said.“You don’t care if it’s eventurned on. Just the fact thatit’s there might alterbehavior.”“It’s a finger in the eyeof

the brokerage community,”

said Don. He wore a t-shirtthatsaidILoveAquaticLife,and tossed a rugby ball tohimself, but he didn’t feel ascomfortable as he wished toappear. All these other guyshadworkedatbigWallStreetbanks;noneofthemhadeverhad to dealwith those banksas a customer. They didn’tknowtheirmarketpower.AsDonlaterputit,“Thebrokers,if they all decide to hate us,

we’re fucked. End of story.”Hedidn’tput it sobluntly totheothers,maybebecausehesensedthattheyallknewit.“It’s like saying, ‘I think

people are stealing in thisoffice,’ ” said Brad, withgrowing enthusiasm. “I canruninandrunoutandruninand run out and keepchecking and try to catchsomeone. Or I can install acamera.Itmaybepluggedin

—ornot.Butthere’sstillthiscamera. And whoever isfucking stealing my coffeepotswon’tknowifit’son.”“We don’t really give a

fuck if the investors use it,”addedRonan. “We justwantthe brokers scared they’llcheck.”Somewhere in the big

room a phone rang, and thesoundwasas joltingas a carhonking in a small town in

the middle of the night. Theroom was an open pit, withno barriers between thepeople in it, but the youngmen inside it behaved as ifthey worked with wallsaround them. They were, allbut one, young men. Theexception, Tara McKee, hadbeen a research associate atRBCuntilBradfoundher,in2009,andaskedhertobehispersonal assistant. (“The first

time I met him, I said, ‘Idon’t care what I do—I justwant to work for him.’ ”)She’dfollowedhimoutwhenheleftthebank,evenafterhetriedtotalkheroutofit,ashecouldn’tpayherproperlyanddidn’tthinkshecouldtoleratethe risk. The cast oftechnologists Brad hadassembled at this new placeTara found even morepeculiarthantheonehe’dput

together at RBC. “Forgeniuses, they are reallydumb,” she said. “Some ofthem are really pampered:They can’t even put togethera cardboard box. They don’tthinkyoudosomething.Theythinkyoucallsomebody.”They were also amazingly

self-contained. This meetingconcerned them all—compelling the big WallStreet banks’ cooperation

might mean the differencebetween success and failure—buttheyallatleastfeignedindifference. The etiquettehere was a kind of willedincuriosity—even about eachother. “Communication witha lot of the guys is not thatgreat,” said Brad. “It’ssomething we need to workon.” Itwasfunny.Toaman,theywerepuzzlesolvers,andyet, to each other, they

remainedunsolvedpuzzles.Schwall looked over the

desks and shouted, “Whosephoneisthat?”“Sorry,”someonesaid,and

theringingstopped.“It’sananny,”saidDon,of

Brad’s security camera idea.“It’sdemeaning.Itcouldbeastrainontherelationship.”“When you get patted

down in the airport, do youhate the people who pat you

down?”askedBrad.“I fuckin’hate them,” said

Don.“I say, ‘I’m glad you’re

checking my bags, becausethat means you’re checkingotherpeople’s,’”saidBrad.“The problem is that

everyone is carryingmarijuana through thecheckpoint,”saidSchwall.“If anyone gets fucking

angry it’s because they’re

guilty,”saidBradhotly.“I’m sorry,” said Don.

“I’m fat and white and I’mnotgonnabombthisairplane.I shouldn’t get extraswabbing.” He’d stoppedtossingtherugbyball.“Is there someuse for this

other than policing brokers?”asked Schwall. He wasasking, “Canwe police themwithout their realizing it?”Thepersonamongthemmost

adept at uncovering thesecrets of others believed itwaspossible for IEXtokeepitsownaffairssecret.“No,”saidBrad.“So it’s a nanny,” said

Schwallwithasigh.“BrokerNanny,”saidDon.

“It’sagreatname.Shamewecan’tpatentit.”The meeting went quiet.

This was just one of athousand arguments they’d

had in designing theexchange. The group wasroughly split—betweenpeople(Ronanand,toalesserextent, Brad) who wanted topick a fight with the biggestWallStreetbanks,andpeoplewho thought itwas insane topickthatfight(Donand,toalesser extent, Schwall). Roband Matt hadn’t yet comeclean, but for differentreasons. After his initial

suggestion had been swattedaway, Rob had gone silent.“Rob is farthest from thechaos,” said Brad. “Hedoesn’t meet with brokers.Thesolutionstotheproblemsthey[theWallStreetbrokers]create are illogical becausethey solve a problem that isillogical.”Matt Trudeau, also quiet,

oftentendedtostepbackandobserve. “I’ve always felt a

little outside the groups ofpeople I hung around with,”he said. He was a naturalconciliator as well. He mayhavequithisjobonprinciple,but he didn’t enjoy conflict,even the internal kind. “Imight not be jaded enough,”Mattnowsaidcarefully.“Butlet’ssaywelaunchandwe’rewildly successful and weneverhavetorollthisout.”That thought was dead on

arrival:Noonebelieved theywould be wildly successfulthemoment they launched—least of all Matt. He knewfirsthand what happenedwhen a new exchangeopened: nothing. Chi-XCanada was now a hugesuccess—20 percent of theCanadian market—but in itsfirstmonth it had traded 700shares total. Entire dayspassedwithout a single trade

on that exchange; and thenext few months weren’tmuch better. And that waswhatsuccesslookedlike.IEXdidn’t have the luxury ofgoing months withoutactivity. Their new stockexchangedidn’tneedtobeaninstantsensation,butithadtohost enough trading toillustrate the positive effectsofhonesty.Theyneededtobeabletoprovetoinvestorsthat

an explicitly fair exchangeyielded better outcomes forinvestors than all the otherexchanges.Toprovethecase,theyneededdata; togeneratethatdata, theyneeded trades.If the big Wall Street bankscolluded to keep trades offIEX,thenewexchangewouldbe stillborn. And they allknewit.“They’regonnabepissed,”

saidSchwallfinally.

“We’re in a fight,” saidBrad.“Ifeveryclientfeltliketheir instructions were beingfollowed, we wouldn’t behaving this discussion. It’snot about IEXwanting to gopunchsomebrokerinthefacefor no reason. It’s not aboutsaying, ‘Who is our enemy?’It’sabout sayingwhowearealigned with. We’re alignedwiththeinvestor.”“They’re still gonna be

pissed,”saidSchwall.“Arewereallyinthepolice

business?”askedDon.“Maybe we don’t have to

haveitatall,”addedSchwall.“Maybe we just have tocreatetheillusionwehaveit.Wetalktothebuysideabouthavingit,andtheywhispertotheir brokers—that might beenough.”“Butthey’llallknow,”said

Don.“Theyknowwehaveto

keep the brokers’ junkprivate.Andthebrokerhastokeeptheclients’junkprivate.Andtheclientcan’toptout.”Bradofferedone last idea:

a chat room in whichinvestorscouldconversewiththeirbrokersasthetradewashappening. “Or they canalwaysgettheirbrokeronthephoneandsay,‘Tellmewhatthe fuck is going on,’ ” hesaid. “It’s always been a

solution.”“They’ve never done it,”

saidRonan.“They’ve never been

motivatedtodoit,”saidMatt.True: Investors had neverbeen given a compellingreason to favor one stockexchangeoveranother.“You get DannyMoses in

a chat roomwith Goldman,”said Brad, referring to theheadtraderatSeawolf.“He’ll

askthem.”“But Danny’s a bit argy-

bargy,”saidRonan.“Argy-bargy, I like that,”

saidDon.Ronan had been teaching

Don Irish epithets, one at atime. “You got wanker.Tosser. Now you got argy-bargy,”saidRonan.“You do nothing, and

everyone does what theywant,” said Brad. “You do

something and you caninfluence behavior. But, bycreating the tool, do weincentivizebehaviorwewantto eliminate? By shining thelight, do we create a grayzone,justoutsidethelight?Isit like RegNMS,where youcreate the very thing you’retryingtogetridof?”“Shining a light creates

shadows,” said Don. “If youtry to create this bright line,

you are going to create grayzonesoneitherside.”“If we sincerely believe it

creates toomanyblind spots,wemight notwant to do it,”saidBrad.“Ifwebillitasanannyand

she’sdrunkonthecouch,arewe gonna look likeassholes?” added Don.“Betternottohaveanannyatall. Just leave the kids homealone.”

“If you can think of anyother possible use for thisfucker,thatwouldhelp,”saidSchwall, who clung to hishopethattheymightdisguisetheiractions.Thattheymightbesecretcops.“I’m less bullish on this

thanIwasbefore,”saidBrad.“I’ll be honest. Because adrunk nanny might not bebetterthannonannyatall.”“How drunk can a nanny

get?”askedRonanidly.Brad tossed the marker

back into thewhiteboardbin.“You can see why the clienthasbeen left in thedust,”hesaid.“Thesystemisdesignedto leave the client in thedust.”ThenheturnedtoDon.“At Nasdaq did they talkaboutthis?”“No,” said Don, leaning

backagainstthewindow.Foramoment,Bradlooked

at Don, and at the view thathe only partly concealed. Inthat moment, he might aswell have been, not on theinside of his new exchangelooking out, but on theoutside looking in. How didthey seem to others? To thepeople out there? Out there,where the twin symbols ofAmerican capitalism onceloomed, reduced in a fewhours to a blizzard of office

memosandaruin.Out there,where idealism was either aruseoraspeciesofstupidity,and where the people whobadlyneededthemtosucceedhadn’t the faintest idea oftheir existence.But out therea lot of things happened.People built new towers toreplace the old ones. Peoplefound strength they didn’tknow they had. And peoplewere already coming to their

aid, and bracing for the war.Out there, anything waspossible.

_____________* Thefirst roundof investors includedGreenlight Capital, Capital Group,Brandes Investment Partners, SenatorInvestment Group, Scoggin CapitalManagement, Belfer Management,Pershing Square, and Third PointPartners.† Intheinterestofclarity,they’dhopedto preserve the full name, but theydiscovered a problem doing so whenthey set out to create an Internet

address: investorsexchange.com. Toavoid that confusion, they createdanother.‡ The market order is the first andsimplest type. Say, for instance, aninvestor wishes to buy 100 shares ofProcter & Gamble. When he submitshis order, the market for the shares inP&Gis,say,80–80.02.Ifhesubmitsamarket order, he will pay the offeringprice—in this case, $80.02 per share.But amarket order comeswith a risk:that themarketwillmove between thetimetheorderissubmittedandthetimeit reaches the market. The flash crashwasadramatic illustrationof that risk:Investorswho submittedmarket orders

wounduppaying$100,000a share forP&Gandselling thosesameshares forapennyapiece.Tocontroltheriskofamarket order, a second order typewasinvented, the limit order.The buyer ofP&G shares might say, for instance:“I’llbuyahundredshares,withalimitof eighty dollars and three cents ashare.”Bydoingso,hewillensurethathe does not pay $100,000 a share; butthismayleadtoamissedopportunity—he may not buy the shares at all,because he never gets the price hewanted.Anothersimple,andlong-used,order type is “good ’til canceled.”Theinvestorwhosayshewants tobuy100sharesofP&Gat$80ashare,“good’til

canceled,” will never have to thinkabout it again until he buys them, ordoesnot.§ Thevalueofthemicrosecondssavedby proximity to the exchangesexplainedwhytheexchangesexpanded,bizarrely, after the people inside themhadvanished.Youmighthave thoughtthat, when the whole of the stockmarketmovedfromafloorthatneededto accommodate thousands of humantraders into a single black box, thebuilding that housed the exchangemightshrink.Thinkagain.TheoldNewYork Stock Exchange building on thecorner of Wall and Broad streets was46,000 square feet. The NYSE data

center in Mahwah, which housed theexchange, was 400,000 square feet.Because the value of the space aroundthe black box was so great, theexchanges expanded to enclose greateramountsofthatspacesothattheymightsell it. IEX could function happilyinside a space roughly the size of aplayhouse.¶ In2008,Citadelboughtastakeintheonline broker E*Trade, which wasflounderinginthecreditcrisis.Thedealstipulated that E*Trade route somepercentage of its customers’ orders toCitadel. At the same time, E*Tradecreated its own high-frequency tradingdivision, eventually called G1

ExecutionServices,toexploitthevalueof those orders for itself. Citadel’sfounder and CEO, Kenneth Griffin,pitched a fit, and called out E*Tradepublicly for failing to execute itscustomers’ordersproperly.** ArnukandSaluzzi,theprincipalsofThemis Trading, have done more thananyone to explain and publicize thepredationinthenewstockmarket.Theydeserve more lines in this book thantheyreceivebuthavewrittentheirownbookonthesubject,BrokenMarkets.

CHAPTERSEVEN

ANARMYOFONE

On the morning ofSeptember 11, 2001, ZoranPerkovtookthesubwayfromhis home in Queens toWallStreet, as he did every day.As usual, he woreheadphones and listened tomusic,andpretendedthat theother people on the traindidn’t exist. The differencebetween thatmorningandallthe others was that he was

running late, and the peopleon the trainwereharder thanusual to ignore. They weretalking to each other.“Nobodytalkstoeachother,”said Zoran. “It was a weirdfeeling, when you feelsomething is off.” He wastwenty-six years old, tall andbroad,with hooded eyes thatsaw everything in one shadeof gray or another. Born inCroatia, into long lines of

fishermen and stonemasons,he’d moved with his parentsto theUnitedStateswhenhewas a small child. He’dgrown up in Queens, and heworked on a tech help deskfor the cryptically namedWall Street Systems, at 30Broad Street, immediatelynext door to the New YorkStock Exchange. His jobboredhim.Whatpreciselyhedid on Wall Street Systems’

tech help desk didn’t matter.Hewouldn’tbedoingitmuchlonger.Inthenextfewhours,he’d discover a reason fordoing something else. Thisdiscovery—and the clearsense of purpose that camewith it—would put him on acoursetobeofserioususetoBradKatsuyama.The subway car was a

silent movie. Zoran watchedthe people in it talking to

eachotherallthewaytoWallStreet. Ascending from theholeinthegroundinfrontofTrinity Church and into themorning light, he noticed theneckstiltedbackandtheeyesgazing upward. He, too,lookedup, just as the secondplane hit the South Tower.“Youcouldn’tseetheplane,”he said. “You just saw thisexplosion.”Hetookoffhisheadphones

and heard the sounds. “Allaround people crying, peoplescreaming, people puking.”He saw people running upBroadway. He crossed thestreet and went to work.“Workisn’tworkforme,”hesaid. “I got friends there. Iwenttofindoutwhatisgoingon.” Outside the front door,he spotted the same prettywoman with a cigarette healways saw on his way in.

(“You know, the one hotchick in the building.”) Shewassmokingbutalsocrying.Hewent upstairs, checked inwith his friends, and calledsome guys he’d grown upwith who worked on oraround Wall Street. One ofthem worked in the TwinTowers—which tower Zorancouldn’t recall. A couplemoreworkedinthebuildingsaround the towers. He

reachedthemandtheyagreedto use his office as theirmeeting point. When hisfriend from the Twin Towerarrived, he said that on hiswayouthe’dheardthebodieshittingtheground.The small group of five

friends set out to escape.They discussed strategy.Zoranarguedforwalkingout,up Broadway; the othersvotedtoleaveonthesubway.

“Democracy won,” saidZoran, and back down intothe Wall Street station theywent. It turned out that thiswasnotanoriginal idea.Thecrowds forced them apart;three of them squeezed intoone car, while Zoran andanother pushed into the nextcar. “It was such a mixedcrowd,”saidZoran,“notyourusual subway crowd.” Therewere all these Wall Street

people: guys from the stockexchange in their coloredjackets;peopleyoujustneversaw there. The car lurchedoutofthestationandintothedark tunnel, then stopped.“That’s when my earspopped,” said Zoran. “Likewhen you go swimmingunderwater.”The tunnel filled with

smoke. Zoran had no ideawhathadhappened—whyhis

ears had popped, why thetunnel was full of smoke—buthenoticedaguytryingtoopen a window, and hehollered at him to stop.Whogave you the authority? theguy screamed back at Zoran.“It’s smoke,” Zoran shouted.“Breathe it. Die. It’s thatfuckingsimple.”Thewindowstayed shut, but the carremained fractious andunsettled.Thecarholdinghis

other friends was tranquil.Peoplebentover,praying.The conductor came on

and announced that the trainneeded to return to theWallStreet station. To generalconcern, the guy who drovethe train walked from thefront car to the back car, didwhatever needed to be doneto allow the train to go thewrong way inside a tunnel,and jolted it back from

whence it had come.But notcompletely: Only the fronttwocarsgainedaccess to theplatform.Thepeople inwhatwasnow the rearof the trainneededtofileoutthroughthecarstoreachtheexit.That’swhenZorannoticed

theoldman—hisneighbor,inacrowdtrying to forma lineto exit the train. “He’s got acane,”saidZoran.“He’sinanold suit—he’s gotten thinner

and smaller, so it doesn’t fithim very well. I rememberthinking: I should probablymake sure this guy doesn’tgetcrushed.SoI justkindofkepthiminfrontofme.Ifeltresponsible for him.” Half-guiding the old man, henudged his way back up thesteps of the subway stationand onto Wall Street. Theneverythingwenttotallyblack.“Weget tostreet level,andI

had to realize it was streetlevel,”saidZoran.“AndIlostthe old guy. From thatmoment I was just payingattentiontoeverythingaroundme.”He now couldn’t see, but

he could hear peopleshouting. “Over here! Overhere!” he heard someonescream. He and the friendwho’dbeeninthesubwaycarwith him followed the sound

of the voices, walking intowhat turned out to be theAmericanExpressbuilding—thoughZorandidn’trealizeituntil they’dbeen inside foraminute.Whathenoticedwasthe pregnant woman, sittingon the floor with her backagainst a wall. He went toher, made sure she wasn’tabouttogivebirth,thengaveher his phone, which stillworked.Theblackairoutside

begantoacquireacolor.“Forsome reason everything hadthis beige-like tone,” herecalled. He could now seemoreorlesswheretheywere,and which direction waswhich. A cop inside thebuilding said, “You need tostay in here.” Zoran grabbedhis friend and left. Theywalked east and north untilthey arrived at some facelessapartment buildings on the

Lower East Side. “It’s theprojects,” said Zoran, “andpeople are coming out withcupsofwaterandallof theircordless phones. To help.That’swhenIstartedtocry.”Eventually they reached

theFDRDriveandcontinueddue north. That might havebeentheoddestfeelingoftheentire morning: that walkalong a stretch of the FDR.Theywerealone.Itwasquiet.

For an amazingly long time,the only human being theyencountered was a half-dressed cop who roared pastthem on a motorbike towardthe catastrophe. Then thepapers began to flutter downfrom above. On them Zorancould read the addressof theWorldTradeCenter.To say that Zoran found

the whole experienceexhilarating—well, that

wouldn’t be quite right,though, as he told his story,he said that “somehow I feelguiltyabouttellingit.”Itwasmore that there hadn’t beeneven amomentwhenhe hadfelt he didn’t know what heshould do next. He’d beenjarred into a new kind ofawareness,andinterest inthepeople around him, and heliked the feeling. Hisreactions had surprised him

into an observation abouthimself. “I was impressedthat I did not fall apart,” hesaid. “I didn’t use it as anexcuse for anything.What ittellsmeisthatIwasn’tafraidof those situations. I likebeing front and center. I likebeing in a drama.” He couldevenpinpoint themomentherealized he was better suitedto a crisis than he expectedhimselftobe.“ItwaswhenI

realizedI’vestartedtogiveashit about other people,” hesaid.Twodayslaterhereturned

towork,buthe’dbeenbiffedfrom an ill-defined careerpath onto another, clearerone.Hewantedtobeinajobthat required him to performin a crisis. If youworked onthe technology end of WallStreet and were looking forpressure, you ran an

electronic stock market. Byearly2006,that’swhatZoranwasdoing—atNasdaq.“Theyjust sat me in front of fourmachines with buttons thatcould, like, destroyeverything,” he said. “It wasthe best thing in the world.Every day was the SuperBowl.Thevalueofwhatyouweredoingfeltsohigh.”Thefeelingofthejobwashardtoget across to anyone who

wasn’t a technologist, buttherewasdefinitelya feelingto it. “Put it this way,” saidZoran. “If I fuck up, I’mgoing to be in the news. I’mtheonlyonewhocanbreakit,and if it breaks I’m the onlyonewhocanfixit.”He’d learned this the hard

way,ofcourse.Notlongafterhe started at Nasdaq, he’dbroken one of the markets.(Nasdaq has owned several

markets—Nasdaq OMX,Nasdaq BX, INET, PSX.) Ithappened when he wasmakingchangestothesystemduring trading hours. Heentered a command, thenheard the people around himpanicking; but he failed toimmediately connect oneevent to the other. A formerNasdaqcolleaguerecalledtheensuingbedlam.“Irememberseeingpeoplerunningaround

and screaming while it washappening,” he said. Zoranlookedupatthestockmarketon his computer screen: Itwasfrozen.Ittookhimafewseconds to realize that, eventhough the thing he’d beenworking on should have hadno connection to the marketinrealtime,hehadsomehowshut his entire market down.It took him another fewsecondstoseeexactlyhowhe

haddoneit.Thenhefixedit,and the market resumedtrading. From start to finishthe crisis had lasted twenty-two seconds. Twenty-twoseconds, during which alltradinghadsimplyceased.“Iremember sitting there andthinking: I’m done,” saidZoran. “The CTO [chieftechnologyofficer]savedme.Hesaid,‘Howcanyougetridof a guy who makes a

mistake, stops it, and fixesit?’”Still,theeventshapedhim.

“I said, ‘How do I never dothat again?’ ” said Zoran. “Istarted really jumping intohow to control large-scalecomplexsystems. Ibecameastudent of complexity—defined as something youcannot predict. How do youhavestabilityinasystemthatis by its nature

unpredictable?” He readeverything he could find onthe subject. One of hisfavorite books was actuallycalled Complexity, by M.Mitchell Waldrop. Hisfavoritepapertopassoutwas“How Complex SystemsFail,”aneighteen-bullet-pointsummarybyRichardI.Cook,nowaprofessorofhealthcaresystems safety in Sweden.(BulletPoint#6:Catastrophe

is always just around thecorner.) “People think thatcomplex isanadvancedstateof complicated,” said Zoran.“It’snot.Acarkeyissimple.Acariscomplicated.Acarintrafficiscomplex.”A stock market was a

complex system. Onedefinition of a complexsystemwasaplacewhere,asZoranput it, “Shitwillbreakand there is nothing you can

do about it.” The personwhosejobitwastomakesureshit didn’t break ran twokindsofcareer risks: theriskof shit breaking that waswithin his control, and therisk of shit breaking overwhich he had no control.Zorancontinuedtorunoneofthe Nasdaq markets.Eventually, the companyhandedhimbiggermarketstorun; and the risk of running

them grew. By the end of2011, he was overseeing allof Nasdaq’s market running.(Head of Global Operations,hewas called.)He had spentthe better part of six yearsadding complexity to thosemarkets, for reasons he didnot always understand. Thebusiness people would justdecidetomakesomechange,which it was his job toimplement. “The Post-Only

order typewas the first thingthat got me,” said Zoran, ofthe order designed to beexecuted only if the traderreceivedakickback from theexchange. “What the fuck isthe point of a Post-Onlyorder?” He was somehowexpected to cope with thedemands made on Nasdaq’smarkets by Nasdaq’s biggestcustomers (high-frequencytraders)and,atthesametime,

keep those markets safe andstable. Itwasas ifapitcrewhadbeenaskedtostripdownthe race car, rip out the seatharnesses, and do whateverelse they might to make thecargo faster than it everhadbefore—andatthesametimereduce the likelihood that thedriverwoulddie.Onlyinthiscase, if thedriverwaskilled,blameforhisdeathwouldbeassigned, arbitrarily, to one

memberofthepitcrew.Him.Thisstateofaffairsledtoa

certain skittishness in the pitcrew. It wasn’t just that thehigh-frequency traders weredemanding changes to themarket that would benefitonly them: The mere act ofchanging the systemincreased the risks toeveryonewhodependedonit.Addingcodeandfeaturestoatrading system was like

adding traffic to a highway:You couldn’t predict theconsequences of what youhad done; all you knew wasthat you had made thesituation more difficult tounderstand.“Nooneistryingto control what they don’tknow,” said Zoran. “Andwhat they don’t know isgrowing.” He thought ofhimself as good in a crisis,buthedidn’tsee thepointof

manufacturing crises so thathe might demonstrate hisvirtuosity. He was also farless suited to managing abunchofmarketrunnersthanhe was to running a markethimself. He had no gift forcorporatepolitics.Everyday,he likedhis job less and less—until, in March 2012, hewasfired,whereuponhegotaphone call from DonBollerman. Don wanted

Zoran to run the market forIEX. “I’m not going to pitchyoujustnow,mainlybecausewe have no money and wedon’t even knowwhat we’regoingtodo,”saidDon.“ButImay pitch you later.” Donknew that Zoran had been acasualtyofanofficepoliticalbattle,and,moretothepoint,that he was maybe the bestexchange runner he’d everseen. “He has all the

qualities,” said Don. “Poiseunderpressure.Theabilitytounderstand a complex andvast system. And be able tothink into it—imagine into it—accurately. To diagnoseandforeseeproblems.”It was a little unsettling

that the geeks who now ranthe financial markets werealso expected to have thenerves of a test pilot.But bythe time Don approached

Zoran,ithadgrownclearthatthe investing public had lostfaithintheU.S.stockmarket.Since the flash crash back inMay 2010, the S&P indexhad risen by 65 percent, andyettradingvolumewasdown50percent:For the first timeinhistory,investors’desiretotrade had not risen withmarket prices. Before theflash crash, 67 percent ofU.S. households owned

stocks; by the end of 2013,only 52 percent did: Thefantastic post-crisis bullmarket was noteworthy forhowmanyAmericanselectednot to participate in it. Itwasn’t hard to see why theirconfidence in financialmarketshadcollapsed.AstheU.S.stockmarkethadgrownless comprehensible, it hadalso become moresensationallyerratic.Itwasn’t

just market prices that wereunpredictable but the marketitself—and the uncertainty itcreatedwasbound toextend,sooner or later, to the manyforeign stock markets, bondmarkets,optionsmarkets,andcurrency markets that hadaped the U.S stock market’sstructure.In March 2012 the BATS

exchangehad topull its owninitialpublicofferingbecause

of “technical errors.” Thenext month, the New YorkStock Exchange canceled abunch of trades by mistakebecause of a “technicalglitch.” In May, Nasdaqbungled the initial publicoffering of shares inFacebook Inc. because, inessence, some investors whosubmittedorderstobuythoseshares changed their mindsbefore the price was agreed

upon—and certain Nasdaqcomputers couldn’t dealwiththe faster speeds at whichother Nasdaq computersallowed the investors tochangetheirminds.InAugust2012, the computers of thebigHFT firmKnightCapitalwentberserkandmadestockmarkettradesthatcostKnight$440 million and triggeredthe company’s fire sale. InNovember, the NYSE

suffered what was termed a“matching engine outage”andwasforcedtohalttradingin 216 stocks. Three weekslater, a Nasdaq employeeclickedthewrongicononhiscomputer screen and stoppedthe public offering of sharesin a company calledWhiteHorseFinance.InearlyJanuary 2013, BATSannounced that, because ofsome unspecified computer

error, it had, since 2008,inadvertently allowed tradesto occur, illegally, at pricesworse (for the investor) thanthe National Best Bid andOffer.That was just a sampling

from a single year of whatwere usually described as“technical glitches” in thenew, automated U.S. stockmarkets: Collectively, theyhad experienced twice as

many outages in the twoyears after the flash crash asin the previous ten. Thetechnical glitches wereaccompanied by equallybewildering irregularities instock prices. In April 2013,the price of Google’s sharesfell from $796 to $775 inthree-quartersofasecond,forinstance, and then reboundedto$793inthenextsecond.InMay the U.S. utilities sector

experienced a mini–flashcrash, with stocks falling by50percentormore fora fewsecondsbeforebouncingbacktotheirpreviousprices.Thesemini–flash crashes inindividual stocks that nowoccurred routinely wentlargely unnoticed andunremarkedupon.*Zoran liked to argue that

therewereactuallyfewer,notmore, “technical glitches” in

2012 than there had been in2006—it was only thefinancial consequences ofsystem breakdowns that hadgrown. He also took issuewith theword “glitch.” (“It’sthe worst word in theworld.”)Whensomemachinemalfunctioned and a stockmarket came under scrutiny,the head of that marketusually had no clue eitherwhathadhappenedorhowto

fixit:Hewasatthemercyofhis technologists.But he hadto say something, and so hesaid that there had been a“technicalglitch.”Itwasasifthere was no way to explainhow the financial marketactuallyworked—ordidn’t—without resorting to fuzzymetaphors and meaninglesswords.† If stock marketcomputer–related problemsweretobereducedtoasingle

phrase, Zoran preferred it tobe“normalaccidents.”‡When Bollerman called

himagain,lateinthesummerof2012,IEXhadanidea,andthefirstglimmerofhopethattheywould findmoney.Thatthe idea was also idealisticmade Zoran skeptical; hewasn’t sure it was possibleever to make a financialmarketfair.Butheabsolutelyloved the idea of running a

markethehelpedtodesign—to limit thenumberof thingsinithecouldnotcontrol.Hecamein to IEXtomeetBradand Rob and John SchwallandRonan.BradandSchwallandRoblikedhim,Ronannotsomuch.“Whatputmeoffisthathewouldn’tshutthefuckup,”saidRonan.Hisfirstfewmonthsonthe

job, Zoran drove everyonenuts.Lackingamarketcrisis,

he proceeded to create asocial one. They’d tell himabout some new feature theyhad thought to introduce intothesystemandask,“Willthismake the system harder tomanage?” To which Zoranwould reply, “It depends onyour definition of ‘harder.’ ”Or they would ask him ifsome small change in thesystem would cause thesystem to become less stable

—to which Zoran wouldreply, “It depends on yourdefinitionof‘stable.’”Everyquestionheansweredwithanuneasy chuckle, followed bysome other question. A rareexceptioncamewhenhewasasked, “Why do you alwaysanswer a question withanother question?” “Clarity,”hesaid.Zoran also seemed to

assume that his new

colleagues would fail tounderstand the differencebetween what he couldcontrolandwhathecouldn’t.Inonethirty-dayspanafterhejoined IEX, he shot outfifteen emails on this onesubject—tohammerhomethemysteryinherentinanystockmarket technological failure.He even invited a speaker tocome in to reinforce thepoint. “It was one the few

times that the people in theroom wound up at eachother’s throats,” said Brad.“The tech people were allagreeing with him, and thebusiness peoplewere saying,‘If something melts down,how could it not besomeone’s fault?’ ” Brad’sbreakingpointcameafter theguest speaker had left andZoran circulated a blog postcalled “A Short Story on

HumanError.” The gist of itwas that when complexsystems broke, it was neverthe fault of any one person.The post described somecomputer catastrophe andthen concluded, “. . . you’llnotice that it wasn’t just onelittle thing that caused it. Itwasn’tthedeveloperwhojustso happened to delete thewrongtable.Itwasanumberof causes that came together

to strike hard, all of themverylikelytobebiggerissuesinside the organization ratherthan a problem with theindividual.” At which pointBrad finally walked the tenyards from his desk toZoran’s desk and shouted,“Stop sending these fuckingemails!”And he did, finally. “I

knowwhattodowhenthingsareexplodingaroundme,”he

latersaid.“Butwhennothingisexploding,theoverthinkingcomesintoplay.”Initially Brad was

mystified: How could a guywho thrived under pressurealsohavesuchafearofbeingblamedifthingswentwrong?“He’s so good in a crisis,”said Brad later. “In game-time situations. Underpressure.I’veseenit.Butit’slike a quarterback who is

great in the game, thenspends the other six daysexplaining how it isn’t hisfault if he throws aninterception. ‘Dude, yourpasser rating is 110. Stopit.’ ” Brad realizedsomething: “It comes from asenseofinsecuritythatcomesfrom the fact that hewill bemorerecognizedwhen thingsgo wrong than when thingsgo right.” Brad further

realizedthattheproblemwasnot peculiar to Zoran butgeneral to Wall Streettechnologists. The marketswerenowrunby technology,but the technologists werestill treated like tools.Nobody bothered to explainthebusinesstothem,buttheywere forced to adapt to itsdemands and exposed to itsfailures—which was,perhaps, why there had been

so many more conspicuousfailures. (The exception wasthe high-frequency tradingfirms,wherethetechnologistswere kings. But then, theHFT firms didn’t haveclients.) Nasdaq’s famouslytalented engineers were anextremeWallStreetcase.Theconstant pressure onNasdaq’s tech guys to adaptthestockmarkets’codetotheneeds of high-frequency

traders had created amiserable, politicizedworkplace. The Nasdaqbusinessguysfoistedalltheseunreasonabledemandson thetechguysandthen,whenthedemands busted the system,blamed the tech guys for thefailure. The tech guys allwound up with this abusedanimalquality to them.“Youjust have to unabuse them,”Bradexplained,“andletthem

know theyaren’tgoing tobeblamed just becausesomething goes wrong.” Weall know that things will gowronganditisn’tnecessarilyanyone’sfault.Rob and John Schwall

seemedtoagreethatthiswasthe correct approach to takewith the people they hiredfrom Nasdaq: to tell themover and over that theyweren’t to blame for

whatever had just happened,to include them in everybusiness discussion so thatthey could see why theycould be a part of it, and soon.Ronanhadnopatienceforanyof it.“C’mon, theycamefrom a corporate Americanjob,” he said. “They didn’tcome from Auschwitz.” Onthe other hand, in time, evenRonan saw that Zoranpossessed useful qualities he

hadn’t at first perceived.“Someone who will be goodat running the market—youneed tobe themostparanoidfuck in the world,” saidRonan. “And he’s the mostparanoid fuck in the world.He thinks ten stepsdown theroadofwhatcouldgowrong—because he’s thinking ofwhatcouldhappentohimifitgoeswrong.He’sreallygoodatit.”

OnthemorningofOctober25, 2013, Zoran Perkov tookthesubwayfromhishometoWallStreet,ashealwaysdid.Asusual, he read somebookor white paper, and tried topretend that the peoplearound him didn’t exist. Thedifference between thatmorning and the others wasthathewasrunningearlyandhadastockmarkettoopen—and itwasunlikeanymarket

he’d ever run. Spare, clean,single-minded,andbuiltfromthe ground up by people henot only admired but nowtrusted. “Every singlemorning, the system isstateless,” he said, ofexchange matching enginesgenerally. “It doesn’t knowwhat it’s supposed to do.Ninety-nine percent of thetime,it’sthesamethingitdidthedaybefore.”On thisday,

that could not possibly havebeen true, as the IEXmatching engine had neveractuallydoneanything.ZoransatdownathisdeskinIEX’soffice and punched a fewbuttons and watched codescroll down his screen. Hepulled out an old, batteredcomputer mouse—thennoticed it was dead. Hefrowned. “It’s my warmouse,” he said. “Every

single market I have openedinthepasttenyearshasbeenwiththismouse.”Heknockedit against the desk, realizedthat its battery had probablydied, and wondered, briefly,how to replace it. “My wifemocks me because I can’tworkthemicrowaveovenbutI can run amarket,” he said.He switched out his warmouse for another, andchecked his computer

screens. The seconds tickeddown; it was approachingnine thirty in the morning,when the U.S. stock marketwould open and,with it, thisnew market inside of it thataimed to transform it. Hewaited and watched forsomething to go wrong. Itdidn’t.A minute before nine

thirty, Brad walked over toZoran’s desk: By popular

agreement,Bradwas toopenthe market that first day. Helookeddownatthekeyboard,perplexed.“WhatdoIdo?”heasked.“Just hit Enter,” said

Zoran.The entire room counted

downthefinalsecondsbeforetheopening.“Five...four...three...

two...one.”Six and a half hours later,

themarketclosed.Zoranhadnoideawhetherthemarketasa whole had finished up ordown for the day. Tenminutesafterthathecouldbefound, alone, pacing outsidethe9/11memorial,smokingacigarette. “This is like thefirst day of the battle againstcomplacency,”hesaid.

TWOANDA halfmonths later,sixteen people—the chiefexecutivesortheheadtradersof some of the world’sbiggest stock market moneymanagers—gathered in aconference room on top of aManhattan skyscraper.They’dflowninfromaroundthe country to hear Braddescribe what he’d learnedabout the U.S. stock marketsince IEX had opened for

trading. From that trading,he’d gotten new information.Toaffordpeopleinterestedinthe truthevenaglimpseof itwas now considered faintlyseditious.§ “This is theperfect seat to figure all thisout,”saidBrad.“It’snot likeyou can stand outside andwatch. We had to be in thegametoseeit.”The sixteen investors

controlled roughly $2.6

trillion in stock marketinvestments among them, orroughly 20 percent of theentire U.S. market.Collectively, theypaid to thebigWallStreetbanksroughly$2.2billionofthe$11billionayear theStreetearnedfromstock market commissions.¶They weren’t exactly of onemindorspirit.Afewofthemwere also investors in IEX,butmostwere not.A couple

held the knowing, seeminglygrown-up view that it wasnaïve to think that idealismcouldhaveanyeffectonWallStreet. A few thought it wasimportant to remember thattechnology had lowered theirtrading costs fromwhat theyhad been decades earlier—and half-turned a half-blindeye to the stuntsWall Streetintermediaries had pulled toprevent technology from

lowering those costs evenfurther. But whatever theirpredispositions, theywereallat least a little bit angry,becausetheyallhadspentthepast few years listening toBrad’s descriptions of theinner workings of the U.S.stock market. They nowthought of him less as a guytryingtosell themsomethingthan as a partner, in apossibly quixotic attempt to

fixafinancialsystemthathadbecome deeply screwed up.“You kind of know what’sgoingon,butyoudon’thavea good explanation for it,”said one. “He gave us theexplanation.” A second said,“This isn’t about execution.It’s about a movement. I’msick and tired of gettingfucked. When I go into themarket I want to know it’sclean.”Athirdadded,“Allof

a sudden the market is allabout algos and routers. It’shard to figure this stuff out.There’s no book you canread. It’s just calling uppeople and talking to them.Fromthepeopleat thebanksyou can’t get a straightanswer to any question. Yousay, ‘The sky is blue.’ Theysay, ‘The sky is green.’ Andyou’re like, ‘What are youtalkingabout?’Andafterhalf

anhouritcomesoutthattheyhave changed the definitionof ‘sky.’ You know whatyou’re asking. They knowwhat you’re asking.But theydon’t want to answer it. ThefirsttimeItalkedtoBradandhe was telling me how it allactuallyworked,myjawmusthavehitthefloor.”Another investor had a

question about Brad. “Whydoesapersontaketheharder

path?It’sadifferentsituationfromwhat you typically see.If it works, he will makemoney. But he’ll make less”thanifhehadstayedatRBC.The sixteen were all men.

Most wore suits, with deepcreases on the backs of theirjackets that looked as ifthey’d been made with abullwhip.Theyweredifferentfrom the peoplewhoworkedat the bigWall Street banks,

andfromtheHFTguys.Theywere a lot less likely tobounce from firm to firm—alot more likely to have acareer in one place. Theyweremoreisolated,too:Theydidn’t know each other welland didn’t, until Bradsuggested it,haveanyreasonto organize themselves intoany kind of fighting force.ManyhadjustlandedinNewYorkCity,andafewofthem

were obviously weary. Theirtone was informal andfamiliar, with none of theusual jockeying for status.Theymightnotallhavebeencapable of outrage, but theywere all still capable ofcuriosity.Atsomelevel,theyallnow

realized that this thirty-five-year-old Canadian guysomehowhadputhimselfinaposition to understand the

UnitedStatesstockmarketina way that the system,possibly, had never beenunderstood. “The game isnowclear tome,”Brad said.“There’snotapressreleaseIdon’tunderstand.”OnAugust22,Nasdaqhadexperiencedatwo-hour outage caused bywhat they said was atechnical glitch in the SIP.Brad thought he understoodwhyithadhappened:Nasdaq

threw vast resources into thecoolnewtechnologyusedbyHFT to speed up its tradingand little into the basicplumbing of themarket usedby the ordinary investor.“Nasdaq’s got this state-of-the-art facility for HFT,” hesaid. “Seventeen-kilowattliquid-cooled cabinets andcross-connects everywhereandallthisshit,andthentheyhave this single choke point

intheentiremarket—theSIP—and they don’t care aboutit.TheBteamisservicingit.”Four days later, two of thepublic exchanges,BATS andDirect Edge, revealed theirintention to merge. In anormal industry, the point ofa merger of two companiesthat performed identicalfunctions would be toconsolidate—to reduce costs.But, as a subsequent press

release explained, bothexchangesintendedtoremainopen after the merger. ToBradthereasonwasobvious:The exchanges were both atleastpartiallyownedbyhigh-frequency trading firms, and,from theHFT point of view,the more exchanges thebetter.A few weeks later, both

Nasdaq and the New YorkStock Exchange announced

that they had widened thepipe that carried informationbetween the HFT computersand each exchange’smatching engine. The priceforthenewpipewas$40,000amonth,upfromthe$25,000a month the HFT firms hadbeen paying for the old,smaller pipe. The increase inspeedwas twomicroseconds.Brad understood that thereason for this was not that

the market was better off ifHFT had information twomicroseconds faster thanbefore, but that the high-frequency traders were allterrifiedofbeingslower thantheirpeers,andtheexchangeshad figured out how to milkthisanxiety.Inastockmarketnow defined by itstechnologyaccidents,nothingactually happened byaccident: Therewas a reason

for even the oddest events.For instance, one day,investorswokeuptodiscoverthat they’d bought shares insome company for $30.0001.Why?Howwasitpossibletopay ten-thousandths of apenny for anything? Easy:High-frequency traders hadasked for an order type thatenabledthemtotackdigitsonthe right side of the decimal,so that they might jump the

queue in front of peopletrying to pay $30.00. Thereasonforchangewasseldomexplained; change justhappened.“The fact that it issuch an opaque industryshould be alarming,” Bradsaid.“Thefactthatthepeoplewho make the most moneywanttheleastclaritypossible—that should be alarming,too.”Everything he had done

with his new exchange wasaimed at making it moretransparent, and forcingWallStreet to follow. The sixteeninvestors understood IEX’sbasic commercial strategy: toopen as a private stockmarket and convert to apublic exchange once theirtrading volume justifiedincurring the millions ofdollarsinregulatoryfeestheywouldhave topay.Although

technically a dark pool, IEXhad done something noWallStreet dark pool had everdone: It had published itsrules.Investorscouldsee,forthe first time, what ordertypes were allowed on theexchange, and if any tradershad been given specialaccess. IEX, as a dark pool,would thus try to set a newstandard of transparency—and perhaps shame others

intofollowingitsexample.Orperhaps not. “I would havethought onedarkpoolwouldhave come forward after usand published their ownrules,” Brad now told theinvestors. “Someone musthave nothing to hide. Myprediction was six or sevenout of the forty-four wouldhave done it. None. Zero.There are now forty-fivemarkets. On forty-four of

them no one has any ideahow they trade. Has it notdawned on anyone that itmightactuallybeagoodideatotellpeoplehowthemarketworks?Peoplecan lookbackon the financial crisis andsay, ‘How can you give amortgage loan with nodocumentation? It’spreposterous.’ But banks didit. And now trillions ofdollars of trades are being

executed on markets wherenoonehasanyideaofhowitworks, because there is nodocumentation. Does thatsoundfamiliar?”Nowheexplainedjusthow

badly the market wanted toremain in the shadows—andjust how badly the people attheheartof itwanted IEX tofail.EvenbeforeIEXopened,brokers from the big WallStreet banks went to work

trying to undermine them.OneinvestorcalledtoinformBrad that a representative ofBankofAmericahadjusttoldhim that IEX was owned byhigh-frequency trading firms.On themorning IEXopened,a manager at an investmentfirm called ING sent out amassemailthatlookedasifithad been written on herbehalfbysomeoneinsideoneof thebigWallStreet banks:

“With the pending launch ofIEX,we request that all INGEquityTradingexecutionsbeexcluded from executing ontheIEXvenue. . . . Iamstillchallenged by the conflict ofinterest inherent in theirbusinessmodel.As a result Irequest to opt out of tradingwiththeIEXvenue.”TheemployeesofIEXhad

risked their careers to attacktheconflictsofinterestinthe

stock market. They hadrefused the easy capital fromthebigWallStreetbanks—toavoidconflictsofinterest.Toavoidconflictsofinterest,theinvestors who had backedIEX had structured theirinvestments so that theythemselvesdidnotpersonallyprofit from sending tradesonto the exchange: Profitsfrom their investment flowedthrough to the people whose

money they managed. Theseinvestors had further insistedonhavingastakeoflessthan5percent in the exchange, toavoid having even theappearanceofcontroloverit.Before IEX launched, BradhadrebuffedanoverturefromIntercontinentalExchange(known as ICE), the newowners of the New YorkStock Exchange, to buy IEXfor hundreds of millions of

dollars—and walked awayfrom the chance to get richquick.Toaligntheir interestswith the broader market’s,IEX planned to lower theirfees as their volumes rose—for everyone who used theexchange. And on the dayIEX opened for trading, thismanager at ING—who hadearlier refused to meet withthem so that they mightexplaintheexchangetoher—

was spreading a rumor thatIEX had a conflict ofinterest.**Butthenallsortsofbizarre

behavior had attended IEX’sarrival in the U.S. stockmarket.Ronanhadgone to aprivate trade conference—nomedia,lotsofWallStreetbigshots.Itwasthefirst timehehad been invited to theexclusive event, and heintended to lie low. He was

outside in thehallwayonhisway to the bathroom whensomeone said, “You know,they’re in there talkingaboutIEX.” Ronan returned to theconferenceroomand listenedto the heads of several bigpublic U.S. stock exchangeson a panel. All agreed thatIEXwouldonlycontributetothe biggest problem in theU.S. stock market: itsfragmentation. The market

already had thirteen publicexchanges and forty-fourprivate ones: Who neededanother? When it came timefor audience participation,Ronan found a microphone.“Hi,I’mRonan,andIthinkIwent to go take a piss at thewrong time,” he said, andthen gave a little speech.“We’renotlikeyouguys,”heconcluded.“Oranyoneelseinthemarket.We’reanarmyof

one.” He thought he wasbeingcalmandmeasured,butthe crowd, by its standards,went wild—which is to saytheyactuallyclapped.“Jesus,I thought you were about tothrow a punch,” some guysaidafterward.Thestockexchangesdidn’t

likeIEXforobviousreasons,thebigWallStreetbanks forless obvious ones. But themore the big banks sensed

thatBradwasbeingregardedbybig investorsasanarbiterof Wall Street behavior, themore carefully theyconfronted him. Instead ofvoicing their own objectionsto him directly, they wouldvoiceobjectionstheyclaimedto have heard fromother bigbanks. The guy fromDeutsche Bank would saythat the guy from Citigroupwas upset that IEX was

telling investors how to tellthe banks to route to IEX—that sort of thing. “When Ivisited,theywereallcordial,”said Brad. “It made me feelthat theplanwastostarveusout.”Butwithout seeming todo so.Thedaybefore they’dopened for trading, a guyfromBankofAmericacalledBrad and said, Hey, buddy,what’s going on? I’dappreciate it if you’d say

we’rebeingsupportive.BankofAmericahadbeenthefirsttoreceivethedocumentstheyneeded to connect to theexchange and, on openingday,were still dragging theirfeet in establishing aconnection. Brad declined tohelpBankofAmericaoutofits jam. “Shame is a hugetacticwehavetodeploy,”hesaid.Nine weeks after IEX

launched, it was alreadypretty clear that the bankswere not following theircustomers’ instructions tosend their orders to the newexchange. A few of theinvestors in the room knewthis; the rest now learned.“When we told them wewanted to route to IEX,”onesaid,“theysaid, ‘Whywouldyou want that? We can’t dothat!’ The phrase ‘squealing

pigs’ comes to mind.” Afterthe first six weeks of IEX’slife,UBS,thebigSwissbank,inadvertentlydisclosedtoonebig investor that it hadn’trouted a single order ontoIEX—despite explicitinstructionsfromthe investortodo so.Anotherbigmutualfundmanager estimated that,whenhetoldthebigbankstoroute to IEX, they hadfollowed his instructions “at

mosttenpercentofthetime.”Afourthinvestorwastold,bythree different banks, thattheydidn’twanttoconnecttoIEXbecausetheydidn’twantto pay the $300-a-monthconnectionfee.Of all the banks that

dragged their feet after theircustomersaskedthemtosendtheir stock market orders toIEX, Goldman Sachs hadofferedthebestexcuse:They

were afraid to tell theircomputer system to doanything it hadn’t donebefore. In August 2013, theGoldman automated tradingsystem generated a bunch ofcrazyandembarrassingtradesthat lost Goldman hundredsof millions of dollars (untilthe public exchanges agreed,amazingly, to cancel them).Goldman wanted to avoidgivingnew instructions to its

trading machines until itfigured out why they hadceasedtofollowtheoldones.There was something aboutthewayGoldmanhadtreatedBrad when he visited theiroffices—listening to what hehad to say, bouncing him upthe chain of command ratherthan out the door—that ledhim to believe their excuse.He sensed that they weretaking him seriously. After

his first meeting with theirstock market people, forinstance, Goldman’s analystshadtoldthefirm’sclientsthatthey shouldbemorewaryofinvestinginNasdaqInc.The other banks—Morgan

StanleyandJ.P.Morganwerethe exceptions—were mostlypassive-aggressive, but therewere occasions when theybecame simply aggressive.Employees of Credit Suisse

spread rumors that IEXwasn’t actually independentbutownedbytheRoyalBankofCanada—andsojustatoolofabigbank.Onenight,inaManhattan bar, an IEXemployee bumped into asenior manager at CreditSuisse. “After you guys fail,cometomeandI’llgiveyoua job,” he said. “Wait, no,everyone hates your fuckingguts, so I won’t.” In the

middle of their first day oftrading, one of IEX’semployees got a call from asenior executive of Bank ofAmerica,whosaidthatoneofhiscolleagueshad“tiestotheIrishMafia,” and “you don’twant to piss those guys off.”The IEX employee went toBrad, who just said, “He’sfull of shit.” The IEXemployee was less sure, andfollowedthecallwithatext.

IEXemployee:ShouldIbeconcerned?

BankofAmericaemployee:Yes.

IEXemployee:Areyouserious?

BankofAmericaemployee:Jk[Justkidding].

IEXemployee:Haven’tnoticedanyIrishguysfollowingme.

BankofAmerica

employee:Becarefulnexttimeyougetinyourcar.

IEXemployee:GoodthingIdon’townacar.

BankofAmericaemployee:Well,maybeyourgf’scar.

Brad also heard what thebig Wall Street banks werealreadysayingtoinvestorstodissuade them from sending

orders to IEX: It’s too slow.Foryears,thebankshadbeenselling the speed andaggression of their tradingalgos, along with the ideathat, for an investor, sloweralways meant worse. Theyseemed to have persuadedthemselves that the newspeedof themarketsactuallyhelped their clients. They’devendreamedupatechnical-sounding name for an

absence of speed: “durationrisk.” (“If youmake it soundofficial, people will believethat it’ssomethingyoureallyneed to care about,” Bradexplained.) The 350-microsecond delay IEX hadintroduced to foil the stockmarket predator was roughlyone-thousandth of the blinkof an eye. But investors foryearshadbeen led tobelievethat one-thousandth of the

blink of an eyemightmatterto them, and that it wasextremely important for theirorders to move as fast andaggressively as possible.Guerrilla! Raider! Thisemphasis on speed wasabsurd: No matter how fasttheinvestormoved,hewouldnever outrun the high-frequency traders. Speedingup his stock market ordermerely reduced the time it

took for him to arrive inHFT’s various traps. “Buthow do you prove that amillisecond is irrelevant?”Bradasked.He threw the problem to

thePuzzleMasters.Theteamhad expanded to includeLarry Yu, whom Bradthoughtofastheguywiththebox of Rubik’s cubes underhis desk. (The standard 3x3-inch cube he could solve in

under thirty seconds, and sohe kept it oiled withWD-40to make it spin faster. Hiscube box held morechallenging ones: a 4x4-incher, a 5x5-incher, a giantirregularlyshapedone,andsoon.)Yugeneratedtwocharts,which Brad projected ontothescreenfortheinvestors.To see anything in the

stock market, you have tostoptryingtoseeitwithyour

eyes and instead attempt toimagine it as itmight appearto a computer, if a computerhad eyes. The first chartshowed the investors howtrading on all public U.S.stock exchanges in the mostactively traded stock of asingle company (Bank ofAmerica Corp) appeared tothe human eye over a periodoftenminutes,inone-secondincrements. The activity

appears constant, evenfrantic. In virtually everysecond, something occurs: atrade or, more commonly, anew buy or sell order. Thesecond chart illustrated thesame activity on all publicU.S. stock exchanges as itappeared toacomputer,overthecourseofasinglesecond,in millisecond increments.Allthemarketactivitywithina single second was so

concentrated—within a mere1.78 milliseconds—that onthe graph it resembled anobelisk rising from a desert.In 98.22 percent of allmilliseconds, nothing at allhappened in the U.S. stockmarket. To a computer, themarket in even the world’smost actively traded stockwas an uneventful, almostsleepy place. “Yes, youreyeballsthinkthemarketsare

goingfast,”Bradsaid.“Theyaren’t really going that fast.”The likelihood an investorwouldmissoutonsomethingimportant in a third of amillisecondwasclosetozero,even in the world’s mostactivelytradedstock.“Iknewitwasbullshittoworryaboutmilliseconds,” said Brad,“becauseifmillisecondswererelevant, every investorwouldbeinNewJersey.”

“What’s the spikerepresent?” asked one of theinvestors, pointing to theobelisk.“That’soneofyourorders

touchingdown,”saidBrad.A few investors shifted in

their seats. It was growingclear to them, if it wasn’talready so, that, if the stockmarket was the party, theywere the punch bowl. Theywere unlikely to miss any

actionastheresultofadelayofone-thirdofamillisecond.They were the reason for allthe action! “Every time atrade happens at theexchange,itcreatesasignal,”said Brad. “In the fiftymilliseconds running up to it—total silence. Then there isan event. Then there is thismassive reaction. Then areaction to that reaction. TheHFT algos on the other side

arepredictingwhatyou’lldonext based on what you justdid.” The activity peakedroughly 350 microsecondsafter an investor’s ordertriggered the feeding frenzy,orthetimeittookforHFTtosenditsordersfromthestockexchange on which theinvestorhadtoucheddowntoall of the others. “Your eyewill never pick up what isreally happening,” saidBrad.

“You don’t see shit. Even ifyou’re a fucking cyborg youdon’t see it.But if therewasno value to reacting, whywould anyone react at all?”The arrival of the preyawakened the predator, whodeployed his strategies—rebate arbitrage, latencyarbitrage, slow marketarbitrage.Braddidn’tneedtodwell on these; he’d alreadywalked each of the investors

through his earlierdiscoveries. It was his newfindings thathewanted themtofocuson.††On IEX’s opening day—

whenithadtradedjusthalfamillion shares—the flow oforders through its computershad been too rapid for thehuman eye tomake sense ofit. Brad had spent the firstweek or so glued to histerminal, trying to see

whatever he could see. Eventhatfirstweek,hewastryingto make sense of linesscrolling down his computerscreen at a rate of fifty persecond. It felt like speed-reading War and Peace inunder aminute.All he couldsee was that a shockingnumber of the orders beingsentbytheWallStreetbanksto IEX came in small 100-share lots. The HFT guys

used100-sharelotsasbaitonthe exchanges, to teaseinformationoutofthemarketwhile taking as little risk aspossible. But these weren’tHFTorders; thesewere fromthe big banks. At the end ofoneday,heaskedforacountof one bank’s orders: 87percentofthemwereinthesetiny100-sharelots.Why?The week after Brad had

quithisjobattheRoyalBank

of Canada, his doctor notedthat his blood pressure hadcollapsed to virtually normallevels, and he’d cut hismedication in half. Now, inresponsetothisnewsituationhe couldn’t make sense of,Brad had migraines, and hisblood pressure was againspiking. “I’mstraining to seepatterns,” he said. “Thepatterns are being shown tome, but my eyes can’t pick

themup.”One afternoon, an IEX

employee named JoshBlackburn overheard Bradmention his problem. Joshwas quiet—not just reserved,but intensely so—and didn’tsay anything at first. But hethoughtheknewhowtosolvetheproblem.Withpictures.Josh,likeZoran,tracedhis

careerback toSeptember11,2001. He’d just started

college when a friendmessaged him to turn on theTV, and he’d watched theTwin Towers collapse.“When that happened it waskind of a what can I domoment?” A couple ofmonthslater,he’dgonetothelocal air force recruitingcenterandattemptedtoenlist.They’d toldhimtowaituntiltheendofhisfreshmanyear.At theendof theschoolyear

he’d returned. The air forcesent him to Qatar, where acolonel figured out that hehad a special talent forwriting computer code; onething led to another, and twoyears later he was inBaghdad. There he created asystem for getting messagesto all remote units, andanother systemforcreatingaGoogle-like map, before theexistence of Google maps.

From Baghdad he’d gone toAfghanistan,wherehewoundup being in charge of takingthedatafromallthebranchesoftheU.S.militaryacrossallbattlefieldsandturningitintoa single picture the generalscould use tomake decisions.“It told them everything thatwasgoingon,real-time,onatwenty-foot wall map,” Joshsaid. “You could see trends.You could see origins of

rocketattacks.Youcouldseepatterns in when theyoccurred—the attacks on[U.S. Army base] CampVictory would come afterafternoon prayer. You couldseewhattheprojectionswere[of where and when theattacksmightoccur]andhowthey compared to whereattacks actually happened.”The trick was not simply towrite the code that turned

information into pictures butto find the best pictures todraw—shapesandcolors thatled the mind to meaning.“Once you got all that stufftogetherandshowed it in thebestway possible, you couldfindpatterns,”Joshsaid.The job was hard to do,

but,asitturnedout,hardertostop doing. When his firsttour of duty was up, Joshreenlisted,andwhenthattour

ended, he re-upped again.Whenhisthirdtourwasover,hesawthewarwindingdownand his usefulness diminish.“You find it very difficult tocomehomefrom,”saidJosh.“Because you see the impactof your work. After that, Icouldn’t find any passion inanythingIdid,anymeaning.”Coming home, he looked fora place to deploy his skill—and a friend in finance told

him about an opening in anew high-frequency tradingfirm. “In the war, you’retrying to use the picture youcreate to take advantage ofthe enemy,” said Josh. “Inthis case, you’re trying totake advantage of themarket.” He worked for theHFT firm for six weeksbefore it failed, but he foundthejobunsatisfying.He’d come to IEX in the

usualway: JohnSchwallhadfound him while trolling onLinkedIn and asked him tocomeforaninterview.Atthatpoint, Josh was beinginundated with offers fromother high-frequency tradingfirms.“Therewasalotof‘weare elite,’ ” he said. “Theykept hitting the elite thing.”He didn’t care all that muchabout being elite; he justwanted his work to mean

something. “I came in for aninterviewonFriday.Saturdaytheymademe an offer.Bradsaid, we’re going to changethe way things work. But Ididn’treallyknowwhatBradwas talking about.” Sincejoining, he’d been quiet andhad put himself where heliked to be, in thebackground.“Ijusttrytotakein what people are saying,andlistentowhateveryoneis

complaining about,” he said.“IwishthisorIwishthat,andthenbringittogetherandfindthesolution.”Brad knew little of Josh’s

past—onlythatwhateverJoshhaddonefortheU.S.militarysoundedlikethesortofthinghecouldn’t talkabout. “All Iknew was that he was in atrailer in Afghanistan,working with generals,” saidBrad. “When I tell him my

problem—that I couldn’t seethe data—he just says, ‘HitRefresh.’”Quietly, Joshhadgoneoff

andcreated forBradpicturesof the activity on IEX. Bradhit Refresh; the screen wasnow organized in differentshapes and colors. Thestrange 100-lot trades weresuddenly bunched togetherand highlighted in usefulways: He could see patterns.

And in the patterns he couldsee predatory activity neitherhe nor the investors had yetimagined.Thesenewpicturesshowed

him how the bigWall Streetbanks typically handledinvestors’ stock marketorders.Here’showitworked:Sayyouareabiginvestor—amutualfundorapensionfund—and you have decided tomake a big investment in

Procter & Gamble. You areacting on behalf of a lot ofordinaryAmericanswhohavegiven you their savings tomanage. You call somebroker—Bank of America,say—andtellthemyou’dliketo buy 100,000 shares ofProcter & Gamble. P&G’sshares are trading at, say,82.95–82.97, with 1,000shares listed on each side.You tell the big Wall Street

bank you are willing to payup to, say, $82.97 a share.From that point on, youbasically have no clue howyour order—and theinformation it contains—istreated. Now Brad saw: Thefirst thing thebrokerdidwastoping IEXwith anorder tobuy100shares,toseeifIEXhad a seller. Thismade totalsense: You didn’t want toreveal you had a big buyer

untilyoufoundaseller.Whatmade a lot less sense waswhatmanyofthebrokersdidafter they discovered theseller.Theyavoidedhim.Say,forexample, thatIEX

actually had a seller waitingon it—a seller of 100,000shares at $82.96. Instead ofcominginandtryingtobuyamuch bigger chunk of P&G,thebigbankjustkeptpingingIEX with tiny 100-share

orders—or thebankvanishedentirely. If the bank hadsimply sent IEX an order tobuy 100,000 shares of P&Gat$82.97, the investorwouldhavepurchasedall theshareshewantedwithoutdrivingupthe price. Instead, the bankhad pinged away and—byrevealing its insistent, noisydemand—goosedupthepriceof P&G’s stock, at theexpenseoftheinvestorwhose

interests the bankwasmeantto represent. Adding to theinjury, the bank typicallywoundupwithonlyafractionof the stock its customerwantedtobuy.“Itopenedupthis whole new realm ofactivity that was crazy tome,” Brad told his audience.It was as if the big WallStreet banks were looking toseeif IEXhadabigseller toavoid trading with him. “I

thought,Why the hellwouldanyonedothis?Allyoudoisincrease the chances that anHFT will pick up yoursignal.”Theydidn’tallbehavethis

way: A couple of the bigbanks followed up their 100-share orders by forking overthemeatofthebuyorder,andexecuted the trade theircustomer had asked them toexecute. (TheRoyalBank of

Canada was by far the bestbehaved.)But,ingeneral,thebig Wall Street banks whohad connected to IEX—agroupthatinthefirstweekoftrading excluded Bank ofAmerica andGoldmanSachs—connected disingenuously.It was as if they wished toappear to be interacting withtheentirestockmarket,whileactually they were trying toprevent any trades from

happening outside their owndarkpools.Brad now explained to the

investors,whowereofcoursepaying the price for thisbehavior, thereasons that thebanks behaved as they did.The most obvious was tomaximize the chance ofexecuting the stock marketorders given to them byinvestors in their own darkpools. The less honestly a

bank looked for P&G stockoutside of its owndark pool,thelesslikelyitwastofindit.This evasiveness explainedthe banks’ incredible abilityto find, eventually, the otherside of any trade inside theirown dark pools.A bank thatcontrolled less than 10percent of all U.S. stockmarket orders was somehowabletosatisfymorethanhalfof its customers’ orders

without ever leaving its owndark pool. Collectively, thebanks had managed to move38 percent of the entire U.S.stock market now tradedinside their dark pools—andthis is how they had done it.“It’sa façade that themarketisinterconnected,”saidBrad.The bigWall Street banks

wanted to trade in their owndark pools not only becausethey made more money—on

topoftheircommissions—byselling the right to HFT toexploit orders inside theirdark pools. They wanted totrade their orders inside theirdark pools to boost thevolumes in those pools, forappearances’ sake. Thestatisticsused tomeasure theperformance of the darkpools, as well as theperformance of the publicstock exchanges, were more

than a little screwy. A stockmarket was judged by thevolume of trading thatoccurredonit,andthenatureofthatvolume.Itwaswidelybelieved, for example, thatthe bigger the average tradesize on an exchange, thebetter the market was for aninvestor. (By requiring fewertrades to complete hispurchase or sale, theexchange reduced the

likelihood of revealing aninvestor’s intentions to high-frequency traders.) Everydark pool and every stockexchangefoundwaystocookits own flattering statistics;the art of torturing data maynever have been so finelypracticed. For example, toshow that they were capableof hosting big trades, theexchanges published thenumber of “block” trades of

morethan10,000sharestheyfacilitated. The New YorkStock Exchange sent IEX arecord of 26 small trades ithad made after IEX hadrouted an order to it—andthen published the result onthe ticker tape as a single15,000-shareblock.Thedarkpoolswereevenworse,asnoone but the banks that ranthemhadaclearviewofwhathappened inside them. The

banksallpublishedtheirownself-generated stats on theirown dark pools: Every bankranked itself #1. “It’s anentire industry thatoverglorifies data, becausedata is so easy to game, andthe true data is so hard toobtain,”saidBrad.The banks did not merely

manipulate the relevantstatistics in their own darkpools; they often sought to

undermine the stats of theircompetitors. That wasanother reason the bankswere sending IEX orders intiny 100-share lots: to lowerthe average trade size in amarket that competed withthe banks’ dark pools. AloweraveragetradesizemadeIEX’s stats look bad—as ifIEX were heavily populatedby high-frequency traders.“When the customer goes to

his broker and says, ‘Whatthehellhappened?WhyamIgetting all these hundred-share fills?,’hisbrokercouldeasily say, ‘Well, I put theorder on IEX,’ ” said Brad.The strategy cost theircustomers money, and theopportunity to buy and sellshares, but the customerswouldn’t know about it: Allthey would see was IEX’saveragetradesizefalling.

Soon after it opened fortrading, IEX published itsownstatistics—todescribe,ina general way, what washappening in its market.“Since everyone is behavinginaparticularway,youcan’tsee if anyone is behavingparticularlybadly,”saidBrad.Now you could see. DespitethebesteffortsofWallStreetbanks, the average size ofIEX’s trades was by far the

biggest of any stockexchange, public or private.Moreimportantly,thetradingthat occurred was morerandom, unlinked to activityelsewhere in the stockmarket: For instance, thepercentage of trades on IEXthat followed the change inthe price of some stock washalf that of the otherexchanges. (Investors werebeing picked off—as West

Chester, Pennsylvania,money manager Rich Gateshad been picked off—onexchangesthatfailedtomovetheir standing orders quicklyenough to keep up whenstockpriceschanged.)Tradeson IEXwere also four timesmore likely than thoseelsewhere to trade at themidpointbetween thecurrentmarket bid and offer—whichis to say, the price thatmost

wouldagreewasfair.DespitethereluctanceofthebigWallStreet banks to send themorders,thenewexchangewasalready making the darkpools and public exchangeslook bad, even by their ownscrewed-upstandards.‡‡Brad’s biggest weakness,

as a strategist, was hisinability to imagine just howbadly others might behave.Hehad expected that the big

banks would resist sendingorders to IEX. He hadn’timagined they would usetheircustomers’stockmarketorders to actively tryat theircustomers’ expense tosabotageanexchangecreatedtohelptheircustomers.“Youwanttocreateasystemwherebehaving correctly would berewarded,” he concluded.“And the system has beendoing the opposite. It’s

rational for a broker tobehavebadly.”The bad behavior played

right into the hands of high-frequency traders in themostextraordinary ways. One daywhile watching the picturesJosh Blackburn had createdfor him, Brad saw a bankmachine-gun IEX with 100-share lots and drive up astock price 5 cents inside of232 milliseconds. IEX’s

delay—one-third of amillisecond—wasoflittleusein disguising an investor’sstockmarketorderifabrokerinsistedonbroadcastingabigorderhecontrolledoverafarlongerperiod:HFTpickedupthesignalandwasgettingoutin front of it. Wondering ifthe broker was spreadingnews of his buy orderelsewhere, Brad turned hisattention to the consolidated

tape of all the trades thatoccurred in the U.S. stockmarket. “I just wondered: Isthis broker peppering thewholeStreet,orisitjustus?”he told the room full ofinvestors. “What we foundblewourminds.”For each trade on IEX,

he’dspottedanearlyidenticaltrade that had occurred atnearlythesametimeinsomeother market. “I noticed the

odd trade sizes,” he said.He’d see a trade on IEX for131sharesof,say,Procter&Gamble,andthenhe’dsee,insome other market, exactlythe same trade—131 sharesofProcter&Gamble—withina few milliseconds, but at aslightly different price. Ithappened over and overagain.Healsonoticedthat,ineachcase,ononesideof thetrade was a broker who had

rentedouthispipestoahigh-frequencytrader.Up till that point, most of

the predation they haduncovered occurred whenstock prices moved. A stockwent up or down; the high-frequency guys found outbeforeeveryoneelseandtookadvantage of them. Roughlytwo-thirdsofallstockmarkettrades took place withoutmovingthepriceofthestock

—the trade happened at theseller’s offering price, or thebuyer’s bidding price, or inbetween; afterwards, the bidand offering price remainedthe same as they had beenbefore. What Brad now sawwas howHFT,with the helpof the banks, might exploitinvestorsevenwhenthestockprice was stable. Say themarket for Procter &Gamble’s shares was 80.50–

80.52, and the quote wasstable—the price wasn’tabouttochange.TheNationalBestBidwas$80.50,andtheNational Best Offer was$80.52,andthestockwasjustsitting there. A seller of10,000 Procter & GamblesharesappearedonIEX.IEXtried to price the orders thatrested on it at the midpoint(the fair price), and so the10,000 shares were being

offeredat$80.51.Somehigh-frequency traderwouldcomeinto IEX—it was always ahigh-frequency trader—andchip away at the order: 131shareshere,189sharesthere.But elsewhere in themarket,thesameHFTwassellingtheshares—131 shareshere,189shares there—at $80.52. Onthe surface, HFT wasperformingauseful function,building a bridge between

buyer and seller. But thebridgewasitselfabsurd.Whydidn’t the broker whocontrolled the buy ordersimplycometoIEXonbehalfof his customer and buy,more cheaply, the sharesoffered?Back when Rich Gates

conducted his experiments,he had managed to gethimself robbed inside WallStreet’s dark pools, but only

afterhehadchangedthepriceofthestock(becausethedarkpools were so slow to movethe price of his order restinginsideof them).These tradesthat Brad was now noticinghad happened without themarket moving at all. Heknew exactly why they werehappening: The Wall Streetbanks were failing to sendtheircustomers’orderstotherest of the marketplace. An

investor had given a WallStreet bank an order, say, tobuy 10,000 shares of P&G.The bank had sent it to itsdark pool with instructionsfor the order to stay there,aggressively priced, at$80.52. The bank wasboostingitsdarkpoolstats—and also charging someHFTafeeratherthanpayingafeeto another exchange—but itwas also ignoring whatever

else was happening in themarket. In a functionalmarket, the investors wouldsimply have met in themiddle and traded with eachother at a price of $80.51.Thepriceofthestockneedn’thave moved a penny. Theunnecessary price movement—caused by the screwed-upstock market—also playedinto HFT’s hands. Becausehigh-frequency traders were

always the first todetect anystock price movements, theywere able to exploit, withother strategies, ordinaryinvestors’ ignorance of thefactthatthemarketpricehadchanged. The original falsenote struck by the big WallStreet bank—the act ofavoiding making tradesoutside of its own dark pool—became the prelude to asymphony of scalping.§§

“We’recallingthis‘darkpoolarbitrage,’”saidBrad.IEXhadbuiltanexchange

toeliminatethepossibilityofpredatorytrading—topreventinvestors from being treatedas prey. In the first twomonths of its existence, IEXhad seen no activity fromhigh-frequencytradersexceptthis.Itwasastonishing,whenyoustoppedtothinkaboutit,how aggressively capitalism

protected its financialmiddleman, even when hewas totally unnecessary.Almost magically, the bankshad generated the need forfinancial intermediation—tocompensate for their ownunwillingness to do the jobhonestly.Brad opened the floor for

questions. For the first fewminutes, the investors viedwith each other to see who

could best control his angerand exhibit the sort ofmeasured behavior investorsarefamousfor.“Do you think of HFT

differently than you didbefore you opened?” askedone.That question might have

been better answered byRonan,whohadjustreturnedfrom a tour of the big HFTfirms,andnowleanedagainst

a wall on the side of theroom.BradhadaskedRonantoexplaintotheinvestorsthetechnicalendof things—howIEX had created its 350-microseconddelay,themagicshoebox, and so on—and torelate the details of his tour.He’d done it. But on thesubject of HFT he heldhimself back. To speak hismind, Ronan needed to feellike himself, which,

imprisonedinagraysuitandaddressing a semiformalaudience, he clearly did not.Put another way: It was justextremelydifficult forRonanto say what he felt withoutusing the word “fuck.”Watchinghimstring togethersentences without profanitywas like watching someonetry to swim across a riverwithoutusinghisarmsorhislegs. Curiously, he later

admitted, he wasn’t worriedthat the audience would beoffendedbybadlanguage.“Itwas because some of themwant to be the alpha malecursingintheroom,”hesaid.“When I say ‘fuck,’ theythinkI’mstealingtheshow—so when I’m in front of agroup I go as straight as Ican.”“Ihatethemalotlessthan

beforewestarted,”saidBrad.

“Thisisnottheirfault.Ithinkmost of them have justrationalizedthatthemarketiscreatingtheinefficienciesandthey are just capitalizing onthem. Really, it’s brilliantwhat they have done withinthe bounds of the regulation.They are much less of avillain than I thought. Thesystem has let down theinvestor.”Aforgivingsentiment.But

at that moment the investorsin the conference room didnotseeminaforgivingmood.“It’s still shocking to me tosee how the banks arecolluding against us,” one ofthe investors later said. “Itshows everyone is a badactor.Andthenwhenyouaddin thatyouask them to routeto IEX and they refuse, it’seven worse. Even though Ihadheardsomeofitbefore,I

wasstillincensed.IfthatwasthefirsttimeIwashearingit,I think I’d have gonebonkers.”Aninvestorraisedhishand

and motioned to somenumbers Brad had scribbledon a whiteboard to illustratehow a particular bank hadenableddarkpoolarbitrage.“Who is that?” he asked,

andnotcalmly.An uneasy look crossed

Brad’s face. He was nowhearing that question moreandmore. Just that morning,anoutragedinvestorlisteningto a dry run of hispresentationhad stoppedhimto ask: “Which bank is theworst?”“Ican’t tellyou,”hesaid, and explained that theagreements the big WallStreetbankssignedwithIEXforbade IEX from speakingabout any bank without its

permission.“Do you know how

frustratingitistosithereandhear this and not know whothat broker is?” said anotherinvestor.It wasn’t easy being Brad

Katsuyama—to try to effectsome practical changewithout a great deal of fuss,when the change in questionwas, when you got rightdowntoit,aradicaloverhaul

of a social order. Brad wasnot by nature a radical. Hewas simply in possession ofradicaltruths.“What we want to do is

highlight the good brokers,”said Brad. “We need thebrokers who are doing theright thing to get rewarded.”Thatwastheonlywayaroundthe problem.Brad had askedfor the banks’ permission tohighlight the virtue of the

ones that behaved relativelywell,andtheyhadgrantedit.“Speaking about someone ina positive light does notviolate the terms of notspeaking about someone in anegativelight,”hesaid.The audience considered

this.“How many good brokers

are there?” asked an investoratlength.“Ten,”saidBrad.(IEXhad

dealings with ninety-four.)The ten included the RoyalBank of Canada, SanfordBernstein, and a bunch ofeven smaller outfits. “Threeare meaningful,” he added.MorganStanley,J.P.Morgan,andGoldmanSachs.“Why would any broker

behavewell?”“The long-term benefit is

thatwhentheshithitsthefan,it will quickly become clear

whomadegooddecisionsandwho made bad decisions,”saidBrad.He wondered, often, what

itwouldlooklikeifandwhenthe shit in question hit thefan: The stock market atbottomwas rigged. The iconof global capitalism was afraud. How wouldenterprising politicians andplaintiffs’ lawyers and stateattorneys general respond to

that news? The thought of itactually didn’t give him allthat much pleasure. Really,he just wanted to fix theproblem. At some level, hestill didn’t understand whyWall Street banks needed tomakehistasksodifficult.“Is there a concern from

you that the publicity willcreate even more hostility?”asked another. He wanted toknowiftellingtheworldwho

thegoodbrokerswerewouldmakethebadonesworse.“The bad brokers can’t try

harder at being bad,” saidBrad.“Someofthesebrokersaredoingeverythingtheycannot to do what the clientwantsthemtodo.”An investor wanted to

return to the scribblednumbers that illustrated howone particular bank hadenabled dark pool arbitrage.

“So what do these guys saywhenyoushowthemthat?“Some of them say,

‘You’re one hundred percentright,’ ” said Brad. “ ‘Thisshithappens.’Oneevensaid,‘Weusedtositaroundallthetime talking about how tofuck up other people’s darkpools.’ Some of them say, ‘Ihave no idea what you’retalking about. We haveheuristic data bullshit and

other mumbo jumbo todetermineourrouting.’”“That’s a technical term

—‘heuristic data bullshit andother mumbo jumbo’?” aninvestor asked. A few guyslaughed.Technology had collided

withWallStreetinapeculiarway. It had been used, as itshould have been used, toincreaseefficiency.Butithadalsobeenused to introducea

peculiar sort of marketinefficiency. This newinefficiency was not like theinefficiencies that financialmarkets can easily correct.After a big buyer enters themarket and drives up theprice of Brent crude oil, forexample, it’s healthy andgood when speculators jumpin and drive up the price ofNorth Texas crude, too. It’shealthy and good when

traders see the relationshipbetweenthepriceofcrudeoiland thepriceofoil companystocks,anddrivethesestockshigher. It’s even healthy andgoodwhensomecleverhigh-frequency trader divines anecessary statisticalrelationship between theshare prices of Chevron andExxon, and respondswhen itgets out of whack. It wasneither healthy nor good

when public stock exchangesintroduced order types andspeed advantages that high-frequencytraderscouldusetoexploit everyone else. Thissort of inefficiency didn’tvanish the moment it wasspotted and acted upon. Itwas like a broken slotmachine in the casino thatpaysoffeverytime.Itwouldkeep paying off untilsomeone said something

about it; but no one whoplayed the slot machine hadany interest in pointing outthatitwasbroken.Somelargeamountofwhat

Wall Street had done withtechnology had been donesimplysothatsomeoneinsidethe financial markets wouldknow something that theoutside world did not. Thesame system that once gaveus subprime mortgage

collateralizeddebtobligationsno investor could possiblytrulyunderstandnowgaveusstock market trades thatoccurred at fractions of apennyatunsafe speedsusingorder types that no investorcould possibly trulyunderstand.ThatiswhyBradKatsuyama’smost distinctivetrait—his desire to explainthings not so he would beunderstoodbut so that others

would understand—was soseditious. He attacked thenewly automated financialsystemat itscore: themoneyit made from itsincomprehensibility.Another investor,silent till

that point, now raised hishand.“Itseemslikethere’safirst mover risk for someoneto behave the right way,” hesaid. Hewas right: Even thebanks that were behaving

relatively well weren’tbehaving all thatwell.A bigWall Street bank that gaveIEXanhonestshottoexecuteits customers’ orders wouldsuffer a collapse in its darkpool trading, and in itsprofits.Thebadbankswouldpounceonthegoodbankandargue that, because its darkpool was worse than all theothers, it shouldn’t be giventhe orders in the first place.

That,Brad told the investors,had been maybe his biggestconcern.WouldanybigWallStreetbankhavetheabilitytosee a few years down theroad, and summon the nerveto go first? Then he clickedon a slide. On top it read:December19,2013.

YOUCOULDNEVERsayforsure

exactly what was going oninside one of the big WallStreet banks, but it was amistake to thinkofabankasa coherent entity. Theywerefractious, and intenselypolitical. Most everyonemight be thinking mainlyabouthisyear-endbonus,butthatdidn’tmeantherewasn’tonepersonwhowasn’t,anditcertainly didn’t mean thateveryone inside a big bank

sharedthesameincentives.Adollar in one guy’s pocketwas, in someplaces, adollaroutofanother’s.Forinstance,the guys in the prop groupwhotradedagainst thefirm’scustomers in the dark poolwould naturally feel adifferent concern for thosecustomersthantheguywhosejob it was to sell them stuffwould—iffornootherreasonthanthatitishardertoripoff

a person when you actuallyneedtoseehim,facetoface.That’swhythebankskepttheprop traders on differentfloors from the salespeople,often in entirely differentbuildings.Itwasn’tsimplytoplease the regulators; allinvolved would prefer thatthere be no conversationbetween the twogroups.Thecustomer guy was better athis job—and had deniability

—ifheremainedoblivioustowhateverthepropguywasupto. The frantic stupidity ofWall Street’s stock orderrouters and algorithms wassimply an extension into thecomputer of the willfulignoranceofitssalespeople.Brad’s job, as he saw it,

was to force the argumentbetween the salespeople andthe prop people—and to armthe salespeople with a really

great argument, whichincluded the distinctpossibility that investors inthe stock market were abouttowakeuptowhatwasbeingdone to them, and go towaragainst the people who weredoing it. In most cases, hehad no idea if he hadsucceeded and, as a result,suspectedhehadnot.Right from the start, the

view from inside Goldman

Sachshadbeen lessclutteredthantheviewfrominsidetheother big Wall Street banks.Goldmanwasunliketheotherbanks; for instance, the firstthingthepeoplehemetattheother banks usually did wastellhimofthehostilityalltheother banks felt toward IEX,and of the nefariousness ofthe other banks’ dark pools.Goldman was aloof, anddidn’tappear tocarewhat its

competitors were saying orthinking about IEX. In theirstock market trading andperhaps in other departmentsas well, Goldman wasundergoing some kind oftransition. In February 2013,itsheadofelectronic trading,GregTusar, had left toworkfor Getco, the big high-frequency trading firm. Thetwopartners thenassigned tofigure out Goldman’s role in

the global stock markets—Ron Morgan and BrianLevine—were not high-frequencytradingtypes.Theydidn’t bear a great deal ofresponsibility for whateverthe high-frequency tradingtypes had done before theytookover.MorganworkedinNewYorkandwasinchargeof sales; Levine, responsiblefor trading, worked inLondon. Both were

apparently worried aboutwhat they had found whenthey stepped into their newpositions. Brad knew thisbecause, oddly, RonMorganhadcalledhim.“Hefoundusby talking to clients aboutwhattheywanted,”saidBrad.A week after they first met,Morgan invitedBrad back tomeet with a group of evenmoreseniorexecutives.“Thatdidn’t happen anywhere

else,”Bradsaid.Afterheleft,he was told that the ensuingdiscussion had reached “thehighestlevelsofthefirm.”Intakingover,Morganand

Levine had been taskedwithanswering a big questionposedby thepeoplewho ranGoldman Sachs: Why wasMorgan Stanley growing sofast? Their rival’s marketshare was booming, whileGoldman’s was stagnant.

LevineandMorgandidwhateveryone on Wall Street didwhentheywantedtofindoutwhat was going on inside arivalbank:Theyinvitedsomeof its employees in for jobinterviews. The MorganStanley employees explainedtothemthatthefirmwasnowtrading 300 million shares aday—30 percent of thevolume of the New YorkStock Exchange—through

what it called “Speedway.”Speedway was a serviceMorgan Stanley provided tohigh-frequency traders.MorganStanley built a high-frequency tradinginfrastructure—co-location atvariousexchanges,thefastestroutes between them, astraight road into the bank’sdark pool and so on—andthenturnedaroundandleasedtheir facilities to the smaller

HFT firms, which couldn’tafford the up-front cost ofbuilding their own systems.Morgan Stanley got creditfor, and commissions from,everything theHFT guys didinside Morgan Stanley’spipes. The Morgan StanleyemployeesanglingforjobsatGoldman Sachs told theGoldman executives thatSpeedway was now makingMorganStanley$500million

a year, and that it wasgrowing. This raised theobvious question forGoldman Sachs: Should wecreate our own Speedway?Should we further embracehigh-frequencytrading?One of Goldman’s clients

handedRonnieMorgana listofthirty-threebiginvestorstowhomheshouldspeakbeforemaking this decision. Thisclientdidn’tknow ifMorgan

hadspoken topeoplebeyondthislist,butheconfirmedforhimself that Morgan hadspoken to each of the thirty-three people individually. Atthe same time, Morgan andLevine began to ask someobvious questions aboutGoldman Sachs’s stockmarket businesses. CouldGoldmaneverbeasfastorassmart as the more nimblehigh-frequencytradingfirms?

Why, if Goldman onlycontrolled 8 percent of allstock market orders, was itabletotrademorethanathirdof those orders in its owndarkpool?Givenhowlittleofthe flowGoldman saw,whatwas the likelihood that thebest price for an investor’sorder came from some otherGoldmancustomer?HowdidWall Street dark poolsinteract with each other and

with the exchanges? Howstable was this increasinglycomplex financial market?Was it a good thing that theU.S. stockmarketmodelhadbeen exported to othercountries and other financialmarkets?They already knew or

could guess most of theanswers; for the questionsstill hanging, the investorspointed them toward an

unusually forthright andknowledgeable guy theyknew and trusted who wasstarting a new stockexchange:BradKatsuyama.WhatstruckBradabouthis

visit to Goldman Sachs wasnot only that Levine andMorganwerewillingtospendtime with him, but that theytook the ideas from theirconversations to theirsuperiors. Levine seemed

particularly concerned aboutthestockmarket’sinstability.“Unless there are somechanges,there’sgoingtobeamassive crash,” he said, “aflash crash times ten.” Inconversation and inpresentations, he impressedthepointuponGoldman’stopexecutives, and also asked,“Doyoureallyneed theonlydifferentiatorinthemarkettobe speed? Because that’s

what it seems to be.” Itwasn’t all that hard for thepeople who ran GoldmanSachstoseethesourceoftheproblem, or to see why nooneinsidethesystemcaredtopoint it out. “There’s noupside in it—that’s why nooneeverstepsoutonit,”saidLevine. “And everyone’s gotcareer risk. And no one isthinking that far ahead.Theyare looking at the next

paycheck.”A long string of myopic

decisions had created newrisksintheU.S.stockmarket.Its complexity was just onemanifestationoftheproblem,but in it, the Goldmanpartners both felt sure, laysome future calamity. Thesensational technical glitchesweren’t anomalies butsymptoms. And a stockmarketcalamity,RonMorgan

and Brian Levine boththought,would end up beingblamed generally on the bigWall Street banks, andspecifically on GoldmanSachs. Goldman earned $7billion a year from its equitybusiness;thatbusinesswouldbeputatriskbyanycrisis.But it wasmore than that.

Atforty-eightandforty-three,respectively, Morgan andLevine were, by Wall Street

standards, old guys. Morganhad been made a Goldmanpartner back in 2004,Levinein 2006. Both confided tofriends that IEX presentedthem with a choice, at whatmight be a pivotal financialhistorical moment. Aninvestor who knew RonMorgan said, “Ronnie’ssayingtohimself,‘Youworkfor twenty-five years in thebusiness, how often do you

have a chance to make adifference?’ ” Brian Levinehimself said, “I think it’s abusinessdecision.Ialsothinkit’s amoral decision. I thinkthis is theshotwehave.AndI thinkBrad is the rightguy.It’s thebestoddswehave tofixtheproblem.”

BEFORE THEY OPENED their

market,onOctober25,2013,the thirty-two employees ofIEXmade private guesses asto how many shares they’dtrade their first day and intheir first week. The medianof the estimates came in at159,500 shares the first dayand 2.5 million shares thefirst week. The lowestestimate came from MattTrudeau, the only one ofthem who had ever built a

new stock market fromscratch: 2,500 shares for thefirst day and 100,000 for theweek. Of the ninety-fourstock brokerage firms invarious stages of agreeing toconnecttoIEX,mostofthemsmall outfits, only aboutfifteenwerereadyonthefirstday.“Brokersaretellingtheirclients they’reconnected,butwe haven’t even gotten theirpaperwork,”saidBrad.When

asked how big the exchangemightbeattheendofthefirstyear, Brad guessed, orperhaps hoped, that it wouldtrade between 40 and 50millionsharesaday.To cover their running

costs, they needed to tradeabout50millionsharesaday.If they failed to cover theirrunning costs, there was aquestion of how long theycould last. “It’s binary,” said

Don Bollerman. “Either weare a resounding success orweareacompleteflop.We’redoneinsixtotwelvemonths.In twelve months I knowwhether I need to look for ajob.” Brad thought that theirbidtocreateanexampleofafair financial market—andmaybe change Wall Street’sculture—could take longerand prove messier. Heexpected their first year to

feel more like nineteenth-centurytrenchwarfarethanatwenty-first-century dronestrike. “We’re just collectingdata,” he said. “You cannotmake a case without data.And you don’t have dataunlessyouhavetrades.”EvenBradagreed:“It’soverwhenwerunoutofmoney.”On the first day, they

traded 568,524 shares. Mostof the volume came from

regional brokerage firms andWall Street brokers that hadno dark pools—the RoyalBank ofCanada andSanfordBernstein. Their first week,they traded a bit over 12million shares. Each weekafter that, they grew slightly,until, in the third week ofDecember, theywere tradingroughly 50 million shareseach week. On Wednesday,December 18, they traded

11,827,232 shares. By thenGoldman Sachs hadconnected to IEX, but itsorders were arriving on thenew exchange in the sameuntrustingspiritasthosefromthe other big Wall Streetbanks: in tiny lot sizes,resting for just a fewmilliseconds,thenleaving.The first different-looking

stock market order sent byGoldman to IEX landed on

December 19, 2013, at3:09:42 p.m. 662milliseconds, 361microseconds, and 406nanoseconds. Anyone whohad been in IEX’s one-roomoffice when it arrived wouldhave known that somethingunusual was happening. Thecomputerscreensjitterbuggedas the information flowedinto themarket inanentirelynew way. One by one, the

employees arose from theirchairs;afewminutesintothesurge, all but Zoran Perkovwereon their feet.Then theybegantoshout.“We’re at fifteenmillion!”

someone yelled, ten minutesintothesurge.Intheprevious331 minutes they had tradedroughly5millionshares.“Twentymillion!”“FuckingGoldmanSachs!”“Thirtymillion!”

The enthusiasm wasunpracticed, almostunnatural. It was as if an oilwell had gushed up throughthe floorduringameetingofthechessclub.“We just passed AMEX,”

shouted John Schwall,referring to the AmericanStock Exchange. “We’reahead of AMEX in marketshare.”“Andwegavethemaone-

hundred-and-twenty-yearhead start,” said Ronan,playing a little loose withhistory. Someone had givenRonan a $300 bottle ofChampagne. He’d toldSchwall that it had cost onlyforty bucks, becauseSchwalldidn’t want anyone insideIEX accepting gifts of morethanfortybucksfromanyoneoutside of it. Now Ronanfished the contraband from

under his desk and foundsomepapercups.Someone else put down a

phone and said, “That wasJ.P. Morgan, asking, ‘Whatjust happened?’ They saythey may have to dosomething.”Don put down his phone.

“That was Goldman. Theysay they aren’t even big.They’re coming bigtomorrow.”

“Fortymillion!”At his desk Zoran sat

calmly, watching trafficpatterns. “Don’t tell anyone,butwe’restillbored,”hesaid.“Thisisnothing.”Fifty-one minutes after

Goldman Sachs had giventhemtheirfirsthonestshotatWall Street customers’ stockmarketorders, theU.S. stockmarket closed. Brad walkedoff the floorand intoa small

office, enclosed by glass.Hethoughtthroughwhathadjusthappened. “We needed oneperson to buy in and say,‘You’re right,’ ” he said. “Itmeans that Goldman Sachsagrees with us.” Then hethoughtsomemore.GoldmanSachs wasn’t a single entity;itwasabunchofpeoplewhodidn’talwaysagreewitheachother. Two of these peoplehad been given a new

authority, and they had usedit to take a different, longer-term approach than anyoneimaginedGoldmanSachswascapableof.These twopeoplemadeallthedifference.“Igotlucky Brian is Brian andRonnieisRonnie,”saidBrad.“This is because of them.Now the others can’t ignorethis. They can’t marginalizeit.”Thenheblinked.“Icouldfuckingcrynow,”hesaid.

He’d just been given aglimpseofthefuture—hefeltcertain of it. Goldman Sachswas insisting that the U.S.stock market needed tochange,andthatIEXwastheplace to change it. IfGoldman Sachs was willingto acknowledge to investorsthat this newmarketwas thebest chance for fairness andstability, the other bankswouldbepressuredtofollow.

The more orders that flowedonto IEX, the better theexperience for investors, andtheharderitwouldbeforthebanks to evade this new, fairmarket. At that moment, asGoldman’s orders flowedonto IEX, the stock marketfelt a bit like a river thatwantedtojumpitsbanks.Allthathadbeenneededwasforonemanwithashovel todiga trench in an existing levee,

and the pressure from thewaterwould finish the job—which was why men caughtdigging into the banks oncertain stretches of theMississippi River were onceshot on sight. BradKatsuyamawasthemanwiththe shovel, positioned at theriver’smostvulnerablebend.Goldman had arrived, withexplosives,tohelphim.Threeweekslater,hestood

before a group of investorswho, if they acted together,might force change uponWall Street. To show themthat change was possible, heflashed on a big screen thedatafromwhathadhappened,for fifty-one minutes, onDecember 19. The datashowed, among other things,the power of trust. Goldmanhadactuallysentmoreordersto IEX the day before, on

December18.Somuchmorehad traded on December 19because, on thatday, for justfifty-one minutes, Goldmanhadentrustedthemwithmostof its orders for ten secondsormore. That trust had beenrewarded: The market feltfair; 92 percent of thoseorders traded at themidpoint—thefairprice—comparedto17 percent that traded at themidpoint in Wall Street’s

dark pools. (The number onthe public exchanges waseven lower.) Their averagetrade size was twice themarket average, despite theefforts of other Wall Streetbankstounderminethem.IEX represented a choice.

IEX also made a point: thatthis market which hadbecome intentionally andoverly complicated might beunderstood. That, to function

properly, a free financialmarket didn’t need to berigged in someone’s favor. Itdidn’tneedinsomesickwaythe kickbacks, and paymentfor order flow, and co-location, and all sorts ofunfairadvantageshandedtoasmall handful of traders. Allit neededwas for themen inthe room and other investorslike them to takeresponsibility for

understanding it, and then toseize its controls. “Thebackbone of the market isinvestors coming together totrade,”saidBrad.When he was finished, an

investor raised his hand.“They did it on Decembernineteenth,” he asked. “Andthenwhat?”

_____________* EricHunsader,thefounderofNanex,a stock market data company, is a

fantastic exception to the generalsilence on this subject. After the flashcrash,itoccurredtohimtousehisdatato investigate what had gone wrong,and the search never really ended.“Almost every rock I overturn,something nefarious crawls out fromunder it,” he said. Hunsader hasbrilliantly and relentlessly describedmarket dysfunction and pointed outmany strange micro-movements instock prices. When the last history ofhigh-frequency trading is written,Hunsader, like Joe Saluzzi and SalArnuk of Themis Trading, deserves aprominentplaceinit.† “Glitch”belongsinthesamecategory

as“liquidity”or,forthatmatter,“high-frequency trading.” All terms used toobscureratherthantoclarify,andtoputmindstoearlyrest.‡ FromabookofthatnamebyCharlesPerrow.§ In March 2013, the CommodityFutures Trading Commission, aderivatives regulator, ended its nascentprogram to give outside researchersaccesstomarketdataafteroneofthoseresearchers, Adam Clark-Joseph, ofHarvard University, used the data tostudy the tactics of high-frequencytraders.Thecommissionshutdowntheresearch after lawyers for the ChicagoMercantile Exchange wrote the

regulatorsa letterarguing that thedataClark-Josephhadcollectedbelongedtothe high-frequency traders, and thatsharing it was illegal. Before he wasbooted out of the place, Clark-Josephshowed how HFT firms were able topredictpricemovesbyusingsmallloss-making stock market orders to gleaninformation fromother investors.Theythen used that information to placemuch bigger orders, the gains fromwhich more than compensated for thelosses.¶ EstimatesofcommissionpaidtoWallStreet banks for stockmarket trades in2013 range from $9.3 billion(Greenwich Associates) to $13 billion

(theTabbGroup).** ING,oddlyenough,managedIEX’sthen thirty-person 401(k) plan. Seeingthis, John Schwall returned to his sidecareer in private investigation. Aftersomedigging,hedevelopedtheopinionthatanymoneymanagerwhoarbitrarilydenied his clients access to marketsmight have violated his fiduciaryresponsibility. On those grounds,Schwall pulled the company’s 401(k)fromING.†† Sixty percent of the time that thisfeedingfrenzyoccursonapublicstockexchange, no trade is recorded. Thefrenzycomesinresponsetoatradethathas occurred in some dark pool. The

dark pools are not required to reporttheir tradesinreal time;andso,ontheofficial tape, the frenzy appearsunprovoked.Itisn’t.‡‡ The Financial Industry RegulatoryAuthority (FINRA) publishes its ownodd ranking of the public and privatestockmarkets,basedonhowwell theyavoid breaking the law, presumablyinadvertently, by trading outside theNationalBestBidandOffer.Initsfirsttwomonths of trading, IEX ranked #1onFINRA’slist.§§ The reader might question thecharacterization of such small-timeskimming as scalping. But a pennyhere,apennythereaddsupinthemost

extraordinary ways in the U.S. stockmarket. At IEX, the Puzzle Mastersmade a quick-and-dirty calculation ofthelikelyprofitsmadeannuallybyHFTfrom dark pool arbitrage. They addedup all its instances over a fifteen-dayperiod, then came up with a number:The haul forHFT from theU.S. stockmarket alone came to more than abilliondollarsayear.Andthiswasjustasingletradingstrategy.“They’vebeenin business for ten weeks and they’venow found four of these strategies,”said one big investor of IEX. “Whoknowshowmanymorethey’llfind?”Abillionhere,abillionthere:Itaddsup.

CHAPTEREIGHT

THESPIDERANDTHEFLY

The trial of SergeyAleynikovranfortendaysinDecember of 2010 and wasnotable for its paucity ofinformed outsiders. High-frequencytradingwasasmallworld, and the people whodidit,orknewanythingatallabout it, apparently had farless interest in testifying attrials than in making theirpersonal fortunes. The one

outsideexpertwitnesson thesubject called by thegovernment was an assistantprofessoroffinanceatIllinoisInstitute of Technologynamed Benjamin Van Vliet.Van Vliet had become anexpert in response tojournalists’ need for one.While teaching a computercoding course, he’d castaround for something sexyfor the students to program,

andlandedonhigh-frequencytrading platforms. In mid-2010,Forbesmagazinecalledhimoutofthebluetoaskhimwhathethoughtaboutafiber-optic cable that SpreadNetworks had strung fromChicago to New Jersey. VanVliet had never heard ofSpread Networks, and knewnothing about the cable, butwound up with his name inprint—which, of course, led

tomorecallsfromjournalists,whoneededahigh-frequencytradingexpert.Thencametheflash crash, and Van Vliet’sphone rang off the hook.Eventually, federalprosecutors found him andasked him to serve as theirexpertwitnessinthetrialofaformerGoldman Sachs high-frequency programmer. VanVliet still had never actuallydone any high-frequency

tradinghimself,andhadlittletoaddonthevalueorthegistofwhatSergeAleynikovhadtaken from Goldman Sachs.About the market itself hewas badly misinformed. (Hedescribed Goldman Sachs as“the New York Yankees” ofhigh-frequency trading.) Heturnedouttohavetestifiedasanexpertwitnessinanearliertrial involving the theft ofhigh-frequency trading code,

after which the judge in thecase said that the idea that ahigh-frequency tradingprogram was some kind ofsciencewas“utterbaloney.”The jury in Sergey

Aleynikov’s trial consistedmainly of high schoolgraduates; all of the jurorslacked experienceprogramming computers.“They would bring mycomputer into the

courtroom,” recalled Sergeincredulously. “They wouldpull out the hard drive andshow it to the jury. Asevidence!” Save for MishaMalyshev, Serge’s onetimeemployer, the people whotookthestandhadnocredibleknowledgeof high-frequencytrading: how the money gotmade,what sort of computercodewasvaluable,andsoon.Malyshev testified as a

witness for the prosecutionthat Goldman’s code was ofno use whatsoever in thesystem he’d hired Serge tobuild—Goldman’s code waswritten in a differentprogramming language, itwas slow and clunky, it hadbeendesigned fora firm thatwas trading with its owncustomers, and Teza,Malyshev’s firm, didn’t havecustomers, and so on—but

whenhelookedover,hesawthathalf the juryappeared tobesleeping.“IfIwereajuror,and Iwasn’t a programmer,”saidSerge,“itwouldbeverydifficultformetounderstandwhyIdidwhatIdid.”Goldman Sachs’s role in

thetrialwastomakegenuineunderstanding even moredifficult. Its employees, onthe witness stand, behavedmore like salesmen for the

prosecution than citizens ofthe state. “It’s not that theylied,” said Serge. “But theytold things that were not intheir expertise.” When hisformer boss, AdamSchlesinger,wasaskedaboutthe code, he said thateverything at Goldman wasproprietary. “I wouldn’t sayhe lied, but he was talkingabout stuff that he did notunderstand, and so he was

misunderstood,”saidSerge.Our system of justice is a

poor tool for digging out arich truth. What was reallyneeded,itseemedtome,wasfor Serge Aleynikov to beforcedtoexplainwhathehaddone,andwhy,topeopleabletounderstand theexplanationand judge it.GoldmanSachshad never asked him toexplain himself, and the FBIhad not sought help from

anyone who actually knewanything at all aboutcomputers or the high-frequency trading business.And soover twonights, in aprivateroomofaWallStreetrestaurant, I convened a kindof second trial. To serve asboth jury and prosecution, Iinvited half a dozen peopleintimately familiar withGoldman Sachs, high-frequency trading, and

computer programming. Allwere authorities on ourabstruse new stock market;several had written high-frequency code; one hadactually developed softwarefor Goldman’s high-frequency traders. All weremen. They’d grown up infour different countriesbetween them, but all nowlivedintheUnitedStates.Allof them worked on Wall

Street, and so, to expressthemselves freely, theyneededtoremainanonymous.AmongthemwereemployeesofIEX.Allwerenaturallyskeptical

—of both Goldman Sachsand Serge Aleynikov. Theyassumed that if Serge hadbeensentencedtoeightyearsin jail he must have donesomething wrong. They justhadn’t bothered to figure out

what that was. All of themhad followed the case in thenewspapers and noted theshiver ithadsent throughthespines of Wall Street’ssoftware developers. UntilSerge was sent to jail fordoing it, it was commonpractice for Wall Streetprogrammers to take codethey had worked on whentheyleftfornewjobs.“Aguygot put in jail for taking

something no oneunderstood,” as one ofSerge’s new jurors put it.“Every tech programmer outthere got the message: Takecodeandyoucouldgotojail.It was huge.” The arrest ofSerge Aleynikov had alsocausedalotofpeople,forthefirst time, tobegin touse thephrase “high-frequencytrading.” Another new juror,whoin2009hadworkedfora

big Wall Street bank, said,“When he was arrested, wehad a meeting for all theelectronic trading personnel,to talk about a one-pagerthey’ddraftedtobediscussedwith their clients around thisnew topic called ‘high-frequencytrading.’”The restaurant was one of

those old-school Wall Streetplaces that charge you athousand bucks for a private

room and then more or lesschallengeyoutoeatyourwaybacktoeven.Foodanddrinkarrived inmassivequantities:vast platters of lobster andcrab, steaks the size ofdesktop computer screens,smoking mountains ofpotatoes and spinach. It wasthe sort of meal cookeddecades ago, for traderswhospent theirdays trusting theirgutandtheirnightsrewarding

it; but this monstrous feastwas now being served to acollection of weedytechnologists,thepeoplewhocontrolled the machines thatnow controlled the markets,andwho had, in the bargain,put the old school out ofbusiness.Theysataroundthetable staring at the piles offood, like a conquering armyofeunuchswhohadstumbledinto the harem of their

enemy. At any rate, theymadehardlyadent.Serge,forhispart,atesolittle,andwithsuch disinterest, that I halfexpected him to lift off hischair and float up to theceiling.His new jurors began,

interestingly, by asking himlots of personal questions.They wanted to figure outwhat kind of guy he was.They took an interest, for

example, in his job-markethistory, and noted that hisbehavior was prettyconsistently that of a geekwho hadmore interest in hiswork than in the money thework generated. Theyestablished fairly quickly—how, I donotknow—thathewas not just smart butseriously gifted. “These guysareusuallysmartinonesmallarea,” one of them later

explained to me. “For atechnologist to be so totallydominant insomanyareasisjustreally,reallyunusual.”They then began to probe

hiscareeratGoldmanSachs.Theywere surprised to learnthat he had “super-userstatus” inside Goldman,whichistosayhewasoneofa handful of people (roughly35, in a firm that then hadmorethan31,000employees)

who could log onto thesystem as an administrator.Suchprivilegedaccesswouldhave enabled him, at anytime, to buy a cheap USBflash drive, plug it into histerminal, and take all ofGoldman’s computer codewithout anyone having anyideathathehaddoneit.Thatfact alone didn’t proveanything to them. As onepointedout toSergedirectly,

lotsofthievesaresloppyandcareless; just because hewassloppy and careless didn’tmean hewas not a thief. Onthe other hand, they allagreed,therewasn’tanythingtheleastbitsuspicious,muchless nefarious, about themannerinwhichhehadtakenwhat he had taken. Using asubversionrepositorytostorecode and deleting one’s bashhistory were common

practices. The latter made agreat deal of sense if youtyped your passwords intocommand lines. In short,Sergehadnotbehaved likeaman trying to cover histracks.Oneofhisnew jurorsstated the obvious: “Ifdeleting thebashhistorywasso clever and devious, whyhadGoldman ever found outhe’dtakenanything?”To these new jurors, the

story that the FBI found sounconvincing—that Sergehadtakenthefilesbecausehethoughthemight later liketoparse the open source codecontainedwithin—madealotof sense.AsGoldmanhadn’tpermitted him to release hisdebugged or improved codeback to the public—eventhough the original freelicense often stated thatimprovements must be

publicly shared—the onlyway forhim togethishandson thesefileswas to take theGoldman code. That he hadalso taken some code thatwasn’t open source, whichhappened to be in the samefilesastheopensourcecode,surprisednoone.Grabbing abunch of files that containedboth open source and non–open source code was anefficient way for him to

collect theopen source code,even if the open source codewas the only code thatinterestedhim. Itwouldhavemadefarlesssenseforhimtohunt around the Internet forthe open source code hewanted,asitwasscatteredallover cyberspace. It was alsoentirelyplausibletothemthatSerge’s interestwasconfinedto the open source code,becausethatwasthegeneral-

purpose code that might berepurposed later. TheGoldman proprietary codewas written specifically forGoldman’splatform;itwouldhavebeenof littleuse inanynew system he wished tobuild. (The two small piecesof code Serge had sent intoTeza’s computers before hisarrest both came with opensource licenses.) “Even if hehad taken Goldman’s whole

platform, itwould have beenfaster and better for him towrite the new platformhimself,”saidonejuror.Several times Serge

surprised the jurors with hisanswers. They were allshocked, for instance, thatfrom the day Serge firstarrived at Goldman, he hadbeenable to sendGoldman’ssource code to himselfweekly, without anyone at

Goldman saying a word tohim about it. “At Citadel, ifyou stick a USB drive intoyourworkstation,someoneisstanding next to you withinfiveminutes,askingyouwhatthehellyouaredoing,”saidajuror who had worked there.Most were surprised by howlittle Serge had taken inrelation to the whole: eightmegabytes, inaplatformthatconsisted of nearly fifteen

hundred megabytes of code.The most cynical amongthem were surprised mostlybywhathehadnottaken.“Did you take the strats?”

asked one, referring toGoldman’s high-frequencytradingstrategies.“No,”saidSerge.Thatwas

one thing the prosecutorshadn’taccusedhimof.“But that’s the secret

sauce, if there is one,” said

the juror. “If you’re going totake something, take thestrats.”“I wasn’t interested in the

strats,”saidSerge.“Butthat’slikestealingthe

jewelry box without thejewels,”saidanotherjuror.“You had super-user

status!” said the first. “Youcould easily have taken thestrats.Whydidn’tyou?”“To me, the technology

reallyismoreinterestingthanthestrats,”saidSerge.“Youweren’t interested in

how they made hundreds ofmillions of dollars?” askedsomeoneelse.“Not really,” said Serge.

“It’s all one big gamble, onewayoranother.”Because they had seen it

before in other programmertypes, they were not totallyshockedbyhisindifferenceto

Goldman’strading,orbyhowfar Goldman had kept himfrom the action.Talking to aprogrammer type about thetradingbusinesswasabitliketalking to the house plumberatworkinthebasementaboutthe cardgame theMafiadonwas running upstairs. “Heknew so little about thebusiness context,” one of thejurors said, after attendingbothdinners. “You’dhave to

try to know as little as hedid.”Anothersaid,“Heknewasmuch as theywanted himtoknowabouthowtheymademoney, which was virtuallynothing. He wasn’t there forvery long. He came in withno context. And he spent allof his time troubleshooting.”Another said he had foundSergetobetheepitomeoftheprogrammerwhose value thebigWallStreetbankstriedto

minimize—by using theirskillswithout fully admittingthem into thebusiness. “Yousee two résumés from thebanks,” he said. “You linethem up on paper and saymaybe there’s a ten percentdifferencebetweenthem.Butone guy is getting paid threehundred grand and the otheris getting one point fivemillion.Thedifferenceisoneguy has been given the big

picture,andtheotherhasn’t.”Serge had never been shownthe big picture. Still, it wasobvioustothejurors—evenifit wasn’t to Serge—whyGoldmanhadhiredhimwhenit had.With the introductionof Reg NMS in 2007, thespeed of any financialintermediary’stradingsystembecame its most importantattribute: the speed withwhich it took in market data

and the speed with which itresponded to that data.“Whetherheknewitornot,”saidone juror, “hewashiredto build Goldman’s view ofthemarket.NoRegNMS,noSergeinfinance.”At least some part of the

reasonhe remainedobliviousto the nature of GoldmanSachs’s trading business, allofthejurorsnoticed,wasthathis heart was elsewhere. “I

think passion plays a bigrole,” said a juror whohimself had spent his entirecareer writing code. “Themoment he started talkingaboutcoding,hiseyeslitup.”Anotheradded,“Thefactthathe kept trying to work onopen source shit even whilehe was at Goldman sayssomethingabouttheguy.”They didn’t all agree that

whatSergehad takenhadno

value, either to him or toGoldman. But what value itmight have had in creating anewsystemwouldhavebeentrivial and indirect. “I canguaranteeyouthis:Hedidnotsteal code to use it on someother system,” one said, andnone of the others disagreed.For my part, I didn’t fullyunderstandwhysomepartsofGoldman’s systemmight notbe useful in some other

system. “Goldman’s codebase is like buying a reallyold house,” one of the jurorsexplained.“Andyou take thetrouble to soup it up. But itstill has the problems of areally old house. Teza wasgoing to build a new house,onnewland.Whywouldyoutake one-hundred-year-oldcopperpipesandput theminmy new house? It isn’t thatthey couldn’t be used; it’s

that the amount of troubleinvolved in making it usefulis ridiculous.”A thirdadded,“It’sway easier to start fromscratch.” Their convictionthatGoldman’scodewasnotterribly useful outside ofGoldman grew even strongerwhen they learned—later, asSerge failed to mention it atthe dinners—that the newsystem Serge planned tocreatewas to bewritten in a

different computer languagethantheGoldmancode.Theperplexingquestion,at

least to me, was why Sergehad taken anything. A fullmonth after he’d leftGoldman Sachs, he still hadnot touched the code he hadtaken. If the code was sounimportant to him that hedidn’t bother to open it upandstudyit;ifmostofitwaseithersoclunkyorsopeculiar

to Goldman’s system that itwas next to useless outsideGoldman—why take it?Oddly, his jurors didn’t findthis hard to understand. Oneput it thisway: “If PersonAsteals a bike from Person B,thenPersonAisridingabiketo school, and Person B iswalking. Person A is betteroff at the expense of PersonB.Thatisclear-cut,andmostpeople’sviewoftheft.

“In Serge’s case, think ofbeingat a company for threeyears, and you carry a spiralnotebook and writeeverything down. Everythingabout your meetings, yourideas, products, sales, clientmeetings—it’s all writtendown in that notebook. Youleave for your new job andtakethenotebookwithyou—as most people do. Thecontents of your notebook

relate to your history at theprior company but have verylittle relevance to your newjob.Youmayneverlookatitagain.Maybe there are someideas, or templates, orthoughts you can draw on.Butthatnotebookisrelatedtoyour prior job, and you willstart a new notebook at yournewjobwhichwillmake theold one irrelevant. . . . Forprogrammers, their code is

their spiral notebook. [Itenables them] to rememberwhat theyworked on—but ithas very little relevance towhattheywillbuildnext....Hetookaspiralnotebookthathad very little relevanceoutsideofGoldmanSachs.”To thewell-informed jury,

the real mystery wasn’t whySerge had done what he haddone. It was why GoldmanSachs had done what it had

done. Why on earth call theFBI? Why exploit theignoranceofboththegeneralpublic and the legal systemabout complex financialmatters to punish this onelittle guy? Why must thespideralwayseatthefly?The financial insiders had

manytheoriesaboutthis:thatit was an accident; thatGoldman had called the FBIinhasteandthenrealizedthe

truth, but lost control of thelegal process; that in 2009Goldman had been on hair-trigger alert to personnellosses in high-frequencytrading, because they couldsee howmuchmoneywouldbemadefromit,andthoughtthey could compete in thebusiness. The jurors all hadideas about why what hadhappenedhadhappened.Oneof the theories was more

intriguing than the others. IthadtodowiththenatureofabigWallStreetbank,andtheway people who worked forit, at the intersection oftechnology and trading, gotahead. As one juror put it,“Every manager of a WallStreet tech group likes tohave people believe that hisguys are geniuses. Russians,whatever.Hiswhole personaamong his peers is thatwhat

he and his team do can’t bereplicated.When people findoutthatninety-fivepercentoftheir code is open source, itkillsthatperception.Whattheguy can’t say, when he getstold Serge has takensomething, is ‘it doesn’tmatter what he took becauseit’s worse than what they’llcreateontheirown.’Sowhenthe security people come tohim and tell him about the

downloads,hecan’tsay, ‘Nobigdeal.’Andhecan’tsay,‘Idon’tknowwhathetook.’”Toputitanotherway:The

processthatendedwithSergeAleynikov sitting inside twoholding facilities that houseddangerousoffendersand thena federal prison may havestarted with the concern ofsome Goldman Sachsmanager with his bonus.“Whoisgoingtopullthefire

alarm before they smell thefire?” asked the juror whohadadvancedthislasttheory.“It’s always the people whoarepoliticallymotivated.”Ashe left dinner with SergeAleynikov and walked downWallStreet,hethoughtaboutit some more. “I’m actuallynauseous,”hesaid.“Itmakesmesick.”

THE MYSTERY THE jury ofSergeyAleynikov’speershadmore trouble solving wasSerge himself. He appeared,and perhaps even was,completely at peace with theworld. Had you lined up thepeople at those two WallStreet dinners and asked theAmerican public to vote forthemanwhohadjustlosthismarriage, his home, his job,his life savings, and his

reputation,Sergewouldhavecomedeadlast.Atonepoint,oneof thepeopleat thetablestopped the conversationabout computer code andasked, “Why aren’t youangry?” Serge just smiledback at him. “No, really,”said the juror. “How do youstay so calm? I’d be fuckinggoing crazy.” Serge smiledagain. “But what doescraziness giveyou?”he said.

“What does negativedemeanor give you as aperson? It doesn’t give youanything. You know thatsomething happened. Yourlife happened to go in thatparticular route. If you knowthatyou’reinnocent,knowit.But at the same time youknow you are in trouble andthis is how it’s going to be.”Towhichheadded,“TosomeextentI’mgladthishappened

tome. I think it strengthenedmy understanding of whatlivingisallabout.”Attheendofhis trial,whentheoriginaljury returned with its guiltyverdict, Serge had turned tohis lawyer, Kevin Marino,and said, “You know, it didnot turn out thewaywe hadhoped. But I have to say, itwas a pretty goodexperience.” It was as if hewerestandingoutsidehimself

and taking in the situation asanobserver.“I’veneverseenanythinglikeit,”saidMarino.In the comfort of theWall

Streetcornucopia,thatnotion—that the hellish experiencehe’d been through hadactuallybeengoodforhim—was tooweird topursue, andthe jurors had quicklyreturned to discussingcomputer code and high-frequency trading. But Serge

actuallybelievedwhathehadsaid. Before his arrest—before he lost much of whathe thought important in hislife—he went through hisdays and nights in a certainstate of mind: a bit self-absorbed, prone to anxietyandworryabouthis status inthe world. “When I wasarrested,Icouldn’tsleep,”hesaid. “When I sawarticles inthe newspaper, I would

tremble at the fear of losingmy reputation. Now I justsmile. I no longer panic. Orhave panic ideas thatsomething could go wrong.”By the timehewas first sentto jail, hiswife had left him,taking their three youngdaughterswithher.Hehadnomoneyandnooneto turnto.“He didn’t have very closefriends,” his fellow RussianémigréMashaLederrecalled.

“He never did. He’s not apeopleperson.Hedidn’tevenhave anyone to be power ofattorney.” Out of a sense ofRussiansolidarity,andoutofpity,shetookthejob—whichmeant, among other things,frequenttripstovisitSergeinprison. “Every time I wouldcome to visit him in jail, Iwould leave energized byhim,” she said. “He radiatedsomuch energy and positive

emotions that it was liketherapy for me to visit him.His eyes opened to how theworld really is. And hestarted talking to people. Forthe first time!Hewould say:People in jail have the beststories. He could haveconsideredhimselfa tragedy.Andhedidn’t.”By far the most difficult

part of his experience wasexplaining what had

happened to his children.When he was arrested, hisdaughters were five, three,andalmostone.“Itriedtoputit in the most simple termstheywould understand,” saidSerge. “But the bottom linewasIwasapologizingforthefact that this had happened.”In jail he was allowed threehundredminutes amonth onthe phone—and for a longtimethekids,whenhecalled

them, didn’t pick up on theotherend.The holding facility in

which Serge spent his firstfourmonthswasviolent, andessentially nonverbal, but hedidn’t find ithard tostayoutof trouble there. He evenfoundpeoplehecouldtalkto,and enjoy talking to. Whenthey moved him to theminimum-security prison atFort Dix, in New Jersey, he

was still in a room crammedwith hundreds of otherroommates, but he now hadspace to work. He remainedin some physical distress,mainlybecausehe refused toeat meat. “His body, he hadreally bad times there,” saidMasha Leder. “He lived onbeans and rice. He wasalways hungry. I’d buy himthese yogurts and he wouldgulp them down one after

another.” His mind stillworked fine, though, and alifetime of programming incube farmshad lefthimwiththe ability to focus in prisonconditions. A few monthsintoSerge’s jail term,MashaLeder received a thickenvelope from him. Itcontained roughly a hundredpages covered on both sidesin Serge’s meticulous eight-point script. It was computer

code—a solution to somehigh-frequency tradingproblem. Serge feared that ifthe prison guards found it,they wouldn’t understand it,decide that itwas suspicious,andconfiscateit.Ayearafterhe’dbeensent

away, the appeal of SergeAleynikovwas finally heard,by the Second Circuit Courtof Appeals. The judgmentwasswift,unlikeanythinghis

lawyer, Kevin Marino, hadseen in his career. Marinowas by then working gratisfor a client who was deadbroke.Theverydayhemadehis argument, the judgesorderedSergereleased,onthegrounds that the laws hestoodaccusedofbreakingdidnotactuallyapplytohiscase.At six in the morning onFebruary 17, 2012, SergereceivedanemailfromKevin

Marinosaying thathewas tobefreed.A few months later,

Marino noticed that thegovernment had failed toreturn Serge’s passport.Marinocalledandaskedforitback. The passport neverarrived; instead Serge, nowstaying with friends in NewJersey,wasarrestedagainandtaken to jail. Once again, hehad no idea what he was

being arrested for, but thistime neither did the police.The New Jersey cops whopicked him up didn’t knowthe charges, only that heshould be held without bail,as he was deemed a flightrisk. His lawyer was just asperplexed. “When I got thecall,”saidMarino,“IthoughtitmighthavesomethingtodowithSerge’schildsupport.”Itdidn’t. A few days later,

Manhattan district attorneyCyrusVancesentoutapressrelease to announce that theState of New York wascharging Serge Aleynikovwith “accessing andduplicating a complexproprietary and highlyconfidential computer sourcecode owned by GoldmanSachs.” The press releasewent on to say that “[t]hiscodeissohighlyconfidential

that it is known in theindustry as the firm’s ‘secretsauce,’ ” and thankedGoldman Sachs for itscooperation. The prosecutorassigned to the case, JoanneLi, claimed that Sergewas aflight risk and needed to bere-jailedimmediately—whichwas strange, because Sergehad gone to and returnedfromRussiabetweenthetimeofhisfirstarrestandhisfirst

jailing. (It was Li who soonfled the case—to a job atCitigroup.)Marino recognized the

phrase “secret sauce.” Ithadn’t come from “theindustry” but from hisopening statement in Serge’sfirst trial, when he mockedthe prosecutors for treatingGoldman’scodeas if itweresome “secret sauce.”Otherwise Serge’s re-arrest

made no sense to him. Toavoid double jeopardy, theManhattan DA’s office hadfoundnewcrimeswithwhichto chargeSerge for the sameactions. But the sentencingguidelinesforthenewcrimesmeant that, even if he wasconvicted, it was very likelyhewouldn’thavetoreturntojail. He’d already servedtime, for crimes the courtultimately determined he had

notcommitted.MarinocalledVance’s office. “They toldme that theydidn’tneedhimto be punished anymore, butthey need him to be heldaccountable,” said Marino.“They want him to pleadguiltyandlethimgoontimeserved. I told them in thepolitest terms possible thatthey cango fuck themselves.Theyruinedhislife.”Oddlyenough,theyhadn’t.

“Inside of me I wascompletely witnessing,” saidSerge, about the night of hisre-arrest.“Therewasnofear,no panic, no negativity.”Hischildren had reattachedthemselves to him, and hehadanewworldofpeopletowhom he felt close. Hethoughthewaslivinghis lifeas well as it had ever beenlived. He’d even started amemoir, to explainwhat had

happened to anyone whomight be interested. Hebegan:

Iftheincarcerationexperiencedoesn’tbreakyourspirit,itchangesyouinawaythatyoulosemanyfears.Youbegintorealizethatyourlifeisnotruledbyyouregoandambitionandthatitcanendanydayat

anytime.Sowhyworry?Youlearnthatjustlikeonthestreet,thereislifeinprison,andrandompeoplegettherebasedonthejeopardyofthesystem.Theprisonsarefilledbypeoplewhocrossedthelaw,aswellasbythosewhowereincidentallyandcircumstantiallypickedandcrushedby

somebodyelse’sagenda.Ontheotherhand,asavividbenefit,youbecomeverymuchindependentofmaterialpropertyandlearntoappreciateverysimplepleasuresinlifesuchasthesunlightandmorningbreeze.

EPILOGUE

RIDINGTHEWALLSTREET

TRAIL

For at least a fewmembersof the Women’s AdventureClub of Centre County,Pennsylvania, the weatherwas nevermuch of an issue.The Women’s AdventureClub had been created byLisa Wandel, anadministrator at Penn StateUniversity, after she realizedthatmanywomenwereafraidto hike alone in the woods.

Theclubnowhadmore thanseven hundredmembers, andits sense of adventure hadexpanded far beyond a walkin the woods. Between themthe fourwomenwhometmeon their bicycles beside thePennsylvania road had:learned the flying trapeze,swum the Chesapeake Bay,and won silver at thedownhill mountain bikingworld championships; they

had finisheda roadbike racecalled the Gran Fondo“Masochistic Metric,” afootrace called the ToughMudder, and three separatetwenty-four-hour-longmountainbikeraces;theyhadgraduated from race cardriving school and madethirteenPolarBearPlungesinsome local river in the deadof winter. After studying theWomen’s Adventure Club’s

website,Ronanhadsaid,“It’sa bunch of lunatic womenwho meet up and dodangerous shit; I got to getmywifeintoit.”In the bleak January light

wepedaledontoRoute45outof Boalsburg, Pennsylvania,headingeast,alongwhatwasonce the route for thestagecoach that ran fromPhiladelphia to Erie. It wasnine in themorning,andstill

below freezing, with a stiffbreezeloweringthewindchillto elevendegrees.Theviewswere of farms and fallowbrown fields, and the roadwas empty except for theoccasional pickup truck,roaring past us with realanger. “They hate bikers,”explained one of the womenadventurersmildly.“Theytryto see how close they canget.”

The women rode thisstretchofroadeverysooften,and had noticed when thefiber-opticlinewasbeinglaidbesideit,backin2010.Fromtimetotimeoneoftheroad’stwo lanes was closed by theline’s construction crews.You’d see these motleyqueues of bikes, cars, pickuptrucks, Amish horse-drawncarts, and farm equipmentwaitingforthetailendofthe

oncoming traffic. The crewstrenched the ground betweenthepavedroadandthefarms,making it difficult for theAmish in theirwagons togetback to their homes—sometimes you’d see theseAmish kids, the girls in theirprettypurpledresses,hoppingoff the wagon and leapingoverthetrench.Themembersof the Women’s AdventureClubhadbeentoldbyalocal

government official that thefiber-optic line was agovernment project toprovide high-speed Internetaccess to local colleges.Hearingthatitwasactuallyaprivateprojecttoprovidea3-millisecond edge to high-frequency traders, they hadsomenewquestions about it.“Howdoes a private line getaccess to a public right-of-way?”askedone.“I’mreally

curioustoknowthat.”

WE’RE IN A transition here.That’s what the GoldmanSachs people said when youasked them, in so manywords, how they could havegonefrombringingthewrathof U.S. prosecutors downupon Serge Aleynikov foremailingtheirhigh-frequency

trading computer code tohimself, to helping BradKatsuyama change the U.S.stock market in ways thatwould render Goldman’shigh-frequency tradingcomputercodeworthless.There was a connection

betweenSergeAleynikovandGoldman’s behavior onDecember19,2013.Thetrialand the publicity thatattended it caused a lot of

people to think morerigorously about the value ofGoldman Sachs’s high-frequencytradingcode.High-frequency trading had awinner-take-all aspect: Thefastest predator took homethe fattest prey. By 2013 thepeople charged withdeterminingGoldman’sstockmarket strategy hadconcluded that Goldmanwasn’tverygoodat thisnew

game,and thatGoldmanwasunlikelyevertobeverygoodat it. The high-frequencytraders would always befaster thanGoldmanSachs—or any other bigWall Streetbank. The people who ranGoldman Sachs’s stockmarket department had cometounderstandthatwhatSergehad taken wasn’t worthstealing—at least not byanyonewhosechiefneedwas

speed.The trouble for any big

Wall Street bank wasn’tsimplythatabigbureaucracywasill-suitedtokeepingpacewith rapid technologicalchange, but that the usualcompetitive advantages of abigWallStreetbankwereoflittle use in high-frequencytrading. A big Wall Streetbank’sbiggestadvantagewasits access to vast amounts of

cheap risk capital and, withthat, its ability to survive theups and downs of a riskybusiness. That meant littlewhen the business wasn’triskyanddidn’trequiremuchcapital. High-frequencytraders went home everynightwith no position in thestockmarket. They traded inthe market the way cardcounters in a casino playedblackjack: They played only

when they had an edge.That’swhytheywereabletotrade for five years withoutlosingmoneyonasingleday.A big Wall Street bank

reallyhadonlyoneadvantagein an ever-faster financialmarket: first shot at its owncustomers’ stock markettrades. So long as thecustomers remained insidethedarkpool,andinthedark,thebankmightprofit at their

expense. But even here thebankwould never do the jobasefficientlyorthoroughlyasa really good HFT. It washard to resist the pressure tohand the prey over to themore skilled predator, toensure that the killwas donequickly and discreetly, andthen, after the kill, to join inthe feast as a kind of juniorpartner—though more juniorthanpartner.Inthedarkpool

arbitrage IEX hadwitnessed,for instance, HFT capturedabout85percentofthegains,leaving thebankwith just15percent.The new structure of the

U.S. stock market hadremoved the big Wall Streetbanks from their historic,lucrativeroleasintermediary.At the same time it created,for any big bank, someunpleasant risks: that the

customer would somehowfigure out what washappeningtohisstockmarketorders. And that thetechnology might somehowgo wrong. If the marketscollapsed, or if another flashcrash occurred, the high-frequency traders would nottake85percentof theblame,orbear85percentofthecostsoftheinevitablelawsuits.Thebanks would bear the lion’s

share of the blame and thecosts.The relationshipof thebigWall Street banks to thehigh-frequency traders, whenyou thought about it, was abitliketherelationshipoftheentiresociety to thebigWallStreet banks. When thingswentwell,theHFTguystookmost of the gains; whenthings went badly, the HFTguys vanished and the bankstookthelosses.

Goldmanhadfiguredallofthisout—probablybefore theother big Wall Street banks,tojudgefromitstreatmentofIEX.ByDecember19,2013,thepeoplenewlyinstalledontopofGoldmanSachs’sstockmarket operations, RonMorgan and Brian Levine,wantedtochangethewaythemarket worked. They wereobviously sincere.They trulybelievedthatthemarketatthe

heart of the world’s largesteconomy had grown toocomplex, and was likely toexperience some catastrophicfailure. But they also weretryingtoputanendtoagamethey could never win—orcontrol.Andsothey’dflippedaswitch,andsentlotsoftheircustomers’ stock marketorderstoIEX.Whentheydidthis they started a processthat, if allowed to play out,

wouldtakebillionsfromWallStreet and return it toinvestors.Itwouldalsocreatefairness.AbigWallStreetbankwas

a complex environment.There were people insideGoldman Sachs less thanpleased by what Levine andMorgan had done. And afterDecember 19 the firm hadretreated, just a little bit. Itwas hard even for Brad

Katsuyama to know why.Wasitchangingitscollectivemind? Had it underestimatedthe cost of being the firstmover? Was it too much toask Goldman Sachs to lookupfromshort-termprofitandstudythelandscapedowntheroad? It was possible thatevenGoldman Sachs did notknow the answers to thosequestions. Whatever theanswers, something Brian

Levine had said still made alotofsense.“Therewillbealot of resistance,” he’d said.“There will be a lot ofresistance. Because atremendous infrastructurehasbeenbuiltuparoundthis.”It’s worth performing a

Goldman Sachs–like cost-benefit analysis of thisinfrastructure, from the pointof view of the economy it ismeant to serve. The benefit:

Stockmarketpricesadjust tonew information a fewmilliseconds faster than theyotherwise might. The costsmake for a longer list. Oneobviouscost is the instabilityintroduced into the systemwhen its primary goal is nolonger stability but speed.Another is the incalculablebillionscollectedbyfinancialintermediaries.Thatmoneyisa tax on investment, paid for

by the economy; and themore that productiveenterprise must pay forcapital, the less productiveenterprise there will be.Another cost, harder tomeasure,wastheinfluenceallthis money exerted, not justonthepoliticalprocessbutonpeople’sdecisionsaboutwhatto do with their lives. Themore money to be madegamingthefinancialmarkets,

themorepeoplewoulddecidethey were put on earth togamethefinancialmarkets—andcreateromanticnarrativestoexplain to themselveswhya life spent gaming thefinancial markets is apurposeful life. And thenthere is maybe the greatestcost of all: Once very smartpeoplearepaidhugesumsofmoneytoexploittheflawsinthe financial system, they

have the spectacularlydestructiveincentivetoscrewthe system up further, or toremainsilentastheywatchitbeingscrewedupbyothers.The cost, in the end, is a

tangled-up financial system.Untangling it requiresactsofcommercial heroism—andeven then the fix might notwork. There was simply toomuchmoreeasymoneytobemade by elites if the system

worked badly than if itworked well. The wholeculturehadtowanttochange.“Weknowhowtocurethis,”asBradhadputit.“It’sjustamatter ofwhether the patientwantstobetreated.”

FOR A LONG stretch along theSpread Networks line, therewas no happy place for a

rider to stop. The road’sshoulderwasnarrow,andthecornfields beside it wereplanted with No Trespassingsigns. Apart from the plasticsoda bottle and the carcassesofdeerkilledbythespeedingpickup trucks, and a shop ortwo, the landscape looked alot like it once did from thePhiladelphia-Erie stagecoach.The most insistent signs ofmodernity were the white

poleswiththeirbrightorangedomes, every few hundredyards, installed three and ahalf years earlier. After tenmilesorsowefoundanopenfield without a sign andpulled over beside a white-and-orange pole. The polesstretched into the distance inbothdirections.Anambitioushiker or cyclist could followthemallthewaytoabuildingbeside the Nasdaq stock

exchange, inNew Jersey; or,ifheturnedandheadedwest,to the Chicago MercantileExchange.Acrosstheroadwasalocal

landmark: the Red RoundBarn. One of the womenrepeated a rural legend,saying that the red barn hadbeenbuiltintheroundsothatmicehadnocornersinwhichto hide. “People don’t knowhowtoliveinaworldthatis

transparent,”BradKatsuyamahad said, and mice wereprobably no better at it.Beyond the barn was amountain. On top of themountain was a microwavetower—a string of them, infact, perched on themountainsabovethevalleyinwhichthelinewasburied.It takes roughly 8

milliseconds to send a signalfrom Chicago to New York

and back by microwavesignal, or about 4.5millisecondslessthantosendit inside an optical fiber.When Spread Networks waslaying its line, theconventional wisdom wasthat microwave could neverreplace fiber. It might befaster, but whatever wasgoing on betweenNewYorkand Chicago required hugeamounts of complicated data

tobesentbackandforth,anda microwave signal couldn’ttransmit nearly asmuch dataas a signal in a fiber-opticcable. Microwave signalsneeded a direct line of sightto get towherever theyweregoing, with nothing inbetween. And microwavesignals didn’t travel well inbadweather.But what if microwave

technology improved? And

what if the data essential forsomehigh-frequencytradertogainanedgeoverinvestorsinthemarketwasn’tactuallyallthat complicated? And whatif the tops of mountainsaffordedadirect lineofsightbetween distant financialmarkets?The risks taken by high-

frequency traders were notthe usual risks taken bypeople who purport to sit in

themiddleofmarkets,buyingfrom sellers and selling tobuyers. They didn’t riskbuyingabunchofsharesinafalling stock, or selling abunch of shares in a risingone. They were too skittishandwell informed for that—with one obvious exception.Theywereall exposed to therisk that the entire stockmarketwouldmove,byalot.A big high-frequency trader

might “make markets” inseveral thousand individualstocks inNewJersey.As thepurposeof thesebuyandsellorderswasnottobuyandsellstockbut to teaseoutmarketinformation from others, theorderswouldtypicallybetinyineachstock:100sharesbid,100sharesoffered.Therewaslittle risk in any individualcase but great risk in theaggregate.If,say,somepiece

of bad news hit the market,and the entire stock marketfell, it would take all theindividualstockswithit.Anyhigh-frequency traders whodid not receive advancewarningwouldbeleftowning100 shares each of severalthousanddifferentstockstheydidnotwanttoown,withbiglossesineach.But the U.S. stock market

hadanaccidentalbeautytoit,

from the point of view of atrader who wished to tradeonlywhenhehadsomeedge.The bigmoves occurred firstin the futures market inChicago, before sweepinginto the markets forindividualstocks.Ifyouwereable to detect these moves,and warn your computers inNew Jersey of pricemovements in Chicago, youcould simply withdraw your

bids for individual stocksbefore the market fullyrealized that it had fallen.That’s why it was soimportant for high-frequencytraders to move informationfaster than everyone elsefrom the futures exchange inChicago to the stockmarketsin New Jersey: to flee themarket before others. Thisracewas run not just againstordinary investors, or even

Wall Street banks, but alsoagainst other high-frequencytraders. The first high-frequency trader to reachNew Jersey with the newscould sell 100 shares each inthousands of different stockstotheothers.After some obligatory

staring at the Red RoundBarn,wejumpedbackonourbikes and continued. A fewmiles down the road, we

turned onto the road leadingto the summit of amountainwithatowerontopofit.Thewoman who had won thesilver medal at the downhillmountain biking worldchampionshipssighed.“Ilikegoingdownmore thangoingup,”shesaid,thentookoffatspeed, leaving everyone elsebehind.Soon Iwaswatchingthe backs of female riders,climbing rapidly. It could

have been worse: TheAppalachians are mercifullyoldandworn.Thisparticularmountain, once the size of aSwissAlp,hadbeenshrunkenbyhalfabillionyearsofbadweather. It was now almostbeneath the dignity of theWomen’sAdventureClub.It took maybe twenty

minutes to puff to the top ofthe road, where the womenadventurers stood waiting.

From therewe turned onto asmaller road leading into thewoods, headed in thedirection of themountaintop.We rode through the woodsforafewhundredyardsuntilthe road ended—or, rather,was barricaded by a newmetal gate.Thereweditchedourbikes,leaptoverthesignswarning of various dangers,and hiked onto a gravel paththat continued to the

mountaintop. The womendidn’t think twice about anyof this: To them it was justanother adventure. A fewminutes later the microwavetowercameintoview.“Iclimbeduponeof these

towers once,” one of thewomensaidabitwistfully.The tower was 180 feet

high, with no ladder, andfestooned with electricalequipment. “Whydidyoudo

that?”Iasked.“Iwaspregnantanditwas

alotofwork,”shereplied,asifthatansweredthequestion.“Andthat’swhyyourbaby

had seven toes!” hooted oneoftheotherwomen,andtheyalllaughed.If one of the women had

hoppedoverthefencearoundthe tower and climbed to thetop, she would have had anunobstructedviewofthenext

tower and, from there, thetower beyond. This was justone in a chain of thirty-eighttowers that carried news ofthe direction of the stockmarketfromChicagotoNewJersey: up or down; buy orsell; in or out. We walkedaround the site. The towershowedsomesignsofage. Itcouldhavebeenerectedsometime ago, for some otherpurpose. But the ancillary

equipment—the generator, aconcrete bunker to hold Godknows what—was all shinyand new. The repeaters thatamplify financial signalsresembled kettle drums,bolted onto the side of thetower: These were also new.The speed with which theytransmitted signals, and withwhich the computers oneither end of the chain oftowersturnedthesignalsinto

financialactions,werestillasdifficulttocomprehendastheforces of nature once hadbeen. Anything said aboutthem could be believed.People no longer areresponsibleforwhathappensin the market, becausecomputers make all thedecisions. And in thebeginning God created theheavenandtheearth.Inoticed,beforewe left, a

metal plate attached to thefencearoundthetower.Onitwas a FederalCommunicationsCommission license number:1215095. The number, alongwith an Internet connection,was enough to lead aninquisitivepersontothestorybehind the tower. Theapplicationtousethetowertosend amicrowave signal hadbeenfiledinJuly2012,andit

hadbeenfiledby. . .well,itisn’t possible to keep any ofthis secret anymore. A day’sjourney in cyberspace wouldlead anyone who wished toknow it into anotherincrediblebuttrueWallStreetstory, of hypocrisy andsecrecyandtheendlessquestby human beings to gain acertain edge in an uncertainworld.Allthatoneneededtodiscover the truth about the

towerwasthedesiretoknowit.

ACKNOWLEDGMENTS

The U.S. financial systemhas experienced manychanges since I first enteredit, and one of them is in itsrelationshiptoanywriterwho

attempts to figure outwhat’sgoing on inside of it. WallStreet firms—not just thebigbanks but all of them—havegrown greatly moreconcerned than they were inthe late 1980s with whatsome journalist might sayabout them. To judge onlyfrom their behavior, theyhavealotmoretofear.Theyare more likely than theyonce were to seek to shape

anystorytoldaboutthem.Atthe same time, the peoplewhoworkinthesefirmshavegrown more cynical aboutthem, and more willing toreveal their inner workings,so long as their name is notattached to these revelations.As a result, I am unable tothank many of the peopleinside banks and high-frequency trading firms andstock exchanges who spoke

openly about them, andhelpedmetocomprehendtheseeminglyincomprehensible.Some other people not

mentioned in this book wereimportant to its creation.JacobWeisbergreadanearlydraft and had shrewd thingsto say about it. At differenttimes and in different ways,Dacher Keltner, TabithaSoren, and Doug Stumpflistened to me drone on at

length about what I wasworking on, and respondedwith thoughts that neverwould have occurred to me.Jaime Lalinde helped me,invaluably,inresearchingthecase of Serge Aleynikov. Iapologize to RyanHarrington,atW.W.Norton,for sending him chasingaround for illustrations that Ithought might be useful butwhich turned out to be a

dumb idea. He did it verywell,though.Starling Lawrence has

editedmy books since I firststartedwritingthem,withhispeculiar combination ofencouragement anddetachment. He edited thisone, too, and I’ve neverbenefited so much from hisunwillingness to allowme toenjoy even the briefestmoment of self-satisfaction.

The third member of ourteam, Janet Byrne, is thefinestcopyeditorIhaveeverworkedwith.Manymorningsherenthusiasmgotmeoutofmy bed, and many eveningsher diligence prevented mefromgettingbackintoit.Finally,I’dlikenotonlyto

thank the employees of IEXbutalsotolistthembyname,so one day people can lookback and know them. They

are: Lana Amer, BenjaminAisen, Daniel Aisen, JoshuaBlackburn, DonaldBollerman, James Cape,Francis Chung, AdrianFacini, Stan Feldman, BrianFoley, Ramon Gonzalez,Bradley Katsuyama, CraigKatsuyama, Joe Kondel,Gerald Lam, Frank Lennox,TaraMcKee,RickMolakala,Tom O’Brien, Robert Park,Stefan Parker, Zoran Perkov,

Eric Quinlan, Ronan Ryan,RobSalman,PrerakSanghvi,Eric Schmid, John Schwall,Constantine Sokoloff, BeauTateyama, Matt Trudeau,Larry Yu, Allen Zhang, andBillyZhao.

ALSOBYMICHAELLEWIS

Boomerang

TheBigShort

HomeGame

TheBlindSide

Coach

Moneyball

Next

TheNewNewThing

Losers

PacificRift

TheMoneyCulture

Liar’sPoker

EDITEDBYMICHAELLEWIS

Panic

Don’tmissother

bestsellingtitles

by

MICHAELLEWIS

michaellewiswrites.com

“Itistheworkofour

greatestfinancialjournalist,atthetopofhisgame.Andit’sessentialreading.”—Graydon

Carter,VanityFair

“Lewishassuchagiftforstorytelling.

..hewritesaslucidlyforsportsfansasforthosewhoreadhimforotherreasons.”

—JanetMaslin,NewYorkTimes

“Thisdelightfullywritten,lesson-laden

bookdeservesaplaceofitsownintheBaseballHallofFame.”

—Forbes

“Somemorableandalive...oneofthose

rareworksthatencapsulateanddefineanera.”—Fortune

Copyright©2014byMichaelLewis

AllrightsreservedFirstEdition

Forinformationaboutpermissiontoreproduceselectionsfromthisbook,writetoPermissions,W.W.Norton&Company,Inc.,500FifthAvenue,New

York,NY10110

Forinformationaboutspecialdiscountsforbulkpurchases,pleasecontactW.W.NortonSpecialSalesat

specialsales@wwnorton.comor800-233-4830

BookdesignbyChrisWelchDesign

Productionmanager:JuliaDruskin

TheLibraryofCongresshascatalogedtheprintededitionasfollows:

Lewis,Michael(MichaelM.)Flashboys:aWallStreetrevolt/MichaelLewis.—FirstEdition.

pagescmIncludesbibliographicalreferencesand

index.ISBN978-0-393-24466-3(hardcover:

alk.paper)1.Stockbrokers—UnitedStates.2.Wall

Street(NewYork,N.Y.)3.Finance—UnitedStates—History—

21stcentury.I.Title.HG4628.5L492014

332.6'2092273—dc232014003208

ISBN978-0-393-24467-0(e-book)

W.W.Norton&Company,Inc.500FifthAvenue,NewYork,N.Y.

10110www.wwnorton.com

W.W.Norton&CompanyLtd.CastleHouse,75/76WellsStreet,

LondonW1T3QT