WEBVTT - The Magic Shoebox 0:00:15.316 --> 0:00:20.636 Pushkin, Sorry to wake you up to do this. No, 0:00:20.756 --> 0:00:23.316 it's fun, all right. So what do you think the 0:00:23.316 --> 0:00:28.276 stock market is? That's my son Walker. He's eleven, roughly 0:00:28.316 --> 0:00:30.196 the same age that I was when my father sat 0:00:30.236 --> 0:00:33.916 me down for the talk. My father never did actually 0:00:33.956 --> 0:00:36.356 explain how sex work. I think he thought a person 0:00:36.396 --> 0:00:40.916 just naturally figure that out. Money was different. Money was 0:00:40.996 --> 0:00:48.076 something that needed explaining. I think the stock market is 0:00:49.036 --> 0:00:52.556 from the way I look at it at school. When 0:00:52.596 --> 0:00:55.636 I board, I can just open up the stock market 0:00:55.636 --> 0:00:58.396 app and it tells me how much a business is 0:00:58.436 --> 0:01:02.996 growing and making money. And another thing you can do 0:01:03.036 --> 0:01:06.356 with the stock market is you can invest money in it. 0:01:06.396 --> 0:01:10.676 So if the stock market grows, then your money will 0:01:10.716 --> 0:01:13.316 grow with it. Very true. Both excellent. But how do 0:01:13.356 --> 0:01:15.636 you open up the stock market app at school if 0:01:15.636 --> 0:01:18.836 you don't have a phone. It's an iPad. It's on 0:01:18.956 --> 0:01:21.836 the iPad pro they give us at school. Yeah, there's 0:01:21.876 --> 0:01:24.156 there's this little thing on that I've had this stocks 0:01:24.196 --> 0:01:27.316 and I pressed on it and now and then I 0:01:27.516 --> 0:01:30.716 just typed some random I just type fart on it 0:01:30.756 --> 0:01:33.596 and far talks came up. So I have that on 0:01:33.676 --> 0:01:38.036 my front page now, fart talks. Yeah, far talks. Is 0:01:38.036 --> 0:01:41.876 that a company? Yep, it's called Fart Do you spell it? 0:01:42.156 --> 0:01:46.796 F A R t O X FARTF What did they do? 0:01:46.996 --> 0:01:51.516 Let's just check this. It's really funny. Yeah, and it's 0:01:51.556 --> 0:01:54.556 been growing, but it has no recent story. It looks 0:01:54.956 --> 0:01:57.116 you know what it's. It's not an actual company. It's 0:01:57.116 --> 0:02:02.556 a complicated it's a complicated stock Back to the talk. 0:02:03.356 --> 0:02:05.996 We're at the desk in my office. I've pulled up 0:02:05.996 --> 0:02:09.076 the Charles Schwap stock trading page. Now. My father just 0:02:09.156 --> 0:02:11.596 tended me a little black ledger. He said it was 0:02:11.596 --> 0:02:14.796 for me to record my stock market holdings. He bought 0:02:14.796 --> 0:02:18.556 me ten shares of a restaurant company called ChartHouse because 0:02:18.596 --> 0:02:20.756 they own Burger King, and I knew what Burger King was. 0:02:21.996 --> 0:02:23.876 Tell me a company that you like, or a company 0:02:24.036 --> 0:02:29.996 who's products you really like? Here, just a company, any 0:02:29.996 --> 0:02:32.836 company like? Do you like Apple? Do you like? Oh? Yeah? Apple? 0:02:32.996 --> 0:02:36.316 Apples from my favorite. If you own a piece of apple, 0:02:37.796 --> 0:02:40.436 you you know, you might like to own it for 0:02:40.436 --> 0:02:41.876 a while, but if it goes up, you might want 0:02:41.876 --> 0:02:44.836 to sell it. Right where do you think you'd go 0:02:45.156 --> 0:02:48.636 to sell it? You kind of need a place where 0:02:48.636 --> 0:02:51.796 everybody who would want to buy shares an Apple or 0:02:51.836 --> 0:02:55.676 any other company, can meet up with anybody who wants 0:02:55.676 --> 0:02:58.556 to sell the shares an Apple or any other company. Right, 0:02:59.196 --> 0:03:00.716 so it'd be it would be great if it's just 0:03:00.716 --> 0:03:04.156 one place, and it used to be just one place, 0:03:04.196 --> 0:03:07.476 the New York Stock Exchange. That's that's what that's a 0:03:07.476 --> 0:03:10.716 stock exchange is where buyers and sellers come together to 0:03:11.116 --> 0:03:13.716 trade shares. But what if the buyers can't afford to 0:03:13.756 --> 0:03:16.876 fly all the way too, Well, that's a very good point. 0:03:16.916 --> 0:03:18.636 That can then they used to do is make a 0:03:18.636 --> 0:03:21.356 phone call or even before that, they send a telegram 0:03:21.476 --> 0:03:23.996 or even by mail, say I want to do this, 0:03:24.156 --> 0:03:27.676 and there'd be someone there for them, and that's called 0:03:28.676 --> 0:03:31.236 a stockbroker. It's a really good question because you don't 0:03:31.236 --> 0:03:32.716 want to Who wants to have to fly all the 0:03:32.716 --> 0:03:34.556 way to New York if you want to sell or 0:03:34.596 --> 0:03:40.236 buy your shares or buy shares? But now there's no 0:03:40.316 --> 0:03:44.276 people at the exchange. Now it's just computers. Now it's 0:03:44.276 --> 0:03:47.156 just computers, and like all the orders are going into 0:03:47.156 --> 0:03:51.916 computers because you can't persuade a computer, can't persuade a computer, 0:03:52.116 --> 0:03:55.396 or you can't cheat a computer. Well, that's interesting, how 0:03:55.436 --> 0:03:58.076 do you What do you mean, Well, I mean, unless 0:03:58.116 --> 0:04:02.036 you can hack into it, it's pretty hard to cheat 0:04:02.036 --> 0:04:06.036 your way into getting stock without paying anything. It's funny, 0:04:06.076 --> 0:04:08.356 that is. Mine instantly went there. Mine had two when 0:04:08.356 --> 0:04:11.716 I was his age. I looked inside the little black ledger, 0:04:12.196 --> 0:04:15.036 studied my ten shares of chart House, worth roughly two 0:04:15.116 --> 0:04:20.036 hundred bucks, this unimaginably huge sum, and I noticed a 0:04:20.116 --> 0:04:25.516 line item twenty bucks broker's commission. What's a broker's commission, 0:04:25.556 --> 0:04:29.316 I asked my dad. He explained, a guy charged twenty 0:04:29.316 --> 0:04:31.316 bucks just to pick up the phone and tell someone 0:04:31.356 --> 0:04:34.756 to buy the stock. What's this guy's name? I asked. 0:04:35.076 --> 0:04:38.676 I still remember this feeling of outrage, the sheer unfairness 0:04:38.676 --> 0:04:43.436 of it all, twenty bucks for a phone call. My 0:04:43.556 --> 0:04:46.476 dad told me the stockbroker's name. Then I asked where 0:04:46.516 --> 0:04:49.156 the stockbroker lived, and my father told me that too. 0:04:49.276 --> 0:04:51.556 The guy lived in a great, big house a few 0:04:51.556 --> 0:04:54.876 blocks away from us. Then a where he looked across 0:04:54.956 --> 0:04:57.436 my dad's face. Why do you want to know where 0:04:57.476 --> 0:05:00.476 he lives, he asked, because I'm gonna go egg his house. 0:05:00.516 --> 0:05:03.196 I said, because that's just what you did to grown 0:05:03.276 --> 0:05:06.156 ups who behaved badly. You egged their houses, which is 0:05:06.196 --> 0:05:08.316 to say that when I first learned how the people 0:05:08.356 --> 0:05:11.916 inside the stock market got themselves paid, I was genuinely 0:05:11.956 --> 0:05:19.116 pissed off. I'm Michael Lewis and this is Against the Rules, 0:05:19.316 --> 0:05:21.436 a show about the attack on the authority of the 0:05:21.476 --> 0:05:25.036 referee in American life and what that's doing to our 0:05:25.116 --> 0:05:27.916 idea of fairness. And we're now at the end of 0:05:27.916 --> 0:05:32.196 our season, the final episode in which we try to 0:05:32.196 --> 0:05:37.236 answer the question why on earth would anyone ever want 0:05:37.236 --> 0:05:41.636 to be a referee? Do you want to get in 0:05:41.836 --> 0:05:46.916 front of the battle? You care? Yeah, that's good. This 0:05:46.956 --> 0:05:52.676 is where I'm in a car outside of Dublin, in 0:05:52.756 --> 0:05:58.516 the village of Dalky. God, it's gloomy. Thank you for 0:05:58.556 --> 0:06:01.996 coming and getting us. God, I'm with Am and Ryan. 0:06:02.516 --> 0:06:05.156 He'd spent his career in the nineteen seventies and eighties 0:06:05.196 --> 0:06:08.516 as a civil servant. His job was to encourage foreigners 0:06:08.556 --> 0:06:11.596 to invest in Ireland, which back then seemed a hopeless task. 0:06:12.756 --> 0:06:15.316 In nineteen ninety, the Irish government had moved him and 0:06:15.316 --> 0:06:18.876 his family to the United States to Greenwich, Connecticut. They 0:06:18.876 --> 0:06:22.916 were transported to what was and is ground zero for 0:06:22.996 --> 0:06:27.316 America's money culture, our bond traders and investment bankers and 0:06:27.356 --> 0:06:34.076 hedge fund managers. Did you all enjoy living in the 0:06:34.116 --> 0:06:38.036 States or was it the first months were difficult? What 0:06:38.156 --> 0:06:42.236 did you What made it difficult? It was the people 0:06:42.796 --> 0:06:46.556 were a bit snooty. Yeah, a bit snooty, he says, 0:06:46.716 --> 0:06:48.836 in case you didn't hear it, Well they are, yeah, 0:06:48.876 --> 0:06:52.476 they're there. Yeah. I guess there are places in the 0:06:52.516 --> 0:06:54.916 States where you could have found snoot to your people, 0:06:55.356 --> 0:07:01.236 but not many. I think there farkersies number five yeah, yeah, yeah, 0:07:01.356 --> 0:07:06.396 and sometimes they are yeah. When the Ryans moved from Ireland, 0:07:06.636 --> 0:07:08.996 they had no errors about anything except maybe the fact 0:07:08.956 --> 0:07:12.276 that they had no heirs. Ireland was still a poor country. 0:07:12.836 --> 0:07:15.076 The Ryans weren't fancy and didn't really care to be. 0:07:15.956 --> 0:07:18.476 They weren't inclined to look down on other people or 0:07:18.556 --> 0:07:20.836 look up to them, and were suspicious of anyone who 0:07:20.876 --> 0:07:25.396 did either. In other words, they were Irish desired in Jersey. 0:07:25.436 --> 0:07:29.556 What did he play soccer? Yeah, football, soccer, yeah, just 0:07:29.636 --> 0:07:34.996 there on the other side, and that's his sister. They 0:07:35.076 --> 0:07:38.516 remained in America four years. They sent their sixteen year 0:07:38.516 --> 0:07:41.196 old son, Ronan to Greenwich High School and then on 0:07:41.276 --> 0:07:44.876 to Fairfield University, where Ronan developed a secret love for 0:07:44.956 --> 0:07:48.876 a kind of person his parents never fully understood, the 0:07:48.956 --> 0:07:57.516 American money person. Take me back to the first encounter 0:07:57.676 --> 0:08:03.596 you ever have with the US stock market years ago, 0:08:03.676 --> 0:08:06.116 my junior year in college. They gave us tours of 0:08:06.476 --> 0:08:08.636 the New York Stock Exchange floor. This was in nineteen 0:08:08.716 --> 0:08:12.556 ninety five. That's Ronan, and there was literally thousands of 0:08:12.596 --> 0:08:15.276 people pushing and shoving. And at the end of the day, 0:08:15.276 --> 0:08:17.156 when I'm leaving the office AE five, these guys had 0:08:17.196 --> 0:08:19.836 walked out an hour before. It was flashy cars. They 0:08:19.836 --> 0:08:21.676 were wearing their jackets and the bars. They were kind 0:08:21.716 --> 0:08:24.196 of like the cool kids post college. So I just 0:08:24.556 --> 0:08:27.796 I just thought it was interesting. Actually more than interesting. 0:08:28.076 --> 0:08:30.276 Ronan wanted to be one of them, one of those 0:08:30.316 --> 0:08:32.956 people on the lucky side of America. He had no 0:08:32.996 --> 0:08:35.276 connections and no money and no real reason to think 0:08:35.316 --> 0:08:38.596 Wall Street was waiting for him. And really he wasn't 0:08:38.676 --> 0:08:41.996 much like the Wall Street traders. They were big and 0:08:42.076 --> 0:08:46.196 he was slight. They projected confidence and he projected doubt. 0:08:47.196 --> 0:08:49.596 Yet he insisted that Wall Street was where he was 0:08:49.636 --> 0:08:53.276 going to himself. That is, he didn't dare whisper any 0:08:53.316 --> 0:08:55.556 of this to his parents or his friends, it would 0:08:55.556 --> 0:08:59.516 have sounded phony. He knew his parents would say, going 0:08:59.556 --> 0:09:02.436 to Wall Street, why have you started farting channel number five? 0:09:03.756 --> 0:09:06.956 As Ronan approached college graduation, his interest in being a 0:09:07.036 --> 0:09:10.796 stock market trader became an obset. He wrote dozens of 0:09:10.876 --> 0:09:14.036 letters to every Wall Street firm, even the small ones. 0:09:14.556 --> 0:09:18.516 He received only one reply, a form letter. So I 0:09:18.596 --> 0:09:22.396 graduated in June. My parents had already moved back to Ireland. 0:09:22.476 --> 0:09:25.756 I was living with my friend's mother on the floor 0:09:25.756 --> 0:09:27.956 of her apartment, looking for a job, and it wasn't 0:09:27.996 --> 0:09:30.076 going swimmingly well. And then I got a call one 0:09:30.156 --> 0:09:34.396 day from a guy from MCI. MCI was a phone company. 0:09:35.196 --> 0:09:38.356 He went to work for the phone company, and not 0:09:38.436 --> 0:09:40.596 for the glamorous part of it, And it started off 0:09:40.596 --> 0:09:44.116 as something called a national account support consultant. And they 0:09:44.116 --> 0:09:46.116 shipped me off to Atlanta for a couple of weeks 0:09:46.116 --> 0:09:48.396 and started training me on fiber optic gables and the 0:09:48.436 --> 0:09:52.356 difference between glass and copper, and network switches and voice 0:09:52.396 --> 0:09:55.356 and data. And I was just doing pagers on people's belts. 0:09:55.596 --> 0:09:57.476 I was doing voice, you know, I was working with 0:09:57.556 --> 0:10:00.076 travel agents. You know. I would go up to some 0:10:00.196 --> 0:10:03.236 offices in the Bronx where they literally had phone boots 0:10:03.236 --> 0:10:05.356 for people who wanted to call home to Columbia or 0:10:05.356 --> 0:10:08.956 El Salvador and couldn't afford to a few years later, 0:10:09.236 --> 0:10:12.716 Ronan moved from the phone company to another company called Radiance. 0:10:13.716 --> 0:10:16.116 Radiance was in sort of the same business as MCI. 0:10:16.356 --> 0:10:19.036 It helped people to move their data around, Only Radiance 0:10:19.356 --> 0:10:23.036 was helping people who worked with Wall Street traders, traders 0:10:23.036 --> 0:10:25.676 who wanted to speed up their trades in various stock markets. 0:10:26.596 --> 0:10:29.316 In the early two thousands, all the stock markets, the 0:10:29.396 --> 0:10:32.356 New York Stock Exchange in NASDAC and the others had 0:10:32.396 --> 0:10:34.796 up and moved out of New York City to New Jersey, 0:10:35.236 --> 0:10:38.556 where floor space was cheaper. They had also gotten rid 0:10:38.596 --> 0:10:41.236 of all the human beings who worked on their trading floors. 0:10:41.716 --> 0:10:45.236 The guys Ronan had once found so cool. The stock 0:10:45.276 --> 0:10:48.796 markets were now simply stacks of computers inside New Jersey 0:10:48.876 --> 0:10:52.356 data centers. The old New York Stock Exchange basically became 0:10:52.396 --> 0:10:56.756 nothing more than a stage set for CNBC. One day 0:10:56.796 --> 0:11:00.236 at Radiance, Ronan got a strange call from a trader 0:11:00.236 --> 0:11:03.356 in Kansas City. The guy wanted Ronan to figure out 0:11:03.396 --> 0:11:06.116 why his stock market orders were taking so long to 0:11:06.116 --> 0:11:10.276 reach the stock exchanges in New Jersey, and it's taking 0:11:10.356 --> 0:11:14.196 him forty three milliseconds round trip for these trades to 0:11:14.556 --> 0:11:16.876 be acknowledged. And I remember my inner monologue at the 0:11:16.916 --> 0:11:18.516 time is I don't even know what the hell a 0:11:18.556 --> 0:11:21.196 millisecond is. But I said, Ted, that sounds terrible. I 0:11:21.276 --> 0:11:26.436 think I can help you. A millisecond is one thousandth 0:11:26.476 --> 0:11:29.036 of a second. It takes roughly four hundred milliseconds to 0:11:29.076 --> 0:11:32.516 blink your eye if you do it fast. Ronan knew 0:11:32.556 --> 0:11:34.476 that the guy's biggest problem was that he was in 0:11:34.596 --> 0:11:37.716 Kansas City. Data travels at the speed of light, but 0:11:37.756 --> 0:11:41.316 it still travels. The further you are from the stock exchanges, 0:11:41.396 --> 0:11:43.356 the longer it takes for your trades to get to them. 0:11:43.596 --> 0:11:46.316 So Ronan moved the guy's trading machines into a building 0:11:46.316 --> 0:11:49.436 in New Jersey near the stock exchanges and dropped his 0:11:49.476 --> 0:11:53.156 trading time from forty three milliseconds to three point nine milliseconds, 0:11:53.796 --> 0:11:56.116 or roughly one hundredth of the time it takes you 0:11:56.156 --> 0:11:59.356 to blink your eye if you do it fast. And 0:11:59.436 --> 0:12:01.396 this guy came up to visit his computer, as I 0:12:01.396 --> 0:12:04.556 guess a few weeks later and he was thrilled. And 0:12:04.796 --> 0:12:06.516 you know, according to what he told me, I was 0:12:06.516 --> 0:12:08.196 trying to ask him, I'm like, what's the value of 0:12:08.196 --> 0:12:11.076 a millisecond? I'm very pleased that you, as my client, 0:12:11.156 --> 0:12:13.316 are happy. I just have no idea why you are. 0:12:13.716 --> 0:12:17.116 And his explanation was in the first I believe, he said, 0:12:17.116 --> 0:12:19.116 the first four or five days of trading out of 0:12:19.156 --> 0:12:22.036 New Jersey, same strategy that I was running in Kansas. 0:12:22.436 --> 0:12:25.996 I've made more additional profit than to pay for your 0:12:26.036 --> 0:12:30.116 services for eighteen months. Anyway, words soon got out across 0:12:30.116 --> 0:12:31.956 Wall Street, and if you wanted to make your trades 0:12:31.996 --> 0:12:35.596 go faster, you call Ronan Ryan, and Ronan was soon 0:12:35.676 --> 0:12:38.556 helping all these high frequency traders, as they were called. 0:12:39.476 --> 0:12:41.916 Ronan had no idea how they were making their money, 0:12:42.076 --> 0:12:45.716 but they would use these mysterious terms like sniffing out 0:12:45.796 --> 0:12:48.196 the whale order, and they'd be like, yeah, you know, 0:12:48.676 --> 0:12:52.036 we can see footprints of large orders entering the market, 0:12:52.076 --> 0:12:54.396 and we can you know, basically, if we see there's 0:12:54.436 --> 0:12:56.956 demand of a stock because a big pension firm or 0:12:57.316 --> 0:12:59.556 mutual fund is trying to buy it, we can buy 0:12:59.556 --> 0:13:01.236 it ahead of them and sell it back to them. 0:13:01.236 --> 0:13:05.236 For more, Ronan was running these super straight fiber optic 0:13:05.316 --> 0:13:08.756 lines across New Jersey. He was scoping out the data 0:13:08.796 --> 0:13:12.396 centers that housed the exchanges to find the shortest paths 0:13:12.516 --> 0:13:16.516 from the traders computers to the stock exchange computers. The 0:13:16.556 --> 0:13:19.356 stock exchanges didn't really understand what was going on, at 0:13:19.436 --> 0:13:22.796 least at first, but then high frequency traders started to 0:13:22.836 --> 0:13:26.356 offer the stock exchanges huge sums of money for what 0:13:26.516 --> 0:13:30.436 seemed like absurdly small things like a shorter cable between 0:13:30.436 --> 0:13:34.476 the traders computers and the stock exchanges computers, and they 0:13:34.556 --> 0:13:38.036 all insisted on having their computers inside the same buildings 0:13:38.076 --> 0:13:42.596 in New Jersey. Co location, they called it. The stock 0:13:42.596 --> 0:13:47.516 exchanges became a peculiar kind of landlord. Just the amount 0:13:47.516 --> 0:13:50.956 that they charge these co located clients to connect them. 0:13:51.036 --> 0:13:53.196 You pay it again into the building and then to 0:13:53.276 --> 0:13:55.636 get from your spot in the building to the exchanges 0:13:55.716 --> 0:13:59.156 meet me point is bananas like. They'll charge as much 0:13:59.156 --> 0:14:02.236 as forty thousand dollars a month for a cable. Forty 0:14:02.436 --> 0:14:06.076 thousand dollars a month for a cable that you could 0:14:06.076 --> 0:14:10.196 buy retail for two hundred bucks. Ronan had no clear 0:14:10.316 --> 0:14:12.956 idea why these big shots were throwing so much money 0:14:12.996 --> 0:14:16.156 around inside these New Jersey data centers, But then neither 0:14:16.196 --> 0:14:18.956 did the data centers. The American part of him just 0:14:18.996 --> 0:14:22.116 sort of went along for the ride. Whatever these people 0:14:22.156 --> 0:14:25.316 were doing must be cool and great, just another wonderful 0:14:25.396 --> 0:14:30.716 aspect of American capitalism. The Irish part of him began 0:14:30.796 --> 0:14:40.276 to wonder if that was true? And what is I 0:14:40.596 --> 0:14:48.716 X group? Group? Is a I X is a stock exchange? 0:14:50.076 --> 0:14:53.036 All people have things that set them apart. Would set 0:14:53.076 --> 0:14:56.316 Brad Katziamo apart? Was his refusal to be set apart. 0:14:59.396 --> 0:15:01.956 Ever since he was a little kid in the Toronto suburbs, 0:15:02.396 --> 0:15:04.876 people had been telling him that he was special, and 0:15:04.956 --> 0:15:07.956 he'd been refusing to take them too seriously. When he 0:15:07.996 --> 0:15:10.196 was seven, his mom told him he had been identified 0:15:10.236 --> 0:15:13.876 as gifted and offered a spot at a special school. 0:15:14.156 --> 0:15:16.236 Brad say he'd rather stay in the normal school with 0:15:16.276 --> 0:15:20.356 his friends. When he was fifteen, he ran a forty 0:15:20.436 --> 0:15:22.756 yard dash in four and a half seconds and the 0:15:22.796 --> 0:15:25.236 track coach told him he could be a star. He 0:15:25.276 --> 0:15:27.596 said he'd rather stay on the football team with his friends. 0:15:29.276 --> 0:15:32.276 At seventeen, he could have gone to any university in 0:15:32.276 --> 0:15:35.676 the world. He chose to go to Wilfrid Laurier, west 0:15:35.676 --> 0:15:40.836 of Toronto to stay with his friends. Brad never thought 0:15:40.956 --> 0:15:42.836 much about what he would do for a living, but 0:15:42.956 --> 0:15:45.996 the Royal Bank of Canada found him and hired him, 0:15:46.436 --> 0:15:49.036 and naturally told him he was going to be a star. 0:15:50.156 --> 0:15:52.076 Brad had never set foot in the United States, but 0:15:52.156 --> 0:15:55.116 right after nine to eleven RBC sent him to Wall 0:15:55.116 --> 0:15:58.596 Street to run their stock trading. He was twenty three 0:15:58.716 --> 0:16:01.636 years old, and so when the two thousand and eight 0:16:01.676 --> 0:16:05.876 financial crisis happened, Brad Casiyama was making two million dollars 0:16:05.876 --> 0:16:08.876 a year running US stock market trading for the Royal 0:16:08.876 --> 0:16:12.516 Bank of Canada. But by then, at least to him, 0:16:13.356 --> 0:16:16.996 something was feeling very wrong. The trouble started with a 0:16:17.076 --> 0:16:20.636 computer he used to trade in the stock market. Up 0:16:20.716 --> 0:16:23.516 until early two thousand and eight, the screens on his 0:16:23.596 --> 0:16:26.956 trading desk had always given him real time pictures of 0:16:26.996 --> 0:16:30.316 the market. If he wanted to buy, say, Hewlett Packard stock, 0:16:31.116 --> 0:16:33.236 he checked his computer screens to see how much of 0:16:33.276 --> 0:16:36.396 it was offered. If they said ten thousand shares were 0:16:36.396 --> 0:16:38.796 offered for sale at a certain price, Brad could hit 0:16:38.796 --> 0:16:42.036 a button and buy all ten thousand shares. At that price. 0:16:42.996 --> 0:16:47.436 Then one day he couldn't Basically my just the computer says, okay, 0:16:47.436 --> 0:16:49.196 well you didn't buy ten thousand, you bought eight thousand, 0:16:49.996 --> 0:16:54.756 and so it was bothersome, But you kind of tend 0:16:54.796 --> 0:16:59.436 to rewire your brain to realize that tradings computerized. It's 0:16:59.436 --> 0:17:02.156 a fast moving market. Things are happening. Maybe someone else 0:17:02.196 --> 0:17:04.716 wanted to buy Hewlett Packard at the same time I 0:17:04.716 --> 0:17:07.476 wanted to buy it. The issue is that by two 0:17:07.476 --> 0:17:09.476 thousand and eight the problem got worse. Instead of buying 0:17:09.876 --> 0:17:12.116 eighty percent of what I saw, I'd get sixty percent. 0:17:12.156 --> 0:17:14.276 By two thousand and nine, instead of getting sixty I'd 0:17:14.276 --> 0:17:16.916 get forty percent of what I saw. So I was 0:17:16.996 --> 0:17:21.076 missing entire chunks of stock, millions of dollars worth of stock, 0:17:21.116 --> 0:17:27.196 of essentially just disappearing. Brad isn't buying and selling stock 0:17:27.316 --> 0:17:30.476 just for himself or for the Royal Bank of Canada. Mainly, 0:17:30.516 --> 0:17:33.356 he's acting on behalf of big American and Canadian pension 0:17:33.356 --> 0:17:36.396 funds and mutual funds and the ordinary people whose money 0:17:36.396 --> 0:17:41.396 they managed. His losses are also their losses, and he 0:17:41.476 --> 0:17:44.836 can't figure out why they're mounting. His first thought was 0:17:44.876 --> 0:17:47.796 it was a computer problem. Maybe the buttons on his 0:17:47.916 --> 0:17:51.276 keyboard didn't work or something. The Royal Bank of Canada's 0:17:51.316 --> 0:17:54.196 geek squad turned up at his desk and told him 0:17:54.236 --> 0:17:57.716 the computer buttons work fine. It was Brad who was 0:17:57.756 --> 0:18:01.076 the problem. They said. He wasn't pressing the button fast enough, 0:18:01.716 --> 0:18:04.356 and I'd count to five or seven or ten, whatever, 0:18:04.756 --> 0:18:07.396 nothing would happen. Then I'd press the button, and then 0:18:07.396 --> 0:18:08.996 I'd miss shares in the stock with your hires. It 0:18:09.036 --> 0:18:12.476 was very clear that it wasn't someone else wanted to 0:18:12.476 --> 0:18:14.876 buy Hewlett Packard because I wanted to buy it, and 0:18:14.996 --> 0:18:17.916 something between me pressing the button and my trade actually executing, 0:18:18.316 --> 0:18:21.516 something was happening, but I could never get a real 0:18:21.556 --> 0:18:25.876 answer as to what was happening. Brad figured out that 0:18:25.916 --> 0:18:28.116 whatever was happening had to do with the way information 0:18:28.156 --> 0:18:31.276 had started to travel. By two thousand and nine, the 0:18:31.316 --> 0:18:34.676 stock exchanges were in some weird relationship with these new traders, 0:18:34.716 --> 0:18:38.956 these so called high frequency traders. But Brad hadn't completely 0:18:38.956 --> 0:18:41.996 worked out was exactly what enabled these guys to know 0:18:42.036 --> 0:18:45.796 what he was doing before he even did it. But 0:18:45.836 --> 0:18:47.796 then he heard about this person who helped make high 0:18:47.836 --> 0:18:52.516 speed traders go faster, An Irish guy named Ronan Ryan, 0:18:53.556 --> 0:18:56.076 like people here, Oh, the exchanges are in New Jersey. 0:18:56.076 --> 0:18:57.396 If you don't live in New Jersey, I live in 0:18:57.396 --> 0:18:59.396 New Jersey. I happen to know where Mahwa is. I 0:18:59.436 --> 0:19:02.276 know where Secaucus is. You live in New York. Brad 0:19:02.316 --> 0:19:04.356 lived in New York and the clue where these places wore. 0:19:04.836 --> 0:19:07.356 And these are things that were fairly rudimentary to me. 0:19:07.476 --> 0:19:09.716 Not because I'm smarter than anybody else Wall Street, It's 0:19:09.756 --> 0:19:11.516 just this is the industry that I grew up with. 0:19:13.236 --> 0:19:16.436 Ronan explained to Brad what happened when he pushed the 0:19:16.476 --> 0:19:22.316 button to trade that instantaneous was not instantaneous. The signal 0:19:22.356 --> 0:19:25.396 Brad sent to buy ten thousand shares of Hewlett Packard 0:19:25.876 --> 0:19:29.236 needed to travel from his desk at one Liberty Plaza 0:19:29.356 --> 0:19:33.116 in Lower Manhattan out to the data centers scattered across 0:19:33.156 --> 0:19:37.276 the Jersey suburbs, to the New stock markets full of 0:19:37.316 --> 0:19:41.596 server racks trading stocks. So one press of the button, 0:19:41.636 --> 0:19:43.756 what I thought was an instantaneous action was actually a 0:19:43.756 --> 0:19:47.236 series of action that happened over the course of many milliseconds. 0:19:47.756 --> 0:19:52.516 High speed traders were able to buy technology and data 0:19:52.716 --> 0:19:55.076 from the exchanges to pick up a signal at one 0:19:55.116 --> 0:19:58.756 exchange and race me while my order is in flight 0:19:58.876 --> 0:20:02.036 to the other exchanges to do one of two things. One, 0:20:02.396 --> 0:20:04.516 they wanted to cancel any sell orders they had out 0:20:04.516 --> 0:20:05.956 there because here comes a big buyer. I don't want 0:20:05.956 --> 0:20:07.556 to sell any more because I know there's a buyer coming. 0:20:07.876 --> 0:20:10.796 But two, to actually buy stock ahead of me to 0:20:10.876 --> 0:20:13.796 sell back to me at a higher price. It's called 0:20:13.836 --> 0:20:16.676 front running. It's not really about being an investor yourself. 0:20:17.316 --> 0:20:20.116 It's about finding out what real investors are about to 0:20:20.156 --> 0:20:23.956 buy and buying it before they do so you can 0:20:23.996 --> 0:20:26.876 sell it to them for a higher price. You're only 0:20:26.916 --> 0:20:31.076 buying because you know I want to buy, and you're 0:20:31.076 --> 0:20:33.716 buying not to own shares in a company that you 0:20:33.756 --> 0:20:36.316 think is going to help you know, you know develop, 0:20:36.756 --> 0:20:39.236 you know, an investment return because you understand their business model. No, 0:20:39.316 --> 0:20:40.756 you're buying it just to flip it back to me 0:20:40.756 --> 0:20:43.836 because you know I want to buy it. So Brad 0:20:43.916 --> 0:20:46.036 figures all this out with a lot of help from Ronan, 0:20:46.956 --> 0:20:49.276 after which Brad takes a long look at this guy, 0:20:49.996 --> 0:20:54.196 this oddly wary irishman. Ronan still longed to be a 0:20:54.196 --> 0:20:57.916 big shot Wall Street stock Market trader, and Brad decided 0:20:57.956 --> 0:21:01.636 to make him one. Inside of a year, Ronan was 0:21:01.676 --> 0:21:08.796 earning more than a million bucks. Brad builds this team 0:21:08.796 --> 0:21:12.356 of people inside the Royal Bank of Canada. The team 0:21:12.436 --> 0:21:15.756 consists mostly of immigrants who are running tests on the 0:21:15.796 --> 0:21:19.956 American stock market to see how to unrig it, to 0:21:19.996 --> 0:21:22.076 see if they can make it impossible for their own 0:21:22.116 --> 0:21:25.116 stock market orders to be front run. So they try this. 0:21:25.756 --> 0:21:28.636 Instead of sending one signal to the four New Jersey centers, 0:21:29.196 --> 0:21:32.956 they send four different signals, so they all arrive at 0:21:32.956 --> 0:21:36.916 the four different centers at precisely the same moment each 0:21:36.916 --> 0:21:39.796 signal was in order to buy. However, many Hewlett Packard 0:21:39.876 --> 0:21:43.356 or whatever shares were for sale in just that data center, 0:21:45.396 --> 0:21:48.796 and just like that, the whole problem vanished, at least 0:21:48.796 --> 0:21:52.156 for RBC. Brad was once again able to buy all 0:21:52.236 --> 0:21:55.956 the shares for sale on his trading screen without being scalped, 0:21:56.196 --> 0:22:00.116 without electronic frontrunners in the middle of his trade. But 0:22:00.196 --> 0:22:03.396 the problem still bothered Brad because it was so obviously 0:22:03.516 --> 0:22:08.516 outrageously unfair. The US government had granted licenses to these 0:22:08.556 --> 0:22:12.476 stock changes on the condition that they referee the stock market. 0:22:12.716 --> 0:22:15.836 Winners and losers are no longer determined solely based on 0:22:15.876 --> 0:22:19.436 who understands a company better and fundamentals. It's now based 0:22:19.476 --> 0:22:22.516 on how long my cable is and do I use 0:22:22.596 --> 0:22:26.996 microwave versus fiber optic cable. We've talked about this sort 0:22:26.996 --> 0:22:30.436 of thing before in this podcast. It happened with CEO 0:22:30.516 --> 0:22:34.396 pay consultants and the ratings agencies and art connoisseurs and 0:22:34.516 --> 0:22:38.716 probably all kinds of other referees. The ref got bought. 0:22:39.356 --> 0:22:42.156 In this case, the refs are the stock exchanges. They 0:22:42.156 --> 0:22:44.556 were now providing a slow picture of the stock market 0:22:44.556 --> 0:22:47.956 to ordinary investors while selling a faster picture of that 0:22:48.076 --> 0:22:51.436 same market to a select group of high speed traders. 0:22:52.436 --> 0:22:56.036 That is like finding out the umpire makes more from 0:22:56.076 --> 0:22:58.276 selling things to one of the teams than they do 0:22:58.316 --> 0:23:00.876 from umpiring the game. One thing a lot of people 0:23:00.916 --> 0:23:04.356 don't realize is that right now New York Stock Exchange 0:23:04.356 --> 0:23:07.116 in AzaC, they make more money selling high speed data 0:23:07.116 --> 0:23:14.356