Flash Boys: A Wall Street Revolt (16 page)

Schwall’s private investigations also revealed to Brad just how little the technical people understood of their role in the financial world. “It’s not like you are building a bridge connecting two pieces of land,” he said. “You can’t see the effects of what you are doing.” The openness with which the Credit Suisse technologists described their activities made him aware of a larger, almost charming obliviousness. “I was totally shocked when John started to pull out these résumés,” he recalled. “The banks had adopted a policy of saying as little as possible about what they were actually doing. They’d fire people for being quoted in the newspaper, but in their LinkedIn pages those same people said whatever they wanted.” From the way the engineers described their roles in the new financial system, he could see that they had no clue about the injustices of that system. “It told me that these tech guys were completely oblivious to what they were working on,” he said. “They were tying these things they were working on—helping the bank to make markets in their dark pools; building automated systems for the bank to use with its customers—in a way you never would if you understood what the banks were doing. It’s like saying on your LinkedIn profile, ‘I have all the skills of a robber and I know this one house intimately.’ ”

Schwall had started out looking for the villains who were committing crimes against the life savings of ordinary Americans, fully aware of their own villainy. He wound up finding, mainly, a bunch of people who had no idea of the meaning of their own lives. In his searches, Schwall noticed something else, though at first he didn’t know what to make of it: A surprisingly large number of the people pulled in by the big Wall Street banks to build the technology for high-frequency trading were Russians. “If you went to LinkedIn and looked at one of these Russian guys, you would see he was linked to all the other Russians,” said Schwall. “I’d go to find Dmitri and I’d also find Misha and Vladimir and Tolstoy or whatever.” The Russians came not from finance but from telecom, physics, medical research, university math departments, and a lot of other useful fields. The big Wall Street firms had become machines for turning analytically minded Russians into high-frequency traders. Schwall filed that fact away for later, as something perhaps worth thinking about.

_____________

*
It is irritating to read about an American bank that insists on calling itself a banc. The banc in this case was pushed to do so, as the securities divisions within American banks (here, Bank of America) are prohibited by regulators from referring to themselves as banks.

†
A year later, in 2012,
Wall Street Journal
reporter Scott Patterson would write an excellent history of the early electronic traders called
Dark Pools
.

‡
“There’s a culture in the SEC of not getting into a dialogue with any individual who comes in,” says a staffer who listened to Brad Katsuyama’s presentation. “They don’t want to give any one person an unfair peek at the way the SEC thinks. But it’s a very defensive culture. And there were people in the room who had written some of the rules he was implicitly criticizing.”

§
In early 2013, one of the largest high-frequency traders, Virtu Financial, publicly boasted that in five and a half years of trading it had experienced just one day when it hadn’t made money, and that the loss was caused by “human error.” In 2008, Dave Cummings, the CEO of a high-frequency trading firm called Tradebot, told university students that his firm had gone four years without a single day of trading losses. This sort of performance is possible only if you have a huge informational advantage.

¶
A former employee of Citadel who also once had top secret security clearance at the Pentagon says, “To get into the Pentagon and into my area, it took two badge swipes. One to get into the building and one to get into my area. Guess how many badge swipes it took me to get to my seat at Citadel? Five.”

**
Those nine banks, in order of their (fairly evenly distributed) 2011 market share, from highest to lowest: Credit Suisse, Morgan Stanley, Bank of America, Merrill Lynch, Goldman Sachs, J.P. Morgan, Barclays, UBS, Citi, Deutsche Bank.

††
Stampfli has not been charged with any wrongdoing.

CHAPTER FIVE

PUTTING A FACE ON HFT

S
ergey Aleynikov wasn’t the world’s most eager immigrant to America, or, for that matter, to Wall Street. He’d left Russia in 1990, the year after the fall of the Berlin Wall, but more in sadness than in hope. “When I was nineteen I haven’t imagined leaving it,” he says. “I was very patriotic about Russia. I cried when Brezhnev died. And I always hated English. I thought I was completely incapable of learning languages.” His problem with Russia was that its government wouldn’t allow him to study what he wanted to study. He wasn’t religious in any conventional sense, but he’d been born a Jew, which had been noted on his Russian passport to remind everyone of the fact. As a Jew he expected to be given especially difficult entrance exams to university, which, if he passed them, would grant him access to just one of two Moscow universities that were more accepting of Jews, where he would study whatever the authorities permitted Jews to study. Math, in Serge’s case. He’d been willing to tolerate this state of affairs; however, as it happened, he’d also been born to program computers. He hadn’t laid hands on a computer until 1986, when he was already sixteen. The first thing he’d done was to write a program: He instructed the computer to draw a picture of a sine wave. When the computer actually followed his instructions, he was hooked. What hooked him, he said, was “its detailed orientation. The way it requires an ability to see the problem and tackle it from different angles. It’s not just like chess, but like solving a particular problem in chess. The more challenging problem is not to play chess but to write the code that will play chess.” He found that coding engaged him not just intellectually but also emotionally. “Writing a program is like giving birth to a child,” he said. “It is a creation. Even though it is technical, it is a work of art. You get this level of satisfaction.”

He applied to switch his major from mathematics to computer science, but the authorities forbade it. “That is what tipped me to accept the idea that perhaps Russia is not the best place for me,” he says. “When they wouldn’t allow me to study computer science.”

He arrived in New York City in 1990 and moved into a dorm room at the 92nd Street Young Men’s and Young Women’s Hebrew Association, a sort of Jewish YMCA. Two things shocked him about his new home: the diversity of the people on the streets and the fantastic range of foods in the grocery stores. He took photographs of the rows and rows of sausages in Manhattan and mailed them to his mother in Moscow. “I’d never seen so many sausages,” he says. But once he’d marveled at the American cornucopia, he stepped back from it all and wondered just how necessary all of this food was. He read books about fasting and the effects of various highly restrictive diets. “I decided to look at it a little bit further and ask what is beneficial and what is not,” he said. In the end he became a finicky vegetarian. “I don’t think all the energy you gain comes from food,” he says. “I think it comes from your environment.”

He’d come to America with no money at all, and no real idea how to get it. He took a course on how to apply for a job. “It was quite frightening,” he says. “I didn’t speak English, really, and a résumé was a totally alien concept.” His first interviewer asked Serge to tell him about himself. “To a Russian mentality,” said Serge, “that question means ‘Where are you born?’ ‘Who are your siblings?’ ” Serge described for the man at great length how he had come from a long line of Jewish scholars and academics—and nothing else. “He tells me I will hear from him again. I never do.” But he had an obvious talent for programming computers and soon found a job doing it, for $8.75 an hour, in a New Jersey medical center. From the medical center he landed a better job, in the Rutgers University computer science department, where, through some complicated combination of jobs and grants, he was able to pursue a master’s degree. After Rutgers he spent a few years working at Internet start-ups until, in 1998, he received a job offer from a big New Jersey telecom company called IDT. For the next decade he designed computer systems and wrote the code to route millions of phone calls each day to the cheapest available phone lines. When he joined the company it had five hundred employees; by 2006 it had five thousand, and he was its star technologist. That year a headhunter called him and told him that there was fierce new demand on Wall Street for his particular skill: writing code that parsed huge amounts of information at great speed.

Serge knew nothing about Wall Street and was in no particular rush to learn about it. His singular talent was for making computers go fast, but his own movements were slow and deliberate. The headhunter pressed upon him a bunch of books about writing software on Wall Street, plus a primer on how to make it through a Wall Street job interview, and told him that, on Wall Street, he could make a lot more than the $220,000 a year he was making at the telecom company. Serge felt flattered, and liked the headhunter, but he read the books and decided Wall Street wasn’t for him. He enjoyed the technical challenges at the giant telecom and didn’t really feel the need to earn more money. A year later, in early 2007, the headhunter called him again. By this time IDT was in serious financial trouble; Serge was beginning to worry that the management was running the company into the ground. He had no savings to speak of. His wife, Elina, was carrying their third child, and they’d need to buy a bigger house. Serge agreed to interview with the Wall Street firm that especially wanted to meet him: Goldman Sachs.

At least on the surface, Serge Aleynikov had the sort of life people are said to come to America for. He’d married a pretty fellow Russian immigrant and started a family with her. They’d sold their two-bedroom Cape-style house in Clifton, New Jersey, and bought a bigger colonial-style one in Little Falls. They had a nanny. They had a circle of Russians they called their friends. On the other hand, all Serge did was work, and his wife had no real clue what that work involved; they weren’t actually all that close to each other. He didn’t encourage people to get to know him well or exhibit a great deal of interest in getting to know them. He was acquiring a lot of possessions in which he had very little interest. The lawn in Clifton was a fair example of the general problem. When he’d gone hunting for his first house, he’d been enchanted by the idea of having his very own lawn. In Moscow such a thing was unheard of. The moment he owned a lawn, he regretted it. (“A pain in the butt to mow.”) A Russian writer named Masha Leder, who knew the Aleynikovs as well as anyone, thought of Serge as an exceptionally intellectually gifted but otherwise typical Russian Jewish computer programmer, for whom technical problems became an excuse not to engage with the messy world around him. “All of Serge’s life was some kind of mirage,” she said. “Or a dream. He was not aware of things. He liked slender girls who loved to dance. He married a girl and managed to have three kids with her before he figures out he doesn’t really know her. He was working his ass off and she would spend the money he was making. He would come home and she would cook him vegetarian dishes. He was serviced, basically.”

And then Wall Street called. Goldman Sachs put Serge through a series of telephone interviews, then brought him in for a long day of face-to-face interviews. These he found extremely tense, even a bit weird. “I was not used to seeing people put so much energy into evaluating other people,” he said. One after another, a dozen Goldman employees tried to stump him with brain teasers, computer puzzles, math problems, and even some light physics. It must have become clear to Goldman (it was to Serge) that he knew more about most of the things he was being asked than his interviewers did. At the end of the first day, Goldman invited him back for a second day. He went home and thought it over: He wasn’t all that sure he wanted to work at Goldman Sachs. “But the next morning I had a competitive feeling,” he says. “I should conclude it and try to pass it because it’s a big challenge.”

He’d been surprised to find that in at least one way he fit in: More than half the programmers at Goldman were Russians. Russians had a reputation for being the best programmers on Wall Street, and Serge thought he knew why: They had been forced to learn to program computers without the luxury of endless computer time. Many years later, when he had plenty of computer time, Serge still wrote out new programs on paper before typing them into the machine. “In Russia, time on the computer was measured in minutes,” he said. “When you write a program, you are given a tiny time slot to make it work. Consequently we learned to write the code in ways that minimized the amount of debugging. And so you had to think about it a lot before you committed it to paper. . . . The ready availability of computer time creates this mode of working where you just have an idea and type it and maybe erase it ten times. Good Russian programmers, they tend to have had that one experience at some time in the past—the experience of limited access to computer time.”

He returned for another round of Goldman’s grilling, which ended in the office of a senior high-frequency trader—another Russian, Alexander Davidovich. The Goldman managing director had just two final questions for Serge, both designed to test his ability to solve problems. The first: Is 3,599 a prime number?

Serge quickly saw that there was something strange about 3,599: It was very close to 3,600. He jotted down the following equations:

3599 = (3600 – 1) = (60² – 1²) = (60 – 1) (60 + 1) = 59 × 61

3599 = 59 × 61

Not a prime number.

The problem wasn’t that difficult, but, as he put it, “it was harder to solve the problem when you are anticipated to solve it quickly.” It might have taken him as long as two minutes to finish. The second question the Goldman managing director asked him was more involved, and involving. He described for Serge a room, a rectangular box, and gave him its three dimensions. “He says there is a spider on the floor, and he gives me its coordinates. There is also a fly on the ceiling, and he gives me its coordinates as well. Then he asked the question: Calculate the shortest distance the spider can take to reach the fly.” The spider can’t fly or swing; it can only walk on surfaces. The shortest path between two points was a straight line, and so, Serge figured, it was a matter of unfolding the box, turning a three-dimensional object into a two-dimensional surface, then using the Pythagorean theorem to calculate the distances. This took him several minutes to work out; when he was done, Davidovich offered him a job at Goldman Sachs. His starting salary plus bonus came to $270,000.