Flash Boys: A Wall Street Revolt (25 page)

In March 2012 the BATS exchange had to pull its own initial public offering because of “technical errors.” The next month, the New York Stock Exchange canceled a bunch of trades by mistake because of a “technical glitch.” In May, Nasdaq bungled the initial public offering of shares in Facebook Inc. because, in essence, some investors who submitted orders to buy those shares changed their minds before the price was agreed upon—and certain Nasdaq computers couldn’t deal with the faster speeds at which other Nasdaq computers allowed the investors to change their minds. In August 2012, the computers of the big HFT firm Knight Capital went berserk and made stock market trades that cost Knight $440 million and triggered the company’s fire sale. In November, the NYSE suffered what was termed a “matching engine outage” and was forced to halt trading in 216 stocks. Three weeks later, a Nasdaq employee clicked the wrong icon on his computer screen and stopped the public offering of shares in a company called WhiteHorse Finance. In early January 2013, BATS announced that, because of some unspecified computer error, it had, since 2008, inadvertently allowed trades to occur, illegally, at prices worse (for the investor) than the National Best Bid and Offer.

That was just a sampling from a single year of what were usually described as “technical glitches” in the new, automated U.S. stock markets: Collectively, they had experienced twice as many outages in the two years after the flash crash as in the previous ten. The technical glitches were accompanied by equally bewildering irregularities in stock prices. In April 2013, the price of Google’s shares fell from $796 to $775 in three-quarters of a second, for instance, and then rebounded to $793 in the next second. In May the U.S. utilities sector experienced a mini–flash crash, with stocks falling by 50 percent or more for a few seconds before bouncing back to their previous prices. These mini–flash crashes in individual stocks that now occurred routinely went largely unnoticed and unremarked upon.
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Zoran liked to argue that there were actually fewer, not more, “technical glitches” in 2012 than there had been in 2006—it was only the financial consequences of system breakdowns that had grown. He also took issue with the word “glitch.” (“It’s the worst word in the world.”) When some machine malfunctioned and a stock market came under scrutiny, the head of that market usually had no clue either what had happened or how to fix it: He was at the mercy of his technologists. But he had to say something, and so he said that there had been a “technical glitch.” It was as if there was no way to explain how the financial market actually worked—or didn’t—without resorting to fuzzy metaphors and meaningless words.
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If stock market computer–related problems were to be reduced to a single phrase, Zoran preferred it to be “normal accidents.”
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When Bollerman called him again, late in the summer of 2012, IEX had an idea, and the first glimmer of hope that they would find money. That the idea was also idealistic made Zoran skeptical; he wasn’t sure it was possible ever to make a financial market fair. But he absolutely loved the idea of running a market he helped to design—to limit the number of things in it he could not control. He came in to IEX to meet Brad and Rob and John Schwall and Ronan. Brad and Schwall and Rob liked him, Ronan not so much. “What put me off is that he wouldn’t shut the fuck up,” said Ronan.

His first few months on the job, Zoran drove everyone nuts. Lacking a market crisis, he proceeded to create a social one. They’d tell him about some new feature they had thought to introduce into the system and ask, “Will this make the system harder to manage?” To which Zoran would reply, “It depends on your definition of ‘harder.’ ” Or they would ask him if some small change in the system would cause the system to become less stable—to which Zoran would reply, “It depends on your definition of ‘stable.’ ” Every question he answered with an uneasy chuckle, followed by some other question. A rare exception came when he was asked, “Why do you always answer a question with another question?” “Clarity,” he said.

Zoran also seemed to assume that his new colleagues would fail to understand the difference between what he could control and what he couldn’t. In one thirty-day span after he joined IEX, he shot out fifteen emails on this one subject—to hammer home the mystery inherent in any stock market technological failure. He even invited a speaker to come in to reinforce the point. “It was one the few times that the people in the room wound up at each other’s throats,” said Brad. “The tech people were all agreeing with him, and the business people were saying, ‘If something melts down, how could it not be someone’s fault?’ ” Brad’s breaking point came after the guest speaker had left and Zoran circulated a blog post called “A Short Story on Human Error.” The gist of it was that when complex systems broke, it was never the fault of any one person. The post described some computer catastrophe and then concluded, “. . . you’ll notice that it wasn’t just one little thing that caused it. It wasn’t the developer who just so happened to delete the wrong table. It was a number of causes that came together to strike hard, all of them very likely to be bigger issues inside the organization rather than a problem with the individual.” At which point Brad finally walked the ten yards from his desk to Zoran’s desk and shouted, “Stop sending these fucking emails!”

And he did, finally. “I know what to do when things are exploding around me,” he later said. “But when nothing is exploding, the overthinking comes into play.”

Initially Brad was mystified: How could a guy who thrived under pressure also have such a fear of being blamed if things went wrong? “He’s so good in a crisis,” said Brad later. “In game-time situations. Under pressure. I’ve seen it. But it’s like a quarterback who is great in the game, then spends the other six days explaining how it isn’t his fault if he throws an interception. ‘
Dude, your passer rating is 110. Stop it
.’ ” Brad realized something: “It comes from a sense of insecurity that comes from the fact that he will be more recognized when things go wrong than when things go right.” Brad further realized that the problem was not peculiar to Zoran but general to Wall Street technologists. The markets were now run by technology, but the technologists were still treated like tools. Nobody bothered to explain the business to them, but they were forced to adapt to its demands and exposed to its failures—which was, perhaps, why there had been so many more conspicuous failures. (The exception was the high-frequency trading firms, where the technologists were kings. But then, the HFT firms didn’t have clients.) Nasdaq’s famously talented engineers were an extreme Wall Street case. The constant pressure on Nasdaq’s tech guys to adapt the stock markets’ code to the needs of high-frequency traders had created a miserable, politicized workplace. The Nasdaq business guys foisted all these unreasonable demands on the tech guys and then, when the demands busted the system, blamed the tech guys for the failure. The tech guys all wound up with this abused animal quality to them. “You just have to unabuse them,” Brad explained, “and let them know they aren’t going to be blamed just because something goes wrong.”
We all know that things will go wrong and it isn’t necessarily anyone’s fault.

Rob and John Schwall seemed to agree that this was the correct approach to take with the people they hired from Nasdaq: to tell them over and over that they weren’t to blame for whatever had just happened, to include them in every business discussion so that they could see why they could be a part of it, and so on. Ronan had no patience for any of it. “C’mon, they came from a corporate American job,” he said. “They didn’t come from Auschwitz.” On the other hand, in time, even Ronan saw that Zoran possessed useful qualities he hadn’t at first perceived. “Someone who will be good at running the market—you need to be the most paranoid fuck in the world,” said Ronan. “And he’s the most paranoid fuck in the world. He thinks ten steps down the road of what could go wrong—because he’s thinking of what could happen to him if it goes wrong. He’s really good at it.”

On the morning of October 25, 2013, Zoran Perkov took the subway from his home to Wall Street, as he always did. As usual, he read some book or white paper, and tried to pretend that the people around him didn’t exist. The difference between that morning and the others was that he was running early and had a stock market to open—and it was unlike any market he’d ever run. Spare, clean, single-minded, and built from the ground up by people he not only admired but now trusted. “Every single morning, the system is stateless,” he said, of exchange matching engines generally. “It doesn’t know what it’s supposed to do. Ninety-nine percent of the time, it’s the same thing it did the day before.” On this day, that could not possibly have been true, as the IEX matching engine had never actually done anything. Zoran sat down at his desk in IEX’s office and punched a few buttons and watched code scroll down his screen. He pulled out an old, battered computer mouse—then noticed it was dead. He frowned. “It’s my war mouse,” he said. “Every single market I have opened in the past ten years has been with this mouse.” He knocked it against the desk, realized that its battery had probably died, and wondered, briefly, how to replace it. “My wife mocks me because I can’t work the microwave oven but I can run a market,” he said. He switched out his war mouse for another, and checked his computer screens. The seconds ticked down; it was approaching nine thirty in the morning, when the U.S. stock market would open and, with it, this new market inside of it that aimed to transform it. He waited and watched for something to go wrong. It didn’t.

A minute before nine thirty, Brad walked over to Zoran’s desk: By popular agreement, Brad was to open the market that first day. He looked down at the keyboard, perplexed.

“What do I do?” he asked.

“Just hit Enter,” said Zoran.

The entire room counted down the final seconds before the opening.

“Five . . . four . . . three . . . two . . . one.”

Six and a half hours later, the market closed. Zoran had no idea whether the market as a whole had finished up or down for the day. Ten minutes after that he could be found, alone, pacing outside the 9/11 memorial, smoking a cigarette. “This is like the first day of the battle against complacency,” he said.

TWO AND A
half months later, sixteen people—the chief executives or the head traders of some of the world’s biggest stock market money managers—gathered in a conference room on top of a Manhattan skyscraper. They’d flown in from around the country to hear Brad describe what he’d learned about the U.S. stock market since IEX had opened for trading. From that trading, he’d gotten new information. To afford people interested in the truth even a glimpse of it was now considered faintly seditious.
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“This is the perfect seat to figure all this out,” said Brad. “It’s not like you can stand outside and watch. We had to be in the game to see it.”

The sixteen investors controlled roughly $2.6 trillion in stock market investments among them, or roughly 20 percent of the entire U.S. market. Collectively, they paid to the big Wall Street banks roughly $2.2 billion of the $11 billion a year the Street earned from stock market commissions.
¶
They weren’t exactly of one mind or spirit. A few of them were also investors in IEX, but most were not. A couple held the knowing, seemingly grown-up view that it was naïve to think that idealism could have any effect on Wall Street. A few thought it was important to remember that technology had lowered their trading costs from what they had been decades earlier—and half-turned a half-blind eye to the stunts Wall Street intermediaries had pulled to prevent technology from lowering those costs even further. But whatever their predispositions, they were all at least a little bit angry, because they all had spent the past few years listening to Brad’s descriptions of the inner workings of the U.S. stock market. They now thought of him less as a guy trying to sell them something than as a partner, in a possibly quixotic attempt to fix a financial system that had become deeply screwed up. “You kind of know what’s going on, but you don’t have a good explanation for it,” said one. “He gave us the explanation.” A second said, “This isn’t about execution. It’s about a movement. I’m sick and tired of getting fucked. When I go into the market I want to know it’s clean.” A third added, “All of a sudden the market is all about algos and routers. It’s hard to figure this stuff out. There’s no book you can read. It’s just calling up people and talking to them. From the people at the banks you can’t get a straight answer to any question. You say, ‘The sky is blue.’ They say, ‘The sky is green.’ And you’re like, ‘What are you talking about?’ And after half an hour it comes out that they have changed the definition of ‘sky.’ You know what you’re asking. They know what you’re asking. But they don’t want to answer it. The first time I talked to Brad and he was telling me how it all actually worked, my jaw must have hit the floor.”

Another investor had a question about Brad. “Why does a person take the harder path? It’s a different situation from what you typically see. If it works, he will make money. But he’ll make less” than if he had stayed at RBC.

The sixteen were all men. Most wore suits, with deep creases on the backs of their jackets that looked as if they’d been made with a bullwhip. They were different from the people who worked at the big Wall Street banks, and from the HFT guys. They were a lot less likely to bounce from firm to firm—a lot more likely to have a career in one place. They were more isolated, too: They didn’t know each other well and didn’t, until Brad suggested it, have any reason to organize themselves into any kind of fighting force. Many had just landed in New York City, and a few of them were obviously weary. Their tone was informal and familiar, with none of the usual jockeying for status. They might not all have been capable of outrage, but they were all still capable of curiosity.

At some level, they all now realized that this thirty-five-year-old Canadian guy somehow had put himself in a position to understand the United States stock market in a way that the system, possibly, had never been understood. “The game is now clear to me,” Brad said. “There’s not a press release I don’t understand.” On August 22, Nasdaq had experienced a two-hour outage caused by what they said was a technical glitch in the SIP. Brad thought he understood why it had happened: Nasdaq threw vast resources into the cool new technology used by HFT to speed up its trading and little into the basic plumbing of the market used by the ordinary investor. “Nasdaq’s got this state-of-the-art facility for HFT,” he said. “Seventeen-kilowatt liquid-cooled cabinets and cross-connects everywhere and all this shit, and then they have this single choke point in the entire market—the SIP—and they don’t care about it. The B team is servicing it.” Four days later, two of the public exchanges, BATS and Direct Edge, revealed their intention to merge. In a normal industry, the point of a merger of two companies that performed identical functions would be to consolidate—to reduce costs. But, as a subsequent press release explained, both exchanges intended to remain open after the merger. To Brad the reason was obvious: The exchanges were both at least partially owned by high-frequency trading firms, and, from the HFT point of view, the more exchanges the better.