Despite the sometimes complicated nature of its main subject – high-frequency trading in a Wall Street that’s rigged – it was a fast and compelling read. And of course, I liked that it was a Canadian, Brad Katsuyama, backed by a Canadian bank, the Royal Bank of Canada (employees called the culture there “RBC nice” – not, as you might guess, a usual kind of moniker on Wall Street), who gets the ball rolling. Katsuyama realizes that every time he’d put in an order to buy shares on the market – shares that were up for sale right up to the point he pushed the button to enter his order – the shares would disappear and the price of the stock would increase.
“Brad’s problem wasn’t just Brad’s problem. What people saw when they looked at the U.S. stock market – the numbers on the screens of the professional traders, the ticker tape running across the bottom of the CNBC screen – was an illusion. ‘That’s when I realized the markets are rigged. And I knew it had to do with the technology. That the answer lay beneath the surface of the technology. I had absolutely no idea where. But that’s when the lightbulb went off that the only way I’m going to find out what’s going on is if I go beneath the surface.'” (from Flash Boys)
Katsuyama faces a somewhat Herculean task: he wants to find out how this is being done, and once he finds out, he wants to let people know. And he wants to find a way to fix things. The culprits, it turns out, are high-frequency traders who have managed to achieve a speed of access to information that gives them the mere nanoseconds advantage they need to beat the market every single time.
Eventually, Katsuyama manages to find other like-minded people and together they put together IEX, a new, fair stock exchange that the high-frequency traders can’t game. Katsuyama’s new exchange opened on October 25, 2013 and two months later, on December 19, got its big break when one of the big Wall Street banks, Goldman Sachs, sent in the exchange’s first big orders.
Since this is non-fiction, there’s no real happy-ever-after ending, which I found a little unsatisfying, although the book isn’t to blame. It’s just real life, that’s all, real life with all its uncertainties. So it’s still an uphill battle for IEX. And while IEX might be one small bright spot of fairness on Wall Street, there will always be more loopholes and more people ready and willing to take advantage of the loopholes to make billions of dollars.
It’s a never-ending story, really.
This main story in Flash Boys is an interesting one, but ultimately it was the story of Sergey Aleynikov that really captured my attention. While Goldman Sachs plays what’s essentially a good-guy role when it comes to IEX, it plays a darker role in its pursuit of criminal charges against Aleynikov, it’s ex-programmer, for theft of its code. In an article at Vanity Fair last year, Michael Lewis wrote about Aleynikov’s plight, and much of what’s in this article also appears in Flash Boys. (I highly recommend it – it’s a great read. Among other things, Lewis “re-tries” Aleynikov before a “jury” of his tech-savvy peers.)
Aleynikov was hired by Goldman Sachs to maintain its high-frequency trading software; the software itself was in the dinosaur stages, but Goldman didn’t want to build a new one from scratch. So Aleynikov spent much of his time patching things up as required.
During his two years at Goldman, Aleynikov often, as programmers do, sent himself snippets of code by uploading to an online repository. He was eventually hired by another firm to design a powerful new trading system from scratch (and in a completely different coding language, no less, which rather puts the charges against him in a whole different kind-of-ridiculous context). In the weeks prior to leaving Goldman, as he helped to bring others up to speed with maintaining Goldman’s outdated system, he continued this practice of sending himself snippets of code:
“The files contained a lot of open-source code he had worked with, and modified, over the past two years, mingled together with code that wasn’t open source but proprietary to Goldman Sachs. As he would later try and fail to explain to an F.B.I. agent, he hoped to disentangle the one from the other, in case he needed to remind himself how he had done what he had done with the open-source code, in the event he might need to do it again. He sent these files the same way he had sent himself files nearly every week, since his first month on the job at Goldman.” (from Vanity Fair)
Now, this makes perfect sense to me, and I’m not even a programmer. Mucking around with the HTML and PHP on this and a few other blogs is the extent of my coding experience. And the thing is, a lot of it wasn’t even Goldman’s original code – it was open source:
“Serge quickly discovered, to his surprise, that Goldman had a one-way relationship with open source. They took huge amounts of free software off the Web, but they did not return it after he had modified it, even when his modifications were very slight and of general, rather than financial, use.” (from Flash Boys)
(It all sounds quite familiar in the wake of the recent Heartbleed virus, doesn’t it? It seems lots of for-profit companies do this when it comes to open source code – they take and they don’t give back.)
So what happened? Aleynikov got charged under two rather ominous sounding pieces of legislation, the Economic Espionage Act of 1996 and the National Stolen Property Act, and after a trial by a non-tech-savvy jury, was convicted and sentenced to eight years in prison. He won his appeal and was released after a year of imprisonment – the appeals court ruled that the laws under which he was charged didn’t actually apply to his case.
But his story doesn’t end there. After Aleynikov’s release, Goldman Sachs continued its attack against its former programmer. A few months after his release, the state of New York charged Aleynikov with “accessing and duplicating a complex proprietary and highly confidential computer source code owned by Goldman Sachs” – essentially, a new crime for the same actions, so as to avoid double jeopardy.
So there isn’t any real ending to Aleynikov’s story either, at least not yet. The state of New York wants him to plead guilty, in exchange for letting him go on time served – as in, the time he served for a crime that the appeals court had already determined he hadn’t committed. But Aleynikov isn’t willing to do that, and really, can you blame him?