In Flash Boys: A Wall Street Revolt,’ Michael Lewis’s controversial new book about how investors are shortchanged billions of dollars by high speed technology, Lewis’s acknowledgements’ page reflects the seditious nature of his conclusion.

“People who work in these (Wall Street) firms have grown more cynical about them, and more willing to reveal their inner workings, so long as their name is not attached to these revelations.’’

Lewis says that technology has enabled high frequency traders and dark pools (private exchanges) to  “scalp’’ billions yearly from investors. The heroes of his book discovered massive inequity in trading and then spent six years figuring out how to combat and correct it.

It was not a popular campaign.  Resistance was widespread. For example, on a recent cable news program, Stifel Financial Corp. Chairman Ron Kruszewski said there are issues in the stock market that could be improved but that to call the stock market rigged, as Lewis and his book’s heroes, have,  “is reckless.’’

Lewis gives the story a David and Goliath structure:  It’s the big banks, hedge funds and HFTs versus half a dozen young men who share a passion for transparency and fairness.

These self-appointed guardians are gathered together by Brad Katsuyama, a trader with the Royal Bank of Canada who suffers culture shock when he’s transferred, in 2002 at age 24, from Toronto to RBC’s Wall Street offices.

As Lewis says, Katsuyama has a problem. It’s not only that Katsuyama, best described as “nice,’’ finds the Wall Street milieu brash and offensive, and not just that he is aghast that excess rules and many of his new acquaintances are in debt. It’s that his trading is suddenly, inexplicably, losing RBC money.

“By the spring of 2007, when his screen showed 10,000 shares of Intel offered at $22 and he pushed the button, the offers vanished. In his seven years as a trader he had always been able to look at the screens on his desk and see the stock market. Now the market as it appeared on his screen was an illusion,’’ Lewis writes.

To his horror, Katsuyama sees that the difference between what used to happen when the stock market was as stated on his screen, and what was happening by the spring of 2007 “was tens of millions of dollars’’ in losses plus fees to RBC. We were hemorrhaging money.’’
 
Over the next six years, the dogged Katsuyama hires people who help him uncover the mystery of “the illusion’’ that has changed the U.S. stock market radically.

And then, angry at apathy and resistance to correcting what they uncover --  unfair “scalping’’ of investors --  the team creates its own exchange, and calls it Investors Exchange (IEX).

Katsuyama’s core group is made up of traders, computer programmers and high-level tech trouble shooters. They are profane, apt to be loners, obsessed with minutiae, and brilliant.  Perhaps to balance the nefariousness of the greedy in his book, Lewis shows that the IEX team has flaws; they are no angels. But they are not corrupt.

They see that trades are now made by hyper-fast computing, and that the cost of being the fastest is enormous -- millions of dollars a year in fees are paid to gain an edge by having a line closest to an exchange computer network.

The shorter the trip, the faster the trading information travels. Katsuyama and company ask,  “How was it legal for a handful of insiders (big banks, HTFs, et al.) to operate at faster speeds than the rest of the market and, in effect, steal from investors?’’

Enter Regulation National Market System, passed by the SEC in 2005 and implemented in 2007, which “required brokers to find the best market prices for the investors they represented.’’ Reg NMS was implemented in response to charges of front running.

Then, the National Best Bid and Offer was implemented to measure all the bids and offers for all U.S. stocks, and that data was compiled in one place, a computer, and was called Securities Information Processor (SIP). But the savvy discovered a loophole: “It (the new regulation) failed to specify the speed of the SIP,’’ Lewis writes.

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