Haim Bodek, genius quant developer of trading software, explains in The Wall Street Code how US financial markets are rigged using High Frequency Trading, bots trading thousands of times a second, some with deliberately unfair and no doubt illegal advantages.
Bodek uses a metaphor of standing in line to buy Metallica tickets when they go on sale at 6 PM. The scalpers hanging around you have close relationships with the venue. They may be big buyers of tickets, own part of the venue, or be connected in other ways. At 6 PM, the ticket sales open and and suddenly the scalpers have somehow teleported to the beginning of the line.
Similarly, special order types allow certain bots to get their orders filled first. They then buy and sell to those behind them in line. The profits may only be a penny per share. However, it’s done millions of times a day on large volumes, so the profits are enormous. And it’s essentially riskless. (Until it’s not, of course. We now have the increasing spectacle of flash crashes when markets go into a black hole and no one knows why.)
The algos wait for and ferret out when big institutional trades are about to happen, especially from pension funds. They call this “dumb money”, “low hanging fruit,” and “dinner.” This is where they make their money. So, everything an institutional trader buys costs a little more and they get a little less when they sell. This, of course, affects pension profits, and your pension (if you are lucky enough to have one.)
From the makers of the much-praised Quants: the Alchemists of Wall Street and Money & Speed: Inside the Black Box. Now the long-awaited final episode of a trilogy in search of the winners and losers of the tech revolution on Wall Street. Could mankind lose control of this increasingly complex system?
VPRO Backlight has just released the documentary we did with them earlier this year. Wall Street Code is about the blatant and planned fixing of, specifically, the US financial markets. After meeting with Haim Bodek and being introduced by him to the guys at Sang Lucci, we decided to ban together and contact Marije. The following is a culmination of that initial meeting and the specials skills possessed by the journalists at VPRO. @DirtyAutomatik aka Bryan Wiener who was Haim Bodek’s head trader and makes a special appearance worth noting.