Flash Boys: A Wall Street Revolt

Chapter 7 introduces Zoran Perkov, who was working at a Wall Street tech help desk on 9/11, during which he steered many people to safety with a particular eye for the elderly and vulnerable. Perkov used his ability to keep cool under pressure to become the runner for Nasdaq’s electronic stock market, where a potential disaster was looming every second of every day. He fixated on mastering complex systems and anticipating every possible danger. This became harder as Nasdaq embraced high frequency trading, which invariably made markets more volatile to the point that Perkov could not predict incoming disasters. Perkov was fired from Nasdaq in 2012 and received an offer to join IEX and run their market. By this point, Wall Street had become far more prone to serious errors which the big firms called “glitches,” opting to blame a technical fault rather than intrinsic flaws within the system itself. This made Perkov very nervous about receiving the blame for anything that went wrong, while receiving none of the credit for what went right since that was a non-event. Katsuyama insisted that they would not hang Perkov out to dry in case of any problems, and so he joined. On October 25, 2013, the IEX exchange was up and running, with Perkov monitoring it every step of the way.

After two and a half months, IEX gathered powerful money managers to share lessons from running an exchange dedicated to fairness and transparency in the hopes of spreading their values to these money managers. The results painted a discouraging portrait of Wall Street as a whole. No one followed IEX’s lead in publishing the rules of their dark pool. Other firms had spread rumors about IEX having ulterior motives or that its leaders were corrupt. Firms often ignored their own investors’ wishes to route trades to the IEX, and when they did send orders, they were often in 100-share batches, an amount commonly used as bait by HFTs. Another IEX employee, a former Air Force systems analyst named Josh Blackburn, figured out that the big firms were using small buys to make noise and drive up prices to discourage lower prices, forcing buyers and sellers to look elsewhere—preferably dark pools run by those same firms. Banks had already been trying to undermine one another’s dark pools, but now firms were pumping up their own dark pools even when they had an opportunity to fulfill their customer’s orders at lower prices. Katsuyama remained confident that modeling better behavior could have a positive influence, if only out of a desire to avoid another crisis like the one Wall Street had precipitated in 2007 and 2008. A sign of hope came when two executives from Goldman Sachs contacted Katsuyama out of their concern that their rival Morgan Stanley had fully embraced HFT for enormous profits. They feared that competition among the big firms for the fastest technology would bring about a crash. In late December, Goldman began to rout orders through IEX in earnest, generating a massive surge in their market share. The triumphant day represented the clearest sign of hope that IEX really could change the way Wall Street operated.