Flash Boys: A Wall Street Revolt by Michael Lewis Read Free Book Online Page B

others.”
    After Brad persuaded Rob to return to RBC, he had the perfect person to figure out what had happened to the U.S. stock market. And in Brad, Rob saw the perfect person to grasp and explain to others whatever he discovered. “All Brad needs is a translator from computer language to human language,” said Park. “Once he has a translator, he completely understands it.”
    Brad wasn’t exactly shocked when RBC finally gave up looking for someone to run its mess of an electronic trading operation and asked him if he would take it over and fix it. Everyone else was shocked when he agreed to do it, as (a) he had a safe and cushy $2-million-a-year job running the human traders and (b) RBC had nothing to add to electronic trading. The market was cluttered; big investors had only so much space on their desks for trading algorithms sold by brokers; and Goldman Sachs and Morgan Stanley and Credit Suisse had long since overrun that space and colonized it. All that was left of RBC’s purchase of Carlin was the Golden Goose. Thus Brad’s first question to the Golden Goose: How do we plan to make money? They had an answer: They planned to open RBC’s first “dark pool.” That, as it turned out, was what the Golden Goose had been up to all along, writing the software for the dark pool.
    Dark pools were another rogue spawn of the new financial marketplace. Private stock exchanges, run by the big brokers, they were not required to reveal to the public what happened inside them. They reported any trade they executed, but they did so with sufficient delay that it was impossible to know exactly what was happening in the broader market at the moment the trade occurred. Their internal rules were a mystery, and only the broker who ran a dark pool knew for sure whose buy and sell orders were allowed inside. The amazing idea the big Wall Street banks had sold to big investors was that transparency was their enemy . If, say, Fidelity wanted to sell a million shares of Microsoft Corp.—so the argument ran—they were better off putting them into a dark pool run by, say, Credit Suisse than going directly to the public exchanges. On the public exchanges, everyone would notice a big seller had entered the market, and the market price of Microsoft would plunge. Inside a dark pool, no one but the broker who ran it had any idea what was happening.
    The cost of RBC’s creating and running its own dark pool, Brad now learned, would be nearly $4 million a year. Thus his second question for the Golden Goose: How will we make more than $4 million from our own dark pool? The Golden Goose explained that they’d save all sorts of money in fees they paid to the public exchanges—by putting together buyers and sellers of the same stocks who came to RBC at the same time. If RBC had some investor who wanted to buy a million shares of Microsoft, and another who wanted to sell a million shares of Microsoft, they could simply pair them off in the dark pool rather than pay Nasdaq or the New York Stock Exchange to do it. In theory this made sense; in practice, not so much. “The problem,” said Brad, “was RBC was two percent of the market. I asked how often we were likely to have buyers and sellers to cross. No one had done the analysis.” The analysis, once finished, showed that RBC, if it opened a dark pool and routed all its clients’ orders into it first, would save about $200,000 a year in exchange fees. “So I said, ‘Okay, how else will we make money?’ ”
    The answer that came back explained why no one had bothered to do any analysis on dark pools in the first place. There was a lot of free money to be made, the computer programmers explained, by selling access to the RBC dark pool to outside traders. “They said there were all these people who will pay to be in our dark pool,” recalled Brad. “And I said, ‘Who would pay to be in our dark pool?’ And they said, ‘High-frequency traders.’ ” Brad tried to think of good