Hunters wolves from Wall Street. Part 3


The adaptation of the book by Michael Lewis, "Quick boys» h4> [ This is the third part of a series of translations of adaptation of a recent book by Michael Lewis. The first two parts can be read here: 1 and 2 i> - approx. pens.]

Ronan Ryan (Ronan Ryan) did not look like a trader from Wall Street. He had pale skin, sloping shoulders, and he behaved with anxious vigilance man survived a massive famine and awaits the coming of the new. In addition, he lacked the typical Wall Street trader with the ability to seem smarter and more capable than he actually was. And yet, he longed to work here, since the day when he 20-year-old man first saw marketplaces Wall Street. "It's hard to resist the temptation to introduce ourselves to all these guys from Wall Street, who are afraid and who earn so much money," - he says.

He was born and raised in Dublin, in the 90s, at the age of 16, he moved to America. Six years later, his father called back to Ireland, and Ronan was in the States. He believed that if you have the opportunity to come back to Ireland, it is better not to do it. He chose his own version of the American dream. After graduation in 1996 he Fairfield sent letters to all banks with Wall Street, but received only one response from a company that even he was unsophisticated ideas semicriminal brokerage firms trading in penny stocks.

Eventually, he met another native Irishman who worked in the New York office of MCI Communications, a large telecommunications operator. "He gave me a job just because I was from Ireland," - says Ryan.


Brad Katsuyama and his team in IEX i>

He was always the smartest, but never learned anything "practical". He knew almost nothing about technology. And now began to study on this topic literally everything. "It's exciting, if not try to turn into botany and seek to find out how everything works," - he says. As information is transmitted over copper wires, and how - through the fiber? What is a network switch Cisco switch differs from Juniper? What at hardware companies make the most "fast" equipment and in which cities have buildings (the best - old factory premises) with floors capable of supporting the weight of the equipment? He studied, as in reality the information is transmitted from one point to another - when it is not a "straight" line owned by one telecom operator and on the winding path, which employs several companies.

"When you call from New York to Florida, you can not even imagine how many different types of equipment are involved in how to make it happen. You probably imagine that it looks like two cans and a taut piece of rope between them. But this is not so. " Communication line connecting New York and Florida, served by Verizon in New York City, AT & T and MCI in Florida between them; It winds from one locality to another.

Ryan could not be a trader, but by 2005 its customers as never was like the big banks with Wall Street. He spent the whole week in the buildings of Goldman Sachs, Lehman Brothers and Deutsche Bank, trying to pave the best routes for their fiber networks, and to find the best machine for carrying out their operations in the stock market.

In 2005 he began working at BT Radianz, a company that emerged after September 11, when the attacks on the World Trade Center brought down most of the communications systems on Wall Street. The company promised to create the system less susceptible to external attacks. Ryan Job was to sell the idea to entrust the financial world with his work information networks of Radianz. In particular, he had to sell the banks on the Rights of the joint tenancy of their computers in the datacenter Radianz in Nutley, New Jersey, so that they were closer to the actual bidding.

Shortly after Ryan took a job in Radianz, he received a call from a hedge fund in Kansas City. The caller said that the company operates in Bountiful Trust, trades on the stock market, and heard that Ryan - expert in moving financial information from one point to another. A Bountiful Trust had problems: the trading of shares between Kansas City and New York too much time spent on it to determine what happens to the orders of the company - which shares were sold or bought. The company also began to notice more and more that it cost them to place orders as the market changes so that they become irrelevant. "He said:" Our delay is 43 milliseconds, "- says Ryan. "And I said," What the hell is a millisecond? ».

"Delay" was simply the time between the moment when a signal was sent and the time when it was received. Delays in the trading system is determined by several factors: the "box", "logic", "line". "Boxes" designates vehicles through which the signal on the way from point A to point B: it could be a server, signal amplifiers and network switches. "Logic" is called software-programmed instructions, which led the "box". Ryan did not work particularly well understood software - except that wrote it, apparently, the guys with a strong Russian accent.

"Lines" of fiber optic cables were who passed information from one "box" to the other. First and foremost indicator from which depended transmission rate was the length of the fiber or the distance at which the signal was transmitted. Ryan did not know what a millisecond, but I understood what the problem hedge fund of Kansas City, he was in Kansas City. Light in vacuum travels at 186,000 miles per second, or, in other words, 186 miles per millisecond. Light in the fiber optics "bounces" from the walls and moves at a speed equal to only 2/3 of the theoretically possible speed. "Physics can not be fooled - this is what traders do not understand," - says Ryan.

By the end of 2007 Ryan earned hundreds of thousands of dollars a year, creating a system that accelerates trading on the stock markets. And each time amazed at how little knew those he helped, the technologies that they used. Except that he knew almost nothing about their customers. Among them were the big banks - Goldman Sachs, Citigroup - which heard everything. Other clients - Citadel, Getco - were known in narrower circles. He learned that some of the clients were hedge funds - which meant that they were taking money from outside investors. But most of them were private trading houses, or "prop shopami» [ Eng. prop shops i> - approx. pens.], only trade with money of its founders. A large number of companies with which he worked - Hudson River Trading, Eagle Seven, Simplex Investments, Evolution Financial Technologies, Cooperfund, DRW - were unknown, and it is more than happy with.

Prop shops behaved particularly strange, because they were both prosperous and short-lived. "Usually in the room were five. All - geeks. The leader of each such five - a particularly arrogant copy of any of them. " Today prop shop trading and closed tomorrow, and all of his staff went to work in any large bank with Wall Street. Ryan saw one group more than others - four Russian and one Chinese. Arrogant Russian guy obviously their leader, named Vladimir, and he and his boys jumped from prop shop to the bank and back, doing write code to make decisions on the basis of current market data, thus opening up opportunities for high-frequency trading. Ryan watched their meeting with one of the most senior employees of large banks with Wall Street, which had hoped to entice them to yourself - "big shot" frankly to him fawning. "He comes to the meeting and said:" I usually - the most important person in the room, but in this case, the most important person - Vladimir. "

« I needed someone from the industry , to confirm the correctness of my guesses," - says Katsuyama. More specifically, he needed someone who knows the underlying processes of the world of high-frequency trading. He spent most of the year on "Cold calling» [ Eng. cold-calling - practice calls or visits by the seller or broker to a potential client without prior arrangement, solely on the initiative of the seller or broker i> - approx. pens.] strangers in search strategies from the world of high-frequency trading, ready "to play against the rules." He had already begun to suspect that every person to understand what traders earn high, he was getting too much to stop and explain what they do. He had to find another approach.

In autumn 2009 Katsuyama each of Deutsche Bank mentioned one Irish guy who seems to have been the best in the world expert in helping traders to be the fastest even faster. Robin Ryan Katsuyama phoned and invited him for an interview about the work on the RBC. In this interview, Ryan described what he saw inside the exchanges: mad competition for a nanosecond, the client attempts to establish their cars as close as possible to the servers exchanges, tens of millions of dollars spent by high-frequency traders for a tiny speed advantage. The US stock market was now the class system consisting of haves and have nots, only now the haves were not capital, and the speed (which allows to amass capital). Haves pay for a nanosecond, the poor had no idea how valuable these nanosecond. Haves enjoy spectacular views of the market, the poor also have never seen the market. "An hour conversation with him, I learned more than six months reading [of high-frequency trading]," - says Katsuyama. "As soon as I met him, I realized that it is necessary to hire them».

He wanted to hire Ryan at the moment has not yet been able to fully explain - neither his superiors nor Ryan himself - why he hired him. He could not call it «вице-президент-отвечающий-за-объяснение-моим-невежественным-боссам-почему-высокочастотный-трейдинг-это-полная-чушь». So he called it a "strategic manager for high-frequency trading." And Ryan finally got a job on the trading floor Wall Street.

Katsuyama and his team turned the "problem" in the Thor program product that RBC could sell to investors. They did not control the path a signal to get to the stock exchanges, and did not know what the traffic in the networks. Sometimes orders required four milliseconds to get to NYSE, and sometimes - seven. In short, Thor was inconsistent - because, as explained Ryan, the ways in which the signal was coming from the computer to the various exchanges Katsuyama, were inconsistent. The signal sent from the computer Katsuyama joining the Exchange in New Jersey at different times because some exchanges have been removed from the place of work Katsuyama more than others. As fast as possible the high frequency signal trader passes from the first to the last of the stock exchange or 465 microseconds for one two-hundredth of the time that we spend on the blink (microseconds - is one millionth of a second). Therefore, to trade orders Katsuyama interacted with the market in its state, which shows computer screens, they had to come all the exchanges during this 465-microsecond window.

To prove his point, Ryan brought an increase in several maps of New Jersey showing the fiber optic networks built by telecommunications companies. Maps tell the story: any Trading signal emerged on Lower Manhattan, held at West Side Highway and out of the Lincoln Tunnel. Immediately after the tunnel in Vihokene, New Jersey, was the exchange BATS. From BATS were more convoluted ways - they had to run through a randomly lined the Jersey suburbs. "Now New Jersey packed with wires like a turkey on Thanksgiving - stuffing" - says Ryan. One way or another signal went west to Secaucus, where were located the family exchange Direct Edge, which owned jointly by Goldman Sachs and Citadel, and to the south, where Carteret family settled exchange Nasdaq.

NYSE, distant less than a mile from the computer Katsuyama, was the closest relative to it the stock market - but the card Ryan showed that the fiber optic cable ran under the Manhattan roundabout way. "To get from Liberty Plaza and 55 Water Street, the signal had to pass through Brooklyn" - he explained. "To get to Midtown Manhattan in the business center, the signals have to walk 50 miles. And in order to achieve a building across the road - 15 miles ».


Office IEX Manhattan i>

Katsuyama cards, among other things, helped to understand why the market data on the exchange BATS were so accurate. The reason that they are always able to buy or sell 100% of the shares offered for BATS, was the fact that the market has always been the first stock market, which accounts warrants Katsuyama. News about their purchases and sales by this time had not yet had time to disperse to the rest of the SEC. Inside BATS high trading companies waited for news that they could use for trading on other venues. Unsurprisingly, BATS and was created by high-frequency traders.

As a result, Brad Katsuyama have come to understand that even the most sophisticated investors do not know what is happening in their own markets. No big mutual funds like Fidelity and Vanguard. No large investment management firm, as T. Rowe Price and Capital Group. Not even the most experienced hedge funds. Legendary investor David Einhorn (David Einhorn), for example, was shocked; just react and Loueb Dan (Dan Loeb), another prominent hedge fund manager. Bill Ackman (Bill Ackman) led the famous hedge fund, Pershing Square, often purchase large amounts of shares of certain companies. During the two years before Katsuyama appeared in his office to explain what is happening, Ackman began to suspect that people may use information about its trades to trade ahead of the curve. "I always felt the leak of information" - says Ackman. "I thought maybe this is the prime broker. It turned out that this is not the type of leak, which I expected. " Sales Specialist of RBC, is responsible for the program Thor, recalls how once called him a large investor to say, "You know, I thought I knew what to make money, but apparently not, because I do not was not the slightest understanding of what happens ».

Katsuyama and Ryan for two met with about 500 professional invesorami who controlled the trillions of dollars in securities. Most of them have reacted the same way: they feel that something is going wrong, but did not realize that, and after learning were outraged. Daniel Vincent (Vincent Daniel), a partner in the company Seawolf, long look at this pair of dissimilar - Canadian of Asian descent from the bank, which no one heard, and the Irishman, the impression of Dublin handyman who had just told him the incredible true story that he had ever heard. In response, the investor said, "The greatest is your competitive advantage lies in the fact that you do not want [...] I».

Confidence on Wall Street was - still is - possible. Large investors who trusted Katsuyama, began to share any information they have received from their other brokers. For example, some of them demanded his other brokers to Wall Street know how much percent of transactions carried out on their behalf, were held inside the dark pools of liquidity. The most famous dark pools led Goldman Sachs and Credit Suisse, but each brokerage firm pleading for something to investors wishing to buy or sell large amounts of shares is carried out within the dark pool of the brokerage firm. In theory, the brokers had to look to its customers the best price.

If the customer would like to buy shares of Chevron, and the best price was on the NYSE, the broker did not have to insist on a less attractive price inside their dark pool. But dark pools operated transparently. Their rules were closed. Nobody from the outside did not know what was happening inside. And the likelihood that traders broker trade against his client within his own dark pool, was very great, because the rules prohibiting it, did not exist. And while brokers denied that inside their dark pools may exist conflicts of interest, all dark pools showed the same strange feature: a huge number of customer orders that are sent to dark pools there and executed.

Even investors giants had to take on faith that Goldman Sachs or Merrill Lynch acted in their best interests, despite the obvious financial incentives to the contrary. As Mike said Gitlin of T. Rowe Price: «Just very difficult to prove that any broker directs trades in some place other than that which is beneficial to you.



See also

New and interesting