The Magic Shoebox

Where is a millisecond worth a million dollars? The New York Stock Exchange. 

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Episode Transcript

Speaker 1 (00:15):
Pushkin, Sorry to wake you up to do this. No,
it's fun, all right. So what do you think the
stock market is? That's my son Walker. He's eleven, roughly
the same age that I was when my father sat
me down for the talk. My father never did actually
explain how sex work. I think he thought a person

(00:36):
just naturally figure that out. Money was different. Money was
something that needed explaining. I think the stock market is
from the way I look at it at school. When
I board, I can just open up the stock market
app and it tells me how much a business is

(00:58):
growing and making money. And another thing you can do
with the stock market is you can invest money in it.
So if the stock market grows, then your money will
grow with it. Very true. Both excellent. But how do
you open up the stock market app at school if
you don't have a phone. It's an iPad. It's on

(01:18):
the iPad pro they give us at school. Yeah, there's
there's this little thing on that I've had this stocks
and I pressed on it and now and then I
just typed some random I just type fart on it
and far talks came up. So I have that on
my front page now, fart talks. Yeah, far talks. Is
that a company? Yep, it's called Fart Do you spell it?

(01:42):
F A R t O X FARTF What did they do?
Let's just check this. It's really funny. Yeah, and it's
been growing, but it has no recent story. It looks
you know what it's. It's not an actual company. It's
a complicated it's a complicated stock Back to the talk.

(02:03):
We're at the desk in my office. I've pulled up
the Charles Schwap stock trading page. Now. My father just
tended me a little black ledger. He said it was
for me to record my stock market holdings. He bought
me ten shares of a restaurant company called ChartHouse because
they own Burger King, and I knew what Burger King was.
Tell me a company that you like, or a company

(02:24):
who's products you really like? Here, just a company, any
company like? Do you like Apple? Do you like? Oh? Yeah? Apple?
Apples from my favorite. If you own a piece of apple,
you you know, you might like to own it for
a while, but if it goes up, you might want
to sell it. Right where do you think you'd go

(02:45):
to sell it? You kind of need a place where
everybody who would want to buy shares an Apple or
any other company, can meet up with anybody who wants
to sell the shares an Apple or any other company. Right,
so it'd be it would be great if it's just
one place, and it used to be just one place,
the New York Stock Exchange. That's that's what that's a

(03:07):
stock exchange is where buyers and sellers come together to
trade shares. But what if the buyers can't afford to
fly all the way too, Well, that's a very good point.
That can then they used to do is make a
phone call or even before that, they send a telegram
or even by mail, say I want to do this,
and there'd be someone there for them, and that's called

(03:28):
a stockbroker. It's a really good question because you don't
want to Who wants to have to fly all the
way to New York if you want to sell or
buy your shares or buy shares? But now there's no
people at the exchange. Now it's just computers. Now it's
just computers, and like all the orders are going into
computers because you can't persuade a computer, can't persuade a computer,

(03:52):
or you can't cheat a computer. Well, that's interesting, how
do you What do you mean, Well, I mean, unless
you can hack into it, it's pretty hard to cheat
your way into getting stock without paying anything. It's funny,
that is. Mine instantly went there. Mine had two when
I was his age. I looked inside the little black ledger,

(04:12):
studied my ten shares of chart House, worth roughly two
hundred bucks, this unimaginably huge sum, and I noticed a
line item twenty bucks broker's commission. What's a broker's commission,
I asked my dad. He explained, a guy charged twenty
bucks just to pick up the phone and tell someone
to buy the stock. What's this guy's name? I asked.

(04:35):
I still remember this feeling of outrage, the sheer unfairness
of it all, twenty bucks for a phone call. My
dad told me the stockbroker's name. Then I asked where
the stockbroker lived, and my father told me that too.
The guy lived in a great, big house a few
blocks away from us. Then a where he looked across
my dad's face. Why do you want to know where

(04:57):
he lives, he asked, because I'm gonna go egg his house.
I said, because that's just what you did to grown
ups who behaved badly. You egged their houses, which is
to say that when I first learned how the people
inside the stock market got themselves paid, I was genuinely
pissed off. I'm Michael Lewis and this is Against the Rules,

(05:19):
a show about the attack on the authority of the
referee in American life and what that's doing to our
idea of fairness. And we're now at the end of
our season, the final episode in which we try to
answer the question why on earth would anyone ever want
to be a referee? Do you want to get in

(05:41):
front of the battle? You care? Yeah, that's good. This
is where I'm in a car outside of Dublin, in
the village of Dalky. God, it's gloomy. Thank you for
coming and getting us. God, I'm with Am and Ryan.

(06:02):
He'd spent his career in the nineteen seventies and eighties
as a civil servant. His job was to encourage foreigners
to invest in Ireland, which back then seemed a hopeless task.
In nineteen ninety, the Irish government had moved him and
his family to the United States to Greenwich, Connecticut. They
were transported to what was and is ground zero for

(06:22):
America's money culture, our bond traders and investment bankers and
hedge fund managers. Did you all enjoy living in the
States or was it the first months were difficult? What
did you What made it difficult? It was the people
were a bit snooty. Yeah, a bit snooty, he says,

(06:46):
in case you didn't hear it, Well they are, yeah,
they're there. Yeah. I guess there are places in the
States where you could have found snoot to your people,
but not many. I think there farkersies number five yeah, yeah, yeah,
and sometimes they are yeah. When the Ryans moved from Ireland,
they had no errors about anything except maybe the fact

(07:08):
that they had no heirs. Ireland was still a poor country.
The Ryans weren't fancy and didn't really care to be.
They weren't inclined to look down on other people or
look up to them, and were suspicious of anyone who
did either. In other words, they were Irish desired in Jersey.
What did he play soccer? Yeah, football, soccer, yeah, just

(07:29):
there on the other side, and that's his sister. They
remained in America four years. They sent their sixteen year
old son, Ronan to Greenwich High School and then on
to Fairfield University, where Ronan developed a secret love for
a kind of person his parents never fully understood, the
American money person. Take me back to the first encounter

(07:57):
you ever have with the US stock market years ago,
my junior year in college. They gave us tours of
the New York Stock Exchange floor. This was in nineteen
ninety five. That's Ronan, and there was literally thousands of
people pushing and shoving. And at the end of the day,
when I'm leaving the office AE five, these guys had
walked out an hour before. It was flashy cars. They

(08:19):
were wearing their jackets and the bars. They were kind
of like the cool kids post college. So I just
I just thought it was interesting. Actually more than interesting.
Ronan wanted to be one of them, one of those
people on the lucky side of America. He had no
connections and no money and no real reason to think
Wall Street was waiting for him. And really he wasn't
much like the Wall Street traders. They were big and

(08:42):
he was slight. They projected confidence and he projected doubt.
Yet he insisted that Wall Street was where he was
going to himself. That is, he didn't dare whisper any
of this to his parents or his friends, it would
have sounded phony. He knew his parents would say, going
to Wall Street, why have you started farting channel number five?

(09:03):
As Ronan approached college graduation, his interest in being a
stock market trader became an obset. He wrote dozens of
letters to every Wall Street firm, even the small ones.
He received only one reply, a form letter. So I
graduated in June. My parents had already moved back to Ireland.
I was living with my friend's mother on the floor

(09:25):
of her apartment, looking for a job, and it wasn't
going swimmingly well. And then I got a call one
day from a guy from MCI. MCI was a phone company.
He went to work for the phone company, and not
for the glamorous part of it, And it started off
as something called a national account support consultant. And they
shipped me off to Atlanta for a couple of weeks

(09:46):
and started training me on fiber optic gables and the
difference between glass and copper, and network switches and voice
and data. And I was just doing pagers on people's belts.
I was doing voice, you know, I was working with
travel agents. You know. I would go up to some
offices in the Bronx where they literally had phone boots
for people who wanted to call home to Columbia or
El Salvador and couldn't afford to a few years later,

(10:09):
Ronan moved from the phone company to another company called Radiance.
Radiance was in sort of the same business as MCI.
It helped people to move their data around, Only Radiance
was helping people who worked with Wall Street traders, traders
who wanted to speed up their trades in various stock markets.
In the early two thousands, all the stock markets, the

(10:29):
New York Stock Exchange in NASDAC and the others had
up and moved out of New York City to New Jersey,
where floor space was cheaper. They had also gotten rid
of all the human beings who worked on their trading floors.
The guys Ronan had once found so cool. The stock
markets were now simply stacks of computers inside New Jersey
data centers. The old New York Stock Exchange basically became

(10:52):
nothing more than a stage set for CNBC. One day
at Radiance, Ronan got a strange call from a trader
in Kansas City. The guy wanted Ronan to figure out
why his stock market orders were taking so long to
reach the stock exchanges in New Jersey, and it's taking
him forty three milliseconds round trip for these trades to

(11:14):
be acknowledged. And I remember my inner monologue at the
time is I don't even know what the hell a
millisecond is. But I said, Ted, that sounds terrible. I
think I can help you. A millisecond is one thousandth
of a second. It takes roughly four hundred milliseconds to
blink your eye if you do it fast. Ronan knew
that the guy's biggest problem was that he was in

(11:34):
Kansas City. Data travels at the speed of light, but
it still travels. The further you are from the stock exchanges,
the longer it takes for your trades to get to them.
So Ronan moved the guy's trading machines into a building
in New Jersey near the stock exchanges and dropped his
trading time from forty three milliseconds to three point nine milliseconds,
or roughly one hundredth of the time it takes you

(11:56):
to blink your eye if you do it fast. And
this guy came up to visit his computer, as I
guess a few weeks later and he was thrilled. And
you know, according to what he told me, I was
trying to ask him, I'm like, what's the value of
a millisecond? I'm very pleased that you, as my client,
are happy. I just have no idea why you are.
And his explanation was in the first I believe, he said,

(12:17):
the first four or five days of trading out of
New Jersey, same strategy that I was running in Kansas.
I've made more additional profit than to pay for your
services for eighteen months. Anyway, words soon got out across
Wall Street, and if you wanted to make your trades
go faster, you call Ronan Ryan, and Ronan was soon
helping all these high frequency traders, as they were called.

(12:39):
Ronan had no idea how they were making their money,
but they would use these mysterious terms like sniffing out
the whale order, and they'd be like, yeah, you know,
we can see footprints of large orders entering the market,
and we can you know, basically, if we see there's
demand of a stock because a big pension firm or
mutual fund is trying to buy it, we can buy

(12:59):
it ahead of them and sell it back to them.
For more, Ronan was running these super straight fiber optic
lines across New Jersey. He was scoping out the data
centers that housed the exchanges to find the shortest paths
from the traders computers to the stock exchange computers. The
stock exchanges didn't really understand what was going on, at
least at first, but then high frequency traders started to

(13:22):
offer the stock exchanges huge sums of money for what
seemed like absurdly small things like a shorter cable between
the traders computers and the stock exchanges computers, and they
all insisted on having their computers inside the same buildings
in New Jersey. Co location, they called it. The stock
exchanges became a peculiar kind of landlord. Just the amount

(13:47):
that they charge these co located clients to connect them.
You pay it again into the building and then to
get from your spot in the building to the exchanges
meet me point is bananas like. They'll charge as much
as forty thousand dollars a month for a cable. Forty
thousand dollars a month for a cable that you could
buy retail for two hundred bucks. Ronan had no clear

(14:10):
idea why these big shots were throwing so much money
around inside these New Jersey data centers, But then neither
did the data centers. The American part of him just
sort of went along for the ride. Whatever these people
were doing must be cool and great, just another wonderful
aspect of American capitalism. The Irish part of him began

(14:30):
to wonder if that was true? And what is I
X group? Group? Is a I X is a stock exchange?
All people have things that set them apart. Would set

(14:53):
Brad Katziamo apart? Was his refusal to be set apart.
Ever since he was a little kid in the Toronto suburbs,
people had been telling him that he was special, and
he'd been refusing to take them too seriously. When he
was seven, his mom told him he had been identified
as gifted and offered a spot at a special school.

(15:14):
Brad say he'd rather stay in the normal school with
his friends. When he was fifteen, he ran a forty
yard dash in four and a half seconds and the
track coach told him he could be a star. He
said he'd rather stay on the football team with his friends.
At seventeen, he could have gone to any university in
the world. He chose to go to Wilfrid Laurier, west

(15:35):
of Toronto to stay with his friends. Brad never thought
much about what he would do for a living, but
the Royal Bank of Canada found him and hired him,
and naturally told him he was going to be a star.
Brad had never set foot in the United States, but
right after nine to eleven RBC sent him to Wall
Street to run their stock trading. He was twenty three

(15:58):
years old, and so when the two thousand and eight
financial crisis happened, Brad Casiyama was making two million dollars
a year running US stock market trading for the Royal
Bank of Canada. But by then, at least to him,
something was feeling very wrong. The trouble started with a
computer he used to trade in the stock market. Up

(16:20):
until early two thousand and eight, the screens on his
trading desk had always given him real time pictures of
the market. If he wanted to buy, say, Hewlett Packard stock,
he checked his computer screens to see how much of
it was offered. If they said ten thousand shares were
offered for sale at a certain price, Brad could hit
a button and buy all ten thousand shares. At that price.

(16:42):
Then one day he couldn't Basically my just the computer says, okay,
well you didn't buy ten thousand, you bought eight thousand,
and so it was bothersome, But you kind of tend
to rewire your brain to realize that tradings computerized. It's
a fast moving market. Things are happening. Maybe someone else
wanted to buy Hewlett Packard at the same time I

(17:04):
wanted to buy it. The issue is that by two
thousand and eight the problem got worse. Instead of buying
eighty percent of what I saw, I'd get sixty percent.
By two thousand and nine, instead of getting sixty I'd
get forty percent of what I saw. So I was
missing entire chunks of stock, millions of dollars worth of stock,
of essentially just disappearing. Brad isn't buying and selling stock

(17:27):
just for himself or for the Royal Bank of Canada. Mainly,
he's acting on behalf of big American and Canadian pension
funds and mutual funds and the ordinary people whose money
they managed. His losses are also their losses, and he
can't figure out why they're mounting. His first thought was
it was a computer problem. Maybe the buttons on his

(17:47):
keyboard didn't work or something. The Royal Bank of Canada's
geek squad turned up at his desk and told him
the computer buttons work fine. It was Brad who was
the problem. They said. He wasn't pressing the button fast enough,
and I'd count to five or seven or ten, whatever,
nothing would happen. Then I'd press the button, and then
I'd miss shares in the stock with your hires. It

(18:09):
was very clear that it wasn't someone else wanted to
buy Hewlett Packard because I wanted to buy it, and
something between me pressing the button and my trade actually executing,
something was happening, but I could never get a real
answer as to what was happening. Brad figured out that
whatever was happening had to do with the way information
had started to travel. By two thousand and nine, the

(18:31):
stock exchanges were in some weird relationship with these new traders,
these so called high frequency traders. But Brad hadn't completely
worked out was exactly what enabled these guys to know
what he was doing before he even did it. But
then he heard about this person who helped make high
speed traders go faster, An Irish guy named Ronan Ryan,

(18:53):
like people here, Oh, the exchanges are in New Jersey.
If you don't live in New Jersey, I live in
New Jersey. I happen to know where Mahwa is. I
know where Secaucus is. You live in New York. Brad
lived in New York and the clue where these places wore.
And these are things that were fairly rudimentary to me.
Not because I'm smarter than anybody else Wall Street, It's
just this is the industry that I grew up with.
Ronan explained to Brad what happened when he pushed the

(19:16):
button to trade that instantaneous was not instantaneous. The signal
Brad sent to buy ten thousand shares of Hewlett Packard
needed to travel from his desk at one Liberty Plaza
in Lower Manhattan out to the data centers scattered across
the Jersey suburbs, to the New stock markets full of

(19:37):
server racks trading stocks. So one press of the button,
what I thought was an instantaneous action was actually a
series of action that happened over the course of many milliseconds.
High speed traders were able to buy technology and data
from the exchanges to pick up a signal at one
exchange and race me while my order is in flight

(19:58):
to the other exchanges to do one of two things. One,
they wanted to cancel any sell orders they had out
there because here comes a big buyer. I don't want
to sell any more because I know there's a buyer coming.
But two, to actually buy stock ahead of me to
sell back to me at a higher price. It's called
front running. It's not really about being an investor yourself.
It's about finding out what real investors are about to

(20:20):
buy and buying it before they do so you can
sell it to them for a higher price. You're only
buying because you know I want to buy, and you're
buying not to own shares in a company that you
think is going to help you know, you know develop,
you know, an investment return because you understand their business model. No,
you're buying it just to flip it back to me

(20:40):
because you know I want to buy it. So Brad
figures all this out with a lot of help from Ronan,
after which Brad takes a long look at this guy,
this oddly wary irishman. Ronan still longed to be a
big shot Wall Street stock Market trader, and Brad decided
to make him one. Inside of a year, Ronan was

(21:01):
earning more than a million bucks. Brad builds this team
of people inside the Royal Bank of Canada. The team
consists mostly of immigrants who are running tests on the
American stock market to see how to unrig it, to
see if they can make it impossible for their own

(21:22):
stock market orders to be front run. So they try this.
Instead of sending one signal to the four New Jersey centers,
they send four different signals, so they all arrive at
the four different centers at precisely the same moment each
signal was in order to buy. However, many Hewlett Packard
or whatever shares were for sale in just that data center,

(21:45):
and just like that, the whole problem vanished, at least
for RBC. Brad was once again able to buy all
the shares for sale on his trading screen without being scalped,
without electronic frontrunners in the middle of his trade. But
the problem still bothered Brad because it was so obviously
outrageously unfair. The US government had granted licenses to these

(22:08):
stock changes on the condition that they referee the stock market.
Winners and losers are no longer determined solely based on
who understands a company better and fundamentals. It's now based
on how long my cable is and do I use
microwave versus fiber optic cable. We've talked about this sort
of thing before in this podcast. It happened with CEO

(22:30):
pay consultants and the ratings agencies and art connoisseurs and
probably all kinds of other referees. The ref got bought.
In this case, the refs are the stock exchanges. They
were now providing a slow picture of the stock market
to ordinary investors while selling a faster picture of that
same market to a select group of high speed traders.

(22:52):
That is like finding out the umpire makes more from
selling things to one of the teams than they do
from umpiring the game. One thing a lot of people
don't realize is that right now New York Stock Exchange
in AzaC, they make more money selling high speed data
and technology than they do from matching buyers and sellers.

(23:14):
Back in twenty fifteen, I wrote a book called Flashboys
about Brad and Ronan and the problem of high frequency trading.
Because I was as outraged as I had been as
a kid when my father tried to explain to me
that some stockbroker had charged twenty bucks to make a
phone call, and I wanted to egg his house. And
I assumed that any right thinking person would share my outrage.

(23:40):
This is what's weird. The computers aren't in one place anymore.
They're they're all in New Jersey, right outside of New
York City. But they're in like four or five different
places in New Jersey. So you see what it says
that ap that it's called their ticker, and we say

(24:00):
buy let's say we want to buy one share, we
want to buy it. Let's buy ten shares? Okay, all right,
isn't that a lot? You're right with that? Yeah? Um,
this is gonna how are you get into college? It's
going to pay my college could if it goes up
a lot? You want to click it? You can do it. Yeah,
you sit in my chair. So what you do is

(24:20):
you go place order Place order. That's it, place order.
So what does it say. It says right now, it
says your estimated total amount is one nine dollars fifty
five cents, and you go down the air place order
do it. Yeah, so they're not allowed to buy in
the night. It's closed at night. Oh, so people are

(24:44):
gonna breaks. People have so people can have breaks, and
the computers, I would bet and the computers need to
break too. They probably do. Now I hit him with
it right between the eyes, the brutal facts of life.
I explained that when he bought his first Apple shares,
these other computers get to see what he's doing before

(25:05):
anyone else, Like there are people out there who get
to live in the few milliseconds ahead of us. This
is the funny thing about the start man. I'm trying
to explain to you, is that you think about You
understand why stocks exist, You understand why people would want
to buy them and sell them. But it's harder to
understand why anybody needs to sit in the middle between

(25:28):
the people who would buy and sell and be given
different information from everybody else, better information so they can
make money off the people who want to buy and sell.
The reason all this happens is it happens so fast
that nobody sees it. These signals move at the speed
of light, which is the second fastest thing. What's the

(25:50):
first fastest thing? Thought? Thought that threw me for a second.
I mean, is it true? Do thoughts move faster than light?
Did I just prove that they don't? I honestly don't
know or if it matters. But then I realized he
didn't pick up on what I was trying to tell him.

(26:12):
Let's see what we got it for. We got it
one hundred and fifty dollars and forty five cents. Actually
it's even smaller. See one hundred fifty forty five point
four cents. That's what we paid for the stock. Someone's
computer in the one of the exchanges in New Jersey
was looking at it and seeing that Apple was below that,

(26:36):
and ah, I can buy it cheaper and sell it
to that kid in Berkeley, California and steal a few
pennies from him. It is not illegal for kids to
buy stock, but their parents have to do it for them.
That's correct, So we didn't break the law technically, I
clicked the button. So what we'll never do is buy

(26:57):
stock drunk. Yeah, it's illegal for kids to buy to
stock drunk, so never trade stocks while drinking. Even an
eleven year old senses that with all this money lying around,
there must be laws involved here, and there are. He's
required by a law to send his order to a
stock exchange through a stockbroker, and that stockbroker gets paid

(27:21):
by the exchanges for those orders, so the stockbroker is
in on the game too. The game is to maximize
the kill of the high speed traders so that they
can afford to pay the stock exchanges, and the stock
exchanges can in turn pay the stockbrokers. Everyone in the
middle takes a bite out of the prey. The prey
is us, and it's all legal because the people who

(27:45):
make the laws screwed up and they're only now beginning
to admit it. The parent company that owns the New
York Stock Exchange is among the few most profitable companies
in the United States, which is astonishing if you think
about it, because their business is simply the exchange of
financial instruments rather than the creation of anything real. That's

(28:08):
Robert Jackson, who in twenty seventeen was named one of
the five commissioners that the Securities in Exchange Commission it's
supposed to oversee the stock exchanges. Think of it as
the referees. Referee. I totally understand why a car manufacturer
might be or why an incredibly innovative internet company might be,
but the idea that the place you go to make

(28:29):
investments is the most profitable business in America tells me
that something's wrong. Can you think of any analogy to
this situation where you've got the companies that are responsible
for both providing this public good, this public service, or
this public information and are also competing with it in
the private sector. I can't, And that just shows how

(28:52):
backward our system for stock markets are. I can think
of lots of examples in the American economy and in
our history where we've had a publicly provided good and
a privately provided good, and sometimes that you even compete
with each other. It would be an example of that.
So there's public transportation that's available in the subway, and
there's privately available substitutes. But this is a little like
letting Uber run the subway and being surprised that the

(29:15):
subway sucks, yeah, Or like having Barnes and Noble run
the library. That's right, and then it's acting surprised when
you get to the library and you realize it doesn't
have that many books. Let's talk just a little bit
about what it says about fairness in the American economy
that this has been allowed to happen. Do you worry
about that subject at all? Here's what I worry about

(29:37):
that if we stop somebody on the street and said, hey,
here's what happens when you buy and sell a share
of stock. It's not that it goes to some central
place where people figure out what the price should be
and then give you the best price possible. No, no, no.
This order bounces around data centers in northern New Jersey
and then is routed to one of twelve exchanges, where

(29:57):
the guy who you gave the order too is paid
best to send it there, and then you're given a
price that's probably reflective of a second class quality of data.
If we told that to somebody, I think they'd be
out But would they I mean, would they really be
that outraged? I just want to know how this makes
you feel. Some guy has got a penny or two,

(30:20):
maybe just a fraction of a penny. Well, it's probably
a penny or two of your money because the stock
exchange told him a walker's coming to buy apple stock.
You can go see if you can get it cheaper
and sell it to him. You can stand in the
middle of his trade. You can get between him and

(30:42):
the person who's actually trying to sell the stock and
make money. You feel our care about that? I don't
really care. Why not, because the original order we placed
we got we that's that was our choice right to
place it, and if we were willing to do that,
it really shouldn't have mattered. It was true. He really

(31:07):
didn't care. It was just a few pennies and it
wasn't even really his money. He didn't even care when
I told him that if you added it up across
the entire market, the theft from all the little kids
and grown ups, it came to many billions of dollars
a year. He didn't care that the cost was spread
across millions of victims while the benefits were concentrated in
the hands of the rich few. I obviously found the

(31:30):
situation outrageous. My son did not. It's like the lottery.
You're happy when if you win it and just stick
with that, and you don't really care about where the
lottery is fair enough if you want, and if you lose,
you just let go. Well, well, if people are really
addicted to it and they know if that they're gonna lose,
but if they win, they're like Hallie Ella's go home,

(31:52):
let's go. It crossed my mind, and not for the
first time that about the best joke life might play
on me is from my son to end up a
Wall Street trader. He already seems to have a useful
character trait, a sense that the game is not about
right and wrong, but about winning and losing a certain
shall we say, lack of interest in the moral question. Hi,

(32:21):
I'm Beth. I'm a senior studying social studies with a
focus on Brazil, and I'm from Sacramento, and I'll be
returning to Bank of America in a sales rolera. I'm
a senior at the College I studying math and computer science,
and I'll be returning to Goldman in a trading role.
We're at Harvard in a seminar mainly juniors and seniors. Anyway,

(32:44):
they're all older than eleven years old and supposedly interested
in fairness, since that's what the class is about. My
name is Michael Sandel, and I teach political philosophy at
Harvard University. He teaches a course called Justice. It's one
of the most sought after courses at Harvard. This seminar,
called Casino Capitalism, is its first cousins. Oh, Vinnie, all right,

(33:08):
we'll wait till three. Is this Vinnie? Yeah, welcome Vini.
It's a chance for thirteen hand picked students to discuss
the fairness of a lot of real world situations, especially
real world situations on Wall Street. Many of the students
have already worked on Wall Street and planned to return. Well,

(33:29):
why don't we begin. I'm delighted that Michael Lewis and
Brad katzi im I could join us for the discussion
of Flashboys. Shall we go around you? Yeah? So, I'm
Michael Lewis. I'm the author of Flashboys and a bunch
of other books and working on this podcast, which gonna
be called Against the Rules. I remember classes like this,

(33:51):
the semi preparedness, the homework half done, the thoughts half baked,
the warrior that today I'm going to be found out.
Although today that's not the problem. I'm the homework. So
is Brad. Brad Katsiamma. I'm CEO, one of the co
founders of IX. Obviously, I work in finance. That's fortunately

(34:14):
or unfortunately, originally Canadian from just outside of Toronto, living Darren, Connecticut. Now,
after Brad figured out how the stock market got rigged,
He set out to fix it. He quit his two
million dollars a year job as the head of stock
market trading at the Royal Bank of Canada. He took
no pay and lots of abuse from Wall Street as
he set out to create a fair stock exchange, the

(34:37):
Investors Exchange. He called it I e X. What's interesting
is that never in my life have I been a
controversial person or looking to fight against the system. I
guess in a way, that was the first time I
think I was motivated to fight against the system. Did

(34:58):
everyone come away from reading the book believing that Wall
Street is rigged? Yes, say, rate your handed. You did
all but a few hands go up. And those of
you who who do not think it's trigged, Kade Marius
Shara is not sure. That's how you don't think it's rigged,

(35:20):
even having read Flash Boys, Well, I'm so here. I'm
a little like vacillating, only for the fact that maybe,
like I didn't understand it as well as I could have.
But in my mind, it seems to be like a
trade gets executed. Someone catches on the trade and just
gets to make a better price because they get to
dump it out. Real quickly, and in my mind, why
is that a problem? A moral problem? I mean, when

(35:42):
Lebron James goes to dunk a basketball and Jalen Brown
stops him and then passes it to Tatum on the
other side and he dunks it, no one says anything.
It kind of sounds like to me, this is the
same thing. You gotta love him just for giving it
a whirl, but most everyone else seems to disagree with him.
The Dutch student Marius is the only one who expresses
anything like outrage at Bay. I think what I found

(36:05):
very surprising is when you talk with traders that had
been active in the fifties sixteen seventies, when they were
still like runners around and phone calls, everyone will say, yes,
there was also a use of arbitrage, and there was
people like taking their bit out of the market, but
it was clear, it's clear for everyone that was an
illegal action, and it was kind of still frowned upon
but tolerated. But I feel like in this book it

(36:27):
sounds like the same thing as happening only on an
institutionalized scale with those high frequency traders. But yet still
it's not illegal, or it's not really frowned upon. Or
not properly regulated. I feel like there's like a moral
decay from back then to appear even though the whole
problem has increased in scale. It's a great point because

(36:52):
I think people are willing to do things behind a
computer screen they might not be willing to do in person.
And I think because you don't have that interface with
the person that, let's say you're taking advantage of it
kind of lets you tell yourself a lot of lies
about what you do when you are not getting that
direct feedback. Morally, the story Brad tells is as black

(37:13):
and white as it gets. The students see that, they
argue some about who deserves the most blame for the situation.
Who's the biggest villain, the high speed traders, the people
like Ronan Ryan who wants helped the high speed traders,
or maybe it's the SEC. Brad says, none of the above.
It's like sitting in a casino with a broken slot machine.

(37:35):
You know, either person that puts your hand up and
says it's broken, or do you drain it of all
it's you know, you know money, it's you know they're capitalists.
But the exchange is I think broke the system on
purpose to make money by selling people, the ability to
take advantage of that system, the fact that they're villains

(37:57):
on Wall Street, Well, that turns out to be not
all that interesting. At Harvard, the students know too much
to be upset. They've long since adapted to this world.
They don't want to talk about corruption of the refs,
or the elaborate system of bribes and kickbacks, or what
it all says about modern life. They want to talk
about the person who strikes them as the freak of
the story. Brad katze Yama, a student named Keller, kind

(38:21):
of puts his finger on it. I think it's extremely
impressive that you guys were able to figure out the
problem and then march right against it. You guys were
able to say no to the broken slot machine. It
would have been very easy to make a lot of
money understanding the market this way. But and then he
says the pronoun he referring to you just chose not to.
And so I was wondering, you know, like why and how?

(38:45):
Because I know and even with my positions about finance,
I think it would have been extremely difficult for me
to walk away from a broken slot machine that was
paying out. So heavily. Yeah, Michael and I obviously talked
a lot about this. Of course we had, because he
begs the question why you Why would any big time
Wall Street trader rebel against his industry? Why would anyone

(39:08):
quit him multimillion dollar job to become a referee? Have
you come away from this experience thinking that maybe you
care more about fairness than a lot of people. I
think this is a complicated subject, and we're fighting a
system who are trying to confuse people into thinking the
world works one way, and we're trying to explain it

(39:29):
in a different way. And to figure out who's right
or wrong, you have to put in the work to
actually understand the details to come to the conclusion that
the market is not fair. And so I don't think
it's necessarily I care more about fairness than others. I
think it's I've put in the work to understand what's
fair or not. Brad katsa Yama is great at explaining things.

(39:53):
The one thing he can't seem to explain is himself.
Good people don't like to explain to you why they're
good people, So that these questions he will not I
could promise you he will never answer this question to
your satisfaction. No, he actually won't because because he's not righteous.
He's not self righteous. He's actually just a great guy.
And the people who follow him follow him because they

(40:16):
sense that he's thinking more about their well being than
his own. And it's a it's a rare quality. I
associate it with being a Canadian. So the simple answer
is he's just a Canadian. And then if he was
an American, there's no chance he would have ever done
any of this. If I were you, I wouldn't say
a word brat. But you know what, even as I

(40:37):
said it, I realized I was wrong or anyway that
I'd let my mind come to rest before it should.
But you know, it's was peculiar about your situation and
character was It's it's odd to find someone get as
deep into Wall Street as you got before experiencing extreme
moral revulsion. So it's the combination of the power of

(41:00):
the feeling you had and how far into it you
were when you had it that the kind of person
who's going to be you got a long way into
it before they offended your sensibilities, and then they offended
it in a big way. Yeah, So that that's actually
that's a fair point. So this is the piece where
you know, I don't use this as a place to
try to take the moral high ground because I did

(41:20):
tolerate a lot of stuff. I saw a lot of
stuff that I just did not think was good. Um,
and I just I just like looked at it. That's
really screwed up, and I moved on. So what was
it about this particular situation that led him to turn
his back on money and risk it all to make
the world fair. Brad's decision was hard for the Harvard

(41:42):
students to understand. Ronan Ryan's would have been utterly incomprehensible.
It's right, it's right that it's in this building. They
and the Hey, they have direct fiber optic connections to
every NBA arena from here. Uh. Crazy, it is crazy,
and it's right. It's right. And see see the NBA logo.

(42:05):
Oh yeah, that's funny. Because you know the lady who
wanted me to meet you like this, nobody shoot them.
The NBA Replay Center is where this podcast began. It's
also just down the road from where Ronan's career collided
with Wall Street. The whole area looks as if it's

(42:27):
waiting for someone to replace the rock on top of
it that they wish they'd never removed. But a lot
happens here. Let's see, wonder can we just pull in here?
There you go. It takes us five minutes to drive
from the replay center to the first Wall Street data
center where Ronan worked for Radiance. It could be a
self storage facility except for one thing. There's a tower

(42:51):
on top festooned with satellite dishes. Look where we're sitting
right now, Michael. We're in a crappy park lot across
the street from one of the most important capital market
building on the globe. On the globe, you just wouldn't
picture the epitome of markets being here. It's it's a
very curious situation. And if CNBC was being honest, they

(43:12):
just have a camera on that building the whole time
while they're talking about what's going on in the stock market. Yeah, yeah,
because that's where it is. Yeah, eight trillion dollars of
stocks traded inside this place in the last year, and
it would occur to no one to visit it to watch.
You know, you look up. You just take for granted
the massive number of wires and power cables and all

(43:34):
the way stuff, and you don't never ask what the
hell they are. All of those towers up there are
microwave towers. You have to pay them from a cable
from your computers up onto the roof, and they sell
you roof rights and roof rights basically means they'll bolt
on your satellite dish, your your microwave dish. Yeah. Ronan

(43:56):
taught Brad about all this new technology inside the stock market,
and he did it so well that Brad created a
stock exchange that might put the entire racket out of business.
Brad taught Ronan how to trade stocks so well that
when Brad ditched his job, the Royal Bank of Canada
wanted Ronan to replace him, which is to say that

(44:16):
Ronan Ryan, finally, after fifteen years, got the job offer
he had dreamed of that, a big shot Wall Street
trader making millions of dollars a year. But when Brad
left to start I e X, Ronan left with him
to build the fair exchange, to create the honest ref
And they didn't do it in the American way by

(44:38):
getting outraged or appealing to a higher authority or electing
a crazy person. They just did an end run around
the whole problem of high frequency trading. Inside the same Bland,
New Jersey warehouse, I e X coiled miles of fiber
optic cable and stuck it in a box. Then they

(45:00):
announced that anyone who traded on I ex would have
to send their orders through this box. The magic shoe box.
Ronan called it. It's slowed down the high speed traders
just enough. Explain in the simplest way that you could
resume mom could explain what the speed bump does. It's
literally coiled cable, thirty eight miles of cable, which takes

(45:21):
the light signal three hundred and fifty millions of a
second to go around it. So we're not talking about
slowing things down dramatically. But what that allows us to
do as an exchange is it gives us the exchange
the clearest picture on what's going on in the market,
whereas other exchanges, because they're slower than the people trading
on their market, they're printing trades without a clear picture

(45:41):
of what's going on. The magic shoebox is a machine
for slowing things down in a speeded up world, an
engine of fairness. There's been a bunch of studies about
its effects. It saves investors somewhere between one and twelve
basis points. A basis point is one hundredth of a percent,
which sounds like a tiny amount, right, But across the

(46:03):
American stock market, each basis point comes to seven billion
dollars a year. If the entire stock market traded on IX,
investors would be spared being ripped off somewhere between seven
and eighty four billion dollars a year. This shit adds
up in Jersey. The skimming of the American investor isn't

(46:28):
a street mugging. It's fantastically complicated and at bottom a
little boring. There was no reason Ronan had to leave
his dream job to step in between Wall Street and
its investors and say stop, you're not doing this anymore.
I think had I not worked at RBC for a
couple of years, I might have thought this was a
great business opportunity. But the level of full of shitness

(46:51):
on the people that we were meeting was just making
me more and more angry. So it was more like
a challenge to make this fair because people What was
most annoying is people are saying it's already fair. Nothing
to see here, Ronan could have walked away from his
middle class Irish self and acquired whatever he wanted, including airs. Instead,
he flew to Ireland. His parents still had no real

(47:13):
idea what their son did for a limit, but he
wanted to talk to them about it because somehow they
were still important to him. Their voices were still in
his head, hanging over a chair, maybe he said, okay, okay,
that's why I'd gone to visit Ronan's mom and dad
just outside of Dublin, in the village of Dalkey, to

(47:35):
hear their voices. What did you think when he told
you was making a million dollars a year? Holy shit, No,
it's hard to believe, you know, I couldn't kind of think.
You know, they're saying every business deal there are two people.
There's a Funk and Fucky and a new Ronan could

(47:58):
be the funker, you know, so that's see. Yeah, how
do it feeling? How it feeling about him? And then,
in the same breath that Ronan revealed his new Wall
Street power and wealth, he confessed that he was thinking
of walking away from it all, plus tossing a match

(48:18):
over his shoulder to burn the place down in a
way that would make it virtually impossible to go back
as a regular trader on Wall Street. And for Ronan's dad,
here was the kicker. His son was leaving the playing
field to become a referee. It all struck me that
if you see referees, that was kind of skinny legs,
and they're always popping around the place. And I was thinking,

(48:40):
you know, those who can do, those who can't teach.
You know, those who can kick the ball, play football,
those can't referee. And it just sort of thoughts strange.
You know that anybody would want to be one? Why
would you want to be one? Why would you want
to be a trap? Why would you want to be
a policeman? Gona making people miserable every day? I X

(49:05):
did not so much open for business as explode. After
its opening, Wall Street's biggest banks were fine hundreds of
millions of dollars for cheating ordinary investors. I X itself
as a target of an expensive and mendacious political media
campaign bought and paid for by the exchanges and high
frequency traders. Brad and Ronan were threatened and slandered. They

(49:29):
needed bodyguards. It took them two years to get the
SEC's approval to open for business more than four times
as long as it took an exchange built by high
frequency traders, all because they were doing the most seditious
thing that you could do. At the heart of American
capitalism introduced fairness. Right, Yeah, fathers never know their sons

(49:54):
are like my father, nephy knew a job I had,
he taught I'd worked for since HSIPOL chargeable organization give
them money to companies. He didn't understand inward investment. But
I didn't fully understand for Ronan was that Ronan Ryan.
I don't think he particularly even wanted to be a referee.
It just so happened that the place he landed, Wall Street,

(50:16):
couldn't accommodate both his ambition and his character. His Mama
and daddy raised him a certain way, and he couldn't
quite forget it. They raised him to see other people
as just people who are either full of shit or not.
It turned out that Wall Street had a crying need
for someone who is not full of shit, and Ronan
Ryan had a serious talent for it. Now right, I did,

(50:42):
I got everything. Why do people become referees actual refs,
I mean, not the ones who get into it because
some powerful player has bribed them to play the role.
I don't think there's a single simple reason the refs
in the NBA may there, mainly because they love the
game and it's their way into it. Ken Feinberg, he

(51:04):
discovered in himself a gift for a kind of ferocious neutrality,
found ways to exercise that gift, and discovered that our
society just now desperately needs it. Let's pause a moment
to thank our refs, the honest ones. We can tell
ourselves that they're doing what they're doing for the same

(51:25):
self serving reasons the rest of us do what we do.
But there really are people who step up in certain moments,
in certain situations to insist on fairness, even if their
fathers never fully understand what they do, and even though
the world never fully appreciates it. All right, consider it

(51:51):
a birthday present. Ten shares of Apple, all right, all right,
give me Apple screws us. Not my fault, if not
your fault, Thanks for being Thanks for being my getting paid.
You're a good podcast job. Do you think in the
olden days just is very off topic, But it's about money.

(52:11):
When money was like a dollar, you could buy a
lot of stuff. M Do you think in the olden
days people called people with over one hundred dollars hundred nays,
one hundred air as opposed to a millionaire. Yeah, and
then a thousand air. They must have had a word

(52:32):
before a millionaire, right, Yeah, it was called rich because
they're rich. They're just a rich I'm Michael Lewis. Thanks
for listening to Against the Rules. Against the Rules is

(52:54):
brought to you by Pushkin Industries. The show is produced
by Audrey Dilling and Catherine Girdo, with research assistance from
Zoe Oliver Gray and Beth Johnson. Our editor is Julia Barton.
Mia Lobelle is our executive producer. Our theme was composed
by Nick Brittell, with additional scoring by Seth Samuel, mastering

(53:15):
by Jason Gambrel. Our show was recorded at Northgate Studios
in Berkeley by Tofa Ruth Special thanks to our founders
Jacob Weisberg and Malcolm Gladwell. That's not Yours