super quick computers and advanced mathematical formulas have largely taken over trading on the financial markets from human beings algorithms which seemed to have a life of their own algorithms secretly like waiting for the moment that your Apple share or your pension money gets on the market the only ones who understand this system in any way or its architect the algorithm developers hi I'm boudic is one such algo developer after finding some strange wrongdoings he set out on a personal crusade against this elusive system it's a step that goes directly against the unwritten wall street code of silence and secrecy this is what's in store for you there's kind of a role never blame other people never blame the market never blaming the other trader it's always you your code your your code is wrong John Wall Street you just assume you're being ripped off unless you're the one doing the ripping off you know on Wall Street you know we talked about the culture of secrecy you just don't go to the SEC this is backlight welcome to the twisted nooks and crannies of our financial markets this is all about just a one cent move in in the stock that's all it is how a single pic you know how a price changes that's when the game is played and when that one kick happens the world is divided into winners and losers the machinery behind our financial markets consisting of mathematical models data centers and miles and miles of fiber optic cables is disguised by technological complexity and secrecy the builders of this financial system are a new breed of Wall Street employees quants mathematicians and physicists who are responsible for a technological revolution I'm bodek is a quant he specialized in artificial intelligence and worked for Hull trading and goldman sachs he knows the system from the inside he helped build it one day I got a call that said hey you gotta get in touch with this individual's name is hyperbolic he's got some revolutionary information about high frequency trading which is one of the subjects that we cover at the Battle of course and I said sure I'll get my calls what's going on having high bodek speak was like opening Pandora's box and he machine guns his way through the series of slides with information that frankly I heard back from people in the audience and said they were astounded nobody ever talked about order types until hi I'm came around I mean it wasn't even part of the conversation and when I you know heard what i was talking about he's looking at water types that you know if used properly guaranteed profit there are definitely people in the audience that were aware of this and cowering in their seats and you know how to who is this guy and why would he allow this information to be out and and potentially ruin our fantastic you know opportunity for generating revenue in the marketplace they're actually quite a lot of Russians and one guy came up to me and he says you know I know what you're doing and I'm behind you and if you need anybody and you need any help I you know I've got some friends hey don't like our name i had a quad conference yeah and these are just other people's reactions right I'm thinking to myself look it's a bunch of geeks who did this I'm not going i don't think i'm going against like the mob or something like that in 2011 boat x own high frequency trading company trading machines went under according to bodek the reason was a wrong order type or the way in which he told the exchange to execute his order well this isn't the setup i used to have their limits but i will do you know when we launch the trade machines we knew which machines we were faster than we knew specifically which firms we were faster than and specifically which firms were faster than us because we traded against these firms so you where it's fast as the others that were fast not we were we were faster you can take a timeframe of one second and it's almost it looks as if it's a lifetime of trading between these algos that you never even see it was but see calamon who invited haim bordick to tell his story at the battle of the quotes a recurring event where quant discuss high-frequency trading amongst other things when you buy a stock you buy it a price and then first the next person to buy they have to pay more so that margin was the advantage that a lot of these hft organizations could could take advantage of now it's minuscule in terms of the amounts but when you do it millions and millions of times it it creates tremendous revenue over a period of time ten years ago these ones would write a model put it out into the market and basically go to the beach and relax and they come back at the end of the day and it did count their money boudic wrote an algorithm for trading machines that would generate a guaranteed income a money machine that whether the financial meltdown of 2008 but then from one day to the next the algorithm stopped working I started seeing behavior on certain exchanges that just was odd you you watch this algorithm and it's cannot trade even though it's moving the price and its trying to treat her like why can't trade who you know it'll trade with it i'm going back to the time and forward saying what code changed we have a million lines of code the pattern i'm seeing is completely inconsistent with every single bug I've ever seen in that area and there's kind of a role never blame other people never blame the market never blame the other trader it's always you your code your your code is wrong took 12 months 12 months from that date until it was explained to me and it was explained to me by a person that's why in the skirt probably white and discover this for so long as I SAT there trying to figure out what we did wrong I went to a holiday event hosted by that exchange and i say i'm sorry i have a bug that who went on to a business development guy whose job is to encourage volume growth the exchange that's his entire job he explained to me that my order was being systematically disadvantaged because i was using the wrong order type so i'm not actually blame stock market asymmetry for work finally killed us but i will say it did waste one year of my life chasing something that I could have learned over drinks what was your first reaction I was humiliated I I was you know how can I not know this boudic thought he understood the plumbing of our automated financial markets but founded on the social codes within the high frequency trading world certain traders had found a way to have their orders jumped the queue photek started his career with a company that pioneered automated trading in chicago at home trading we had a very restrictor process by which we qualified people to work for us so it was pretty tough to get a job at all trading Blair hull is a trading legend a mathematics genius how made his first fortune at the blackjack tables in las vegas with that money he founded whole trading with his quants he was at the forefront of the automation of financial markets in 1977 when i first went down to the Pacific stock exchange I realized that all the paper that was on the floor did not need to exist and i figured a good programmer could automate this whole process within a year to my vision for the direction of where things were going was right on my timing was off by about 30 years nobody who joined whole trading was looking for that wall street job they were they were joining because they wanted to be surrounded by really intelligent people and you're working on amazing problems and now it was not seen as a Wall Street job I mean we've never applied to an investment bank would never even entered my cross my mind rated I'm more of like the Google world not the goldman sachs and even though did okay there our search for the origins of the technological revolution that has taken place in financial markets over the past few decades lead us to possibly an even greater trading legend Thomas Petofi you know everything here we have the American flag and nature and so for 50 minutes from New York on a good day is it's good at age 21 Petofi fled communist hungary he was one of the first to see the enormous possibilities of automated trading with his company interactive brokers his net worth is an estimated six billion dollars he receives us in his office I have the first handheld ipad type of computer that I made up a 1983 that the people used on the floor so this was connected to a battery and here you could display options you know various strikes and expiration dates and here are the bigs anywhere the offers and that way our people on the floor could see what our market was and why are these touch sensitive touch points it's a touchscreen yeah and we're talking what you 1983 and what where other people other people while other people use their minds so did you patented this no I don't believe in patents I believe that patterns make other people disincentivize in coming up with new things x so I other people were sort of copying other patient other people always copying me but that's okay that that move several forward you can have a computer on the floor in the early eighties but you could not have it directly connected to a price feed i have my computer in the office and I would go run up to go up the elevator get my computer run come back down execute trades and walk around the floor and then I go back upstairs to a computer run and come back down so i couldn't actually have real price feeds coming in in fact the first time that we had option quotes on the floor in order to input the S&P 500 price we had what we called a human ticker and that's the person that looked at the screen and put the price up or down to make sure it was the exact same price these are the rules the changes head to make sure that people did not move ahead with automation so we devised a way to to splice into the buyer that was that the keyboard was connected to and we and we put in keystrokes by a computer so we are much quicker without having to use the keyboard having to have people sitting there using the keyboard so this is not the coffee short came and Annie so this and he said where you can do that I said why not he says well because it look at the rule it says that all orders have to be input by the keyboard so we decided to build a overlay or they're over the keyboard that had Pistons rubber fingers that would go up and down and type right and they've only problem was it was very loud so it was already typing like it and so the next time they be a fellow who comes in again and he is this crazy crazy know it's a broad river as he hurts flying in and out and and it so I didn't know what to do and they just look for the Highland and hit run away and then never heard him again but in the nineties the wall street establishment realize it's falling behind in the technological revolution just before the turn of the century Blair whole sales his company including his employees to investment bank Goldman Sachs for half a billion dollars having holding acquired for me was like getting in the back door of Goldman and we kind of joked about it at all often we were all given personality tests and the personality type i got was basically you're mad scientist personality ok here it is there a goal here some mammy was about a period of nine months where people were concerned that i was it working in a bank I spent a lot of my life and my childhood surrounded by physicists at physics labs what did your father say when you I'm I don't think he was that of thrilled about Goldman actually people in that world had yeah where were exceptional I met you I I just remember these parties looking a little get-together to go to and I'm like eight years old and I'm this guy won the Nobel Prize and this guy 10 100 covers son Sheikh good these people believed and keep in mind some of them created nuclear bombs right you know the these people believed that science was going to make a better world and that the way to make a better world was to understand and to create and to discover and I'd say the people in that world would look at the world of high finance and say if you're that smart why would you do that making you more money than the other guy is that really what genius is about the collective brainpower of the mathematics and physics geniuses that have chosen to work in finance has led to seventy percent of trading now being automated and fifty taking place within milliseconds what's called high frequency trading or hft hi Rosie training is nothing to do with economics has everything to do with understanding our networks operate how they fail I'll make them fail how to make them feel in your advantage and making filling your advantage without being detected Eric humse does company nanak's cells financial data out of curiosity he researches abnormal patterns in financial data flows he knows what's going on in the financial markets to within a millisecond so Eric where are you taking us obtained you the CME facility in Aurora Illinois but to see me is downtown chicago downtown Chicago as much as the NYC is downtown New York right so it's really all about the data center that's where the kids were the machines are believed that building up here on the left is the cme's data yes it is huge this huge this is where billions of dollars transactive everyday in the futures markets when you send orders to buy and sell this is where it ends up but what are these poles these huge antenna this is how they get it to New York fast if you were to go climb that Tower and I wouldn't advise it but if you were and you look straight down where that that dish was pointing and you have a telescope you would be able to spot the next one but i thought that that you're at her as fiber to do so let's fiber cable this is more direct so speed of light is all about distance and actually light travels a little bit faster in the air than it does in fiber you know 11 nano second faster one clock cycle faster is all you need to be it's just need to be faster than the other people that's probably big thorn in their side this relay station here there's a number of things that can cause loss of signal professional effect or the or the Atmos atmospheric conditions can change or some child's balloon could go up at the wrong time both decks company trading machines also made money with its ultra-fast trading if it was really an equal match and I lost bear square fair and square i would have beaten myself up to nurse my wounds i would have actually been quite humble about things I knew through my own self criticism what I had screwed up and what I had it I'm Bo decks hft company trading machines closes down for good in January 2011 I heard of training machines but I didn't know anything about hi I'm so I thought okay you know i might as well meet him so we set up a meeting soon after this was a few months after trading machines had basically shut down it was no coincidence that bodek started talking to Scott Pattison a journalist for The Wall Street Journal Pattison has followed high-frequency trading closely for years without knowing about each other bodek and Pattinson had both been looking into the conflict of interest between the hft industry and the exchanges for some time we did meet a starbucks in Italian Hatton and I remember distinctly at one point near the end of our conversation hi I'm said something about there being something in the market is rigged and he thought that it was in part responsible for what happened to training machines I i actually had a full organizational chart with every single headcount one of the top hft is in my bag and other you know things that were part of my business intelligence and he done a lot of work on it but it was very vague so you gave him this file document well LMK look over my shoulder I said you have to tell me what this is because so many times in my career I've talked to people who said they know about something that's you know potentially illegal or something rig somewhere another but it's just it i never really get them to go beyond just something that's really vague and I remember the first real interview that I had with him at his house and we sat down i think it was around ten-thirty in the morning and proceeded to talk for seven hours straight and didn't eat anything i think i had a glass of water and you know I just SAT back and listen to him and took notes the for so long that my computer ran out of power and i had to start taking notes by hand because it just it all came out i'm gonna try to explain metaphorically what I'm gonna it's really a circus so i'm going to make it a little bit of a comedy hear about what happens but sadly this is pretty much the case we're going to have a concert hall let's say it's Metallica I mean I'm i like metal music so Metallica playing at this concert hall the ticket counter opens at 6pm so I'm going to go and stand in line after a while other people come in after me and at the end of the line there are these scalpers well they're in line with me also okay I can see them because they're they're all wearing the same t-shirt they also have a very very close relationship with the exchange you know with the venue and what is that relationship maybe one of them has brings a significant amount you know of volume to this and what does that mean he buys a lot of tickets of course he sells tickets to customers here but no one brings a lot of volume another guy when the scalpers actually owns ten percent of the venue okay the third guy he doesn't have a lot of volume is going on not big on this venue but he's big on another venue and he's got a board seat on this on this and in this menu so there's a very very close relationship between these scalpers and the venue scalping Metallica tickets when the ticket counter opens I'm going to equate that to a the moment when in the stock market a price can change and 6 p.m. on the dot this is what I'm going to witness every single one of these guys is literally going to immediately in one picosecond they teleport ok they are all here ahead of me how did that happen I asked some of the people they say oh they're really fast like not the big teleport that guy was behind me how did how does he get ahead of me there really isn't any difference between an order type and being the guy who wears the t-shirt you just put a little code on your order and you say hey don't treat me badly please how did you get in contact with somebody I met him at Blair House he invited me over to have dinner and that's so that's when I first time what do you think of him as a person he's great he's another he knows he understands code and so we were talking shop within five minutes when he told his story was it something that you also already had noticed in the data feeds that you were getting it no there's no way we don't know who execute on a quote unless we don't know who's behind each one is he would know who's behind his for example and he knows on what exchanges he would see what what why should have been the one and the first I should have been next one to be filled but he wasn't and there's no way to see that not once i was told it was so easy to figure out the rest and fill in all the holes but if you don't actually know that there are scalpers out there who are going to use special order types 2q jump you and then they're going to buy all the tickets and then they're gonna sell them back to the guys in the line if you don't know that that is a significant amount of the trading that occurs on an exchange and if you don't know the mechanisms by which it occurs it's a you know you believe what you see on the price feed so who set this up it's not a business guy who designed these features only a few people out there who the really of the technical competency to design these features like a less than 10 10 less than 10 wheless you know the mold not not personally well i know many of them personally I don't know all of them personally I'm very familiar with their work what where the algorithms that you were building and citadel and what was their Clinton I can't get into that a half I'm terrified of city lawyer is that Dave Lauer was a trader and analyst at top hft firms austin and citadel he was asked to testify as an expert at a Senate committee hearing about high frequency trading like bodek he is one of the few insiders who has come forward with his experiences so at the top you have high frequency trading and proprietary trading desks in the big banks that's that's the main that that that that's the the party that everyone else is trying to serve or be a part of underneath them you have the exchanges and the exchanges entire business model now revolves around volume so exchanges work hard to court hft to attract them to their venues and therefore to attract the volume and the brokers are the ones rounding orders to the exchanges and they're making money of commissions from there by cider so at the bottom is the buy side by side of the pension funds and the mutual funds there are the investors they're the ones who are actually there because they think that a company has good prospects or good fundamentals and so the amount of money that's being made by all these layers that is what it cost that is really yeah it's the cost to train when the mutual fund your pension fund is putting a large order in the market how is that order being called in jargon among traders oh um it's the dumb money it's the it's the slow hanging fruit it's the beads dinner it's the bread-and-butter it's all these algos do is try to detect when that's happening they that it's all about figuring out when the institution is buying and selling they're just waiting for my pension money dance to hit them and they'll just they'll just get skin a little bit off the top death by a thousand cuts you know you'll just get picked apart as that order gets travels through the system you want to be on the other side of that trade that's where you're gonna make money it's just how it's been for a long time so i think most people are just used to it and they don't question it and they probably just assume they're being ripped off that's sort of your on Wall Street you just assume you're being ripped off unless you're the one doing the ripping off the basically the people whose money's in it in the large pension funds and investment accounts they do not understand what is happening if they understood that it is their money that basically the banks are taking from them and report it as profits then they would do something about it but the problem is that it's too complicated for people to understand you know it was kind of a comedy for me when when the order type issue erupted and it was clear how many people did not know that these exchanges offered specialized workers that you're talking about like probably ninety percent of Finance doesn't know how the US stock market works the exchanges were originally owned by the brokers and they would bring new companies to market in the exchange in the hopes that the brokers would then be able to market those new company shares to their customers and get a fee for doing that marketing and those companies would grow and be successful and everybody will be happy what's changed though in in the whole scheme of things is these exchanges have now been taken over to a large extent by investors private equity companies not necessarily interested in growing small companies and going public but instead just generating a monthly return high-frequency trading provides a fee for every trade made so the more successful and more frequently somebody trades the fees generated from that went back into creating a profitable exchange these high frequency firm they thrive on complexity because if you know of everyone they understand that the best they understand because that's their business is to study market structure to understand in efficiencies and market structure and exploit those exchanges have changed from places where companies attracted investors to data centers where wars are waged between algorithms that trade with each other at the speed of light a hidden world where during a sudden implosion the infamous 2010 flash crash 862 billion dollars evaporated within minutes on american stock markets Wow thousand points we call this that competes you're late yet they're going to probably all trading we get stopped selling the flash crash was an event for me that it was a defining event there's no way for me to ignore that I was on the high frequency trading floor things were going pretty normal i mean it's normal that can be the market was down two and a half percent and reserve riots on TV and grease and every time they showed that the Greek riots the market would drop a little and I remember looking up and just like every trading floor CNBC is on and i saw that the dow jones had dropped another 800 points said okay whatever kept keep working minute later I look up and it dropped another hundred points I got off my desk and I walk over to the futures traders and their just scrambling all over the place they don't know what's going on they have huge amounts of of orders in the market everything's going crazy market start dropping another hundred points and the CEO of the firm comes running out onto the floor and he's just screaming pull everything pull everything so they just there's hitting it hitting buttons turning everything off everything off and so we're all sort of huddled around these two screens and the one screen is we're looking at the book so it's the the futures market you have a set of people that are willing to buy an asset of people that are willing to sell this is the market and as we're watching the screen the orders they start they start drifting like orders are being cancelled and then they start drifting more and then they start to go off the screen and then they were gone there was nothing there was no market for four moments four seconds there was no market and we're all just sitting there and you're staring into oblivion really you have no idea what is about to happen i was thinking that something terrible has just happened something indescribable a horrible just happened the market was gone I picked up my phone and called my trading desk and I said what's going on the guys and they said we don't know but it so I said what are you doing are you whining about your markets they said they said yes yes yes I said book about that's all we can do it let's wait until it it stops yeah I mean you gotta know she's feeling get your very do you you don't know if the world coming to an end or what's happening right even 911 didn't have that kind of impact so you're you just things started to return normal in the market recovered and it bounced back and everyone just kept going and for me I don't know it it just changed me looking back on that day I'd I lost faith in capitalism or at least what we had built to be capitalism in and I didn't and entrusted anymore i lost trust my friend has a PhD in climate science from Harvard who was working there there was a PhD in bioinformatics sitting next to me a semiconductor designer on the other side sitting behind me was a master's in math from MIT and these people are taking their huge brain power and devoting it to making pennies and in a high-frequency trading system and I I couldn't really I couldn't justify that anymore because these they should have been to it you know they should have been curing cancer or global warming and here they are they're making a fortune and where are we making the markets a better place where we increasing efficiency or stability i mean that they showed me that we weren't box guys nine bucks dollar the nine dollars supported me web went through its other speedline this is bad this is when you go back up there yeah this is when you know you stop this entire day we've done all this right this algo has been pretty much max payne down 200 bucks up you know 471 rebalance then I'm saying it's down direction she will you're dealing with the puts right you will put this option your question his news oh the markets closed hey i just bought this facebook and i got an overnight what an idiot yeah what herb alright so I'm overnight 500 people that you doing dude that was like three o'clock man so essentially we run a hedge fund out of here we pretty much manage a a community of traders we bootstrapped from nothing I'm from Los Angeles and our head traders from from Boston we decided to come out here and and try to make a killing for ourselves this is brian whiner he is a former head trader overtrading machines which was pretty much run by this guy right here I'm bodek aka the algo arms dealer ok that's what we call him here and he educates us on microstructure and we use it to try to become better traders what i did i get a kick out of watching these guys beat up the machines which they can do which is fascinating to me given what I've seen in this business together with his friends Peter shine rented a loft in downtown Manhattan to start a hedge fund recently they started working with hi I'm bodek to develop an algorithm that simulates the gutsy behavior of a day trader Charlie lives here which is this was originally i think was supposed to be a study has now turned into a rain forest jungle and and he lives pretty well you know obviously he's got his own fans i got his own bathroom school on our main trader he's got the most gigantic room ever but this is the master bedroom though and obviously there's there's there's everything here it's a really big room he pays obviously the most rent here so most the time like after after trading and have to be really worn out we will just kind of crash on the couch and it's just like because we're always in each other's faces you know this is kind of like where we hang out it's also where I sleep this is my blanket right there yep and should probably clean it up a little bit more this time sleep when he's here when x times here he seems right there goes down yes I mean that's the point and I think you guys could be greedy about Delta we actually reached out to him through Twitter and we talked to him on the phone and he seemed like a genius on the phone and when he came in the first time we just said you should just come over you know come see your operation you're going to love it let's do some business maybe and so he comes over and he walks and just like full speed in a suit that doesn't even fit them and write hi I'm what's going on man and on has this list he's got this list like questions to ask hi I'm boudic you know I don't like okay well we'll do that and immediately we notice hi I'm does this thing is called getting high and he just he goes on is the unleashing of the genius pretty much he certainly respected he's he's very experienced he's got a very impressive background but it doesn't take away from the fact that he was a high-frequency trader and his systems failed so i think that plays a large part in how he's seen by the industry you would see things like he's not credible and and this doesn't happen or just doesn't happen anymore or but never facts behind him after talking to journalists at Patterson who later publishes boat x findings in his book dark pools bowtech decides to go to the American stock market regulator the sec you know on Wall Street you know we talked about the culture of secrecy you just don't go to the SEC and tell them about the you know inside workings of Wall Street and how things really operate that's just your private if you do that and I'm thinking to myself you know this thing's going to go away someone just has to open their mouth it'll go away overnight it's a few lines of code to comment out the primary office it's all artificial Botox complaint is taken up by stock market regulator sec the investigation has been going on now for two years the SEC will not comment on its progress the SEC has not taken action and it's been a couple of years now and they have certainly shown that the inclination define exchanges and and to make sure that things are being run as they should be so either there's nothing going on or it's so complex that it's taking them years well there's no question that the sophistication of the trading firms far outpaces the sophistication of the sec I think that these are very smart people and they can go to the SEC and they can explain why they want an order type why it's helpful for the rest of the market and sound very convincing and leave out this other part of how it's going to allow them to you know break up millions in profits every day and guarantee them you could provide guaranteed economics i think the proprietary trading firms are using the rules to their advantage and the fact that we created some rules that should have been created and we created some order types that are now being looked at very seriously by the sec I don't think you can criticize the high-frequency trading firms who have only played by the rules can we really expect the financial regulators to keep pace with the latest technological development the flash crash was followed by numerous other computer-driven technical glitches like the computer problems during the facebook IPO the<font colo