Flash Boys: A Wall Street Revolt (3 page)

In these meetings what didn’t get said was often as interesting as what did. The financial markets were changing in ways even professionals did not fully understand. Their new ability to move at computer, rather than human, speed had given rise to a new class of Wall Street traders, engaged in new kinds of trading. People and firms no one had ever heard of were getting very rich very quickly without having to explain who they were or how they were making their money: These people were Spread Networks’ target audience. Spivey actually didn’t care to pry into their warring trading strategies. “We never wanted to come across as if we knew how they were making money on this,” he said. He didn’t ask, they didn’t say. But the response of many of them suggested that their entire commercial existence depended on being faster than the rest of the stock market—and that whatever they were doing wasn’t as simple as the age-old cash to futures arbitrage. Some of them, as Brennan Carley put it, “would sell their grandmothers for a microsecond.” (A microsecond is one millionth of a second.) Exactly why speed was so important to them was not clear; what was clear was that they felt threatened by this faster new line. “Somebody would say, ‘Wait a second,’ ” recalls Carley. “ ‘If we want to continue with the strategies we are currently running, we have to be on this line. We have no choice but to pay whatever you’re asking. And you’re going to go from my office to talk to all of my competitors.’ ”

“I’ll tell you my reaction to them,” says Darren Mulholland, a principal at a high-speed trading firm called Hudson River Trading. “It was, ‘Get out of my office.’ The thing I couldn’t believe was that when they came to my office they were going to go live in a month. And they didn’t even know who the clients were! They only discovered us from reading a letter we’d written to the SEC. . . .Who takes those kinds of business risks?”

For $300,000 a month plus a few million more in up-front expenses, the people on Wall Street then making perhaps more money than people have ever made on Wall Street would enjoy the right to continue doing what they were already doing. “At that point they’d get kind of pissed off,” says Carley. After one sales meeting, David Barksdale turned to Spivey and said,
Those people hate us.
Oddly enough, Spivey loved these hostile encounters. “It was good to have twelve guys on the other side of the table, and they are all mad at you,” he said. “A dozen people told us only four guys would buy it, and they all bought it.” (Hudson River Trading bought the line.) Brennan Carley said, “We used to say, ‘We can’t take Dan to this meeting, because even if they have no choice, people do not want to do business with people they’re angry with.’ ”

When the salesmen from Spread Networks moved from the smaller, lesser-known Wall Street firms to the big banks, the view inside the post-crisis financial world became even more intriguing. Citigroup, weirdly, insisted that Spread reroute the line from the building next to the Nasdaq in Carteret to their offices in lower Manhattan, the twists and turns of which added several milliseconds and defeated the line’s entire purpose. The other banks all grasped the point of the line but were given pause by the contract Spread required them to sign. This contract prohibited anyone who leased the line from allowing others to use it. Any big bank that leased a place on the line could use it for its own proprietary trading but was forbidden from sharing it with its brokerage customers. To Spread this seemed an obvious restriction: The line was more valuable the fewer people that had access to it. The whole point of the line was to create inside the public markets a private space, accessible only to those willing to pay the tens of millions of dollars in entry fees. “Credit Suisse was outraged,” says a Spread employee who negotiated with the big Wall Street banks. “They said, ‘You’re enabling people to screw their customers.’ ” The employee tried to argue that this was not true—that it was more complicated than that—but in the end Credit Suisse refused to sign the contract. Morgan Stanley, on the other hand, came back to Spread and said,
We need you to change the language.
“We say, ‘But you’re okay with the restrictions?’ And they say, ‘Absolutely, this is totally about optics.’ We had to wordsmith it so they had plausible deniability.” Morgan Stanley wanted to be able to trade for itself in a way it could not trade for its customers; it just didn’t want to seem as if it wanted to. Of all the big Wall Street banks, Goldman Sachs was the easiest to deal with. “Goldman had no problem signing it,” the Spread employee said.

It was at just this moment—as the biggest Wall Street banks were leaping onto the line—that the line stopped in its tracks.

There’d been challenges all along the route. After leaving Chicago they had tried and failed six times to tunnel 120 feet under the Calumet River. They were about to give up and find a slower way around when they stumbled upon a century-old tunnel that hadn’t been used in forty years. The first amp site after leaving Carteret was supposed to be near a mall in Alpha, New Jersey. The guy who owned the land said no. “He said he knew it was going to be some kind of terrorist target and he didn’t want it in the neighborhood,” said Spivey. “There’s always little gotchas out there that you have to be careful of.”

Pennsylvania had proved even more difficult than Spivey had imagined. Coming from the east, the line ran to a small forest in Sunbury, just off the east bank of the Susquehanna River, where it stopped and waited for its western twin. The line coming from the west needed to cross the Susquehanna. That stretch of river was breathtakingly wide. There was one drill in the world—it would cost them $2 million to rent—capable of boring a tunnel under the river. In June 2010, the drill was in Brazil. “
We need a drill that is in Brazil
,” says Spivey. “That idea is quite alarming. Obviously someone is using the drill. When do we get to use it?” At the last minute they overcame some objections from Pennsylvania bridge authorities and were permitted to cross the river on the bridge—by boring holes through its concrete pylons and running the cable on the underside of the bridge.

At which point the technical problems gave way to social problems. Leaving the bridge, the road split; one branch went north; the other, south. If you attempted to travel due east, you hit a dead end. The road just stopped, near a sign beside a levee that said, Welcome to Sunbury
.
Blocking the line’s path were two big parking lots. One belonged to a company that manufactured wire rope, the cable used on ski lifts; the other was owned by a century-old grocery store named Weis Markets. To reach its twin in the Sunbury forest, the line needed to pass through one of these parking lots or travel around the entire city. The owners of both Weis Markets and the Wirerope Works were hostile or suspicious, or both; they weren’t returning calls. “The whole state has been abused by coal companies,” Steve Williams explained. “When you say you want to dig, everyone gets suspicious.”

Going around rather than through the town, Spivey calculated, would cost several months and a lot of money and would add four microseconds to his route. It would also prevent Spread Networks from delivering the cable on time to the Wall Street banks and traders ready to write checks for $10.6 million for it. But the guy who ran the wire rope factory was for some reason so angry with Spread’s local contractor that he wouldn’t speak to them. The guy who ran the Weis Markets was even harder to reach. His secretary told Spread that he was at a golf tournament, and unavailable. He’d already decided—without informing Spread Networks—to reject the somewhat strange offer of low six figures plus free high-speed Internet access they had offered him in exchange for a ten-foot easement under his parking lot. The line passed too close to his ice cream–making plant. The chairman had no interest in signing over a permanent easement that would make it difficult to expand the ice cream plant.

In July 2010 the line dropped back underground beneath the bridge in Sunbury and just stopped. “We had all this fiber out there and we needed it to talk to each other and it couldn’t,” said Spivey. Then, for some reason he never fully understood, the wire rope people softened. They sold him the easement he needed. The day after Spread Networks acquired lifetime rights to a ten-foot-wide path under the wire rope factory’s parking lot, it sent out its first press release: “Round-trip travel time from Chicago to New Jersey has been cut to 13 milliseconds.” They’d set a goal of coming in at under 840 miles and beaten it; the line was 827 miles long. “It was the biggest what-the-fuck moment the industry had had in some time,” said Spivey.

Even then, none of the line’s creators knew for sure how the line would be used. The biggest question about the line—
Why?—
remained imperfectly explored. All its creators knew was that the Wall Street people who wanted it wanted it very badly—and also wanted to find ways for others not to have it. In one of his first meetings with a big Wall Street firm, Spivey had told the firm’s boss the price of his line: $10.6 million plus costs if he paid up front, $20 million or so if he paid in installments. The boss said he’d like to go away and think about it. He returned with a single question: “Can you double the price?”

_____________

*
The principal data center was later moved to Aurora, Illinois, outside Chicago.

CHAPTER TWO

BRAD’S PROBLEM

U
p till the moment of the collapse of the U.S. financial system, Brad Katsuyama could tell himself that he bore no responsibility for that system. He worked for the Royal Bank of Canada, for a start. RBC might be the ninth biggest bank in the world, but it was on no one’s mental map of Wall Street. It was stable and relatively virtuous, and soon to be known for having resisted the temptation to make bad subprime loans to Americans or peddle them to ignorant investors. But its management didn’t understand just what an afterthought their bank was—on the rare occasions American financiers thought about them at all. Brad’s bosses had sent him from Toronto to New York back in 2002, when he was twenty-four years old, as part of a “big push” to become a player on Wall Street. The sad truth about the big push was that hardly anyone noticed it. As a trader who moved to RBC from Morgan Stanley put it, “When I got there, it was like, ‘Holy shit, welcome to the small time!’ ” Brad himself said, “The people in Canada are always saying, ‘We’re paying too much for people in the United States.’ What they don’t realize is that the reason you have to pay them too much is that no one wants to work for RBC. RBC is a nobody.” It was as if the Canadians had summoned the nerve to audition for a role in the school play, then turned up for it wearing a carrot costume.

Before they sent him there to be part of the big push, Brad had never laid eyes on Wall Street or New York City. It was his first immersive course in the American way of life, and he was instantly struck by how different it was from the Canadian version. “Everything was to excess,” he said. “I met more offensive people in a year than I had in my entire life. People lived beyond their means, and the way they did it was by going into debt. That’s what shocked me the most. Debt was a foreign concept in Canada. Debt was evil. I’d never been in debt in my life, ever. I got here and a real estate broker said, ‘Based on what you make, you can afford a $2.5 million apartment.’ I was like,
What the fuck are you talking about?
” In America, even the homeless were profligate. Back in Toronto, after a big bank dinner, Brad would gather the leftovers into covered tin trays and carry them out to a homeless guy he saw every day on his way to work. The guy was always appreciative. When the bank moved him to New York, he saw more homeless people in a day than he saw back home in a year. When no one was watching, he’d pack up the king’s banquet of untouched leftovers after the New York lunches and walk it down to the people on the streets. “They just looked at me like, ‘What the fuck is this guy doing?’ ” he said. “I stopped doing it because I didn’t feel like anyone gave a shit.”

In the United States, Brad also noticed, he was expected to accept distinctions between himself and others that he’d simply ignored in Canada. Growing up, he’d been one of the very few Asian kids in a white suburb of Toronto. During World War II, his Japanese Canadian grandparents had been interned in prison camps in western Canada. Brad never mentioned this or anything else having to do with race to his friends, and they ended up thinking of him almost as a person who did not have a racial identity. His genuine lack of interest in the subject became an issue only after he arrived in New York. Worried that it needed to do more to promote diversity, RBC invited Brad along with a bunch of other nonwhite people to a meeting to discuss the issue. Going around the table, people took turns responding to a request to “talk about your experience of being a minority at RBC.” When Brad’s turn came he said, “To be honest, the only time I’ve ever felt like a minority is this exact moment. If you really want to encourage diversity you shouldn’t make people feel like a minority.” Then he left. The group continued to meet without him.

The episode said as much about him as it did about his new home. Ever since he was a little kid, more by instinct than conscious thought, he had resisted the forces that sought to separate him from any group to which he felt he belonged. When he was seven his mother told him he’d been identified as a gifted student, and she offered him the chance to attend special school. He told her he wanted to stay with his friends and attend the normal school. In high school the track coach thought he could be a star (he ran a 4.5-second forty-yard dash), until he told the coach that he’d rather play a team sport—he stuck with hockey and football. Upon leaving high school at the top of his class, he could have gone on scholarship to any university in the world: He was not only the best student but a college-caliber tailback and a talented pianist. Instead he chose to follow his girlfriend and his football teammates to Wilfrid Laurier University, an hour or so from Toronto. After he graduated from Laurier, taking the prize for best student in the business program, he wound up trading stocks at the Royal Bank of Canada—not because he had any particular interest in the stock market but because he had no idea what else to do for a living. Up till the moment he was forced to, he hadn’t really thought about what he wanted to be when he grew up, or that he might end up in some radically different place than the friends he’d grown up with. What he liked about the RBC trading floor, aside from the feeling it gave him that it would reward his analytical abilities, was that it reminded him of a locker room. Another group, to which he naturally belonged.