In the modern age of milliseconds, fiber optic cable, and government regulation, Michael Lewis's Flash Boys provides an updated view of today's Wall Street for those of us who were asleep at the wheel. I am by no means a "techguy". In their constant pursuit of profit, traders discovered means to utilize government regulations to obtain an advantage over.
The SEC passed Regulation National Market System in 2005 to require brokers to find the best market price for their clients. This was a well-intentioned regulation. However, with the implementation of this regulation, it forces investors to first purchase lowest priced share first regardless of the total shares needed versus available at that price. Large institutional investors purchase thousands of share and have to send out orders to multiple exchanges to comply with the new regulation.
However, this requirement along with advances in technology provided a competitive advantage to high-frequency traders(hft) to front-run institutional "whale" investors. The signal being sent to the lowest priced exchange provides valuable information to hfts. They realize that the bulk of the order is making its way through the cable. By purchasing space closer to exchanges and upgrading their equipment to be fractions of a second quicker than everyone else, they can make money with little to no risk.
To minimize the cost hft inflicted institutional investors, banks began offering Dark Pools to hide trades for their clients. These private exchanges specifically are designed to lack transparency. However, banks sold rights to trade in the pools to institution investors and hft alike.
The first chapter of Flash Boys highlights the vast sums of money put into fiber optic cable by arbitrageurs looking to trade between exchanges on the east cost and Chicago. The seventh chapter highlights IEX, an exchange that put its own delay in the signals to stop anyone from getting an advantage.
That book triggered a firestorm of controversy; I remember when it was published years ago. Do you happen to know if anything actually happened as a result of this book? (Ex. Did the SEC create regulation that would make the manipulation that this book alleged harder?)
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