The appointed thing comes at the appointed time in the appointed way.—Myrtle Reed, 1910
In 2006 a company called BT Radianz called Ronan Ryan to offer him a job. Radianz was born of 9/11, after the attacks on the World Trade Center knocked out big pieces of Wall Street’s communication system. The company promised to build for big Wall Street banks a system less vulnerable to outside attack than the existing system. Ronan’s job was to sell the financial world on the idea of subcontracting their information networks to Radianz. In particular, he was meant to sell the banks on “co-locating” their computers in Radianz’s data center in Nutley, New Jersey.
But not long after he started his job at Radianz, Ronan had a different sort of inquiry, from a hedge fund based in Kansas City. The caller said he worked at a stock-market trading firm called Bountiful Trust, and that he had heard Ronan was expert at moving financial data from one place to another. Bountiful Trust had a problem: in making trades between Kansas City and New York, it took them too long to determine what happened to their orders—that is, what stocks they had bought and sold. They also noticed that, increasingly, when they placed their orders, the market was vanishing on them—if their screens showed ten thousand shares of Intel offered at twenty-two dollars a share, and they pushed the order button, the offers disappeared. “He says, ‘My latency time is forty-three milliseconds,’” recalls Ronan. “And I said, ‘What the hell is a millisecond?’”
Latency was simply the time between the moment a signal was sent and when it was received. There were several factors that determined the latency of a stock-market trading system: the boxes, the logic, and the lines. The boxes were the machinery the signals passed through on their way from Point A to Point B: the computer servers and signal amplifiers and switches. The logic was the software, the code instructions that operated the boxes. Ronan didn’t know much about software, except that, more and more, it seemed to be written by Russian guys who barely spoke English. The lines were the glass fiber-optic cables that carried the information from one box to another. The single biggest determinant of speed was the length of the fiber, or the distance the signal needed to travel to get from Point A to Point B. Ronan didn’t know what a millisecond was, but he understood the problem with this Kansas City hedge fund: it was in Kansas City. Light in a vacuum travels at 186,000 miles per second, or, put another way, 186 miles a millisecond. Light inside of fiber bounces off the walls and so travels at only about two-thirds of its theoretical speed. But it is still fast. The biggest enemy of the speed of a signal is the distance the signal needed to travel. “Physics is physics—this is what the traders didn’t understand,” said Ronan.
Calendar of the twelve months showing workers in the fields, fifteenth-century illustration of Book of Rural Benefits, by Pietro de’ Crescenzi. (Musée Condé, Chantilly, France.)
The whole reason Bountiful Trust had set up shop in Kansas City was that its founders believed that it no longer mattered where they were physically located. That Wall Street was no longer a place. They were wrong. Wall Street was, once again, a place. It wasn’t actually on Wall Street now. It was in New Jersey, where most of the New York stock exchanges had relocated. Ronan moved the computers from Kansas City to Radianz’s data center in Nutley and reduced the time it took them to find out what they had bought and sold from 43 milliseconds to 3.8 milliseconds.
From that moment the demand on Wall Street for Ronan’s services intensified. Not just from banks and well-known high-frequency trading firms but also from prop shops (proprietary-trading firms) no one had ever heard of, with just a few guys in them. All wanted to be able to trade faster than the others. To be faster they needed to find shorter routes for their signals to travel; to be faster they needed the newest hardware, stripped down to its essentials; to be faster they also needed to reduce the physical distance between their computers and the computers inside the various stock exchanges. Ronan knew how to solve all of these problems. But as all his new customers housed their computers inside the Radianz data center in Nutley, this was a tricky business. Ronan says, “One day a trader calls and asks, ‘Where am I in the room?’ I’m thinking, In the room? What do you mean ‘in the room’? What the guy meant, it turned out, was in the room.” He was willing to pay to move his computer that sent orders into the stock market as close as possible to the pipe that exited the building in Nutley—so that he would have a slight jump on the other computers in the room. Another trader then called Ronan to say that he had noticed that his fiber-optic cable was a few yards longer than it needed to be. Instead of having it wind around the outside of the room with everyone else’s cable—which helped to reduce the heat in the room—the trader wanted his cable to hew a straight line right across the middle of the room.
It was only a matter of time before the stock exchanges figured out that, if people were willing to spend hundreds of thousands of dollars to move their machines around inside some remote data center just so they might be a tiny bit closer to the stock exchange, they’d pay millions to be inside the stock exchange itself. Ronan followed them there. He came up with an idea: sell proximity to Wall Street as a service. Call it “proximity services.” “We tried to trademark proximity, but you can’t because it’s a word,” he said. What he wanted to call proximity soon became known as “co-location,” and Ronan became the world’s authority on the subject. When they ran out of ways to reduce the length of their cable, they began to focus on the devices on either end of the cable. Data switches, for instance. The difference between fast data switches and slow ones was measured in microseconds (millionths of a second), but microseconds were now critical. “One guy says to me, ‘It doesn’t matter if I’m one second slower or one microsecond; either way I come in second place.’’’ The switching times fell from 150 microseconds to 1.2 microseconds per trade. “And then,” says Ronan, “they started to ask, ‘What kind of glass are you using?’” All optical fibers were not created equal; some kinds of glass conveyed light signals more efficiently than others. And Ronan thought, Never before in human history have people gone to so much trouble and spent so much money to gain so little speed. “People were measuring the length of their cables to the foot inside the exchanges. People were buying these servers and chucking them out six months later. For microseconds.”
He didn’t know how much money high-frequency traders were making, but he could guess from how much they were spending. From the end of 2005 to the end of 2008, Radianz alone billed them nearly $80 million—just for setting up their computers near the stock-exchange matching engines. And Radianz was hardly the only one billing them. Seeing that the fiber routes between the New Jersey exchanges were often less than ideal, Ronan prodded a company called Hudson Fiber into finding straighter ones. Hudson Fiber was now doing a land-office business digging trenches in places that would give Tony Soprano pause. Ronan could also guess how much money high-frequency traders were making by the trouble they took to conceal how they made it. One HFT firm he set up inside one of the stock exchanges insisted that he wrap their new computer servers in wire gauze—to prevent anyone from seeing their blinking lights or improvements in their hardware. Another HFT firm secured the computer cage nearest the exchange’s matching engine—the computer code that, in effect, was now the stock market. Formerly owned by Toys“R”Us (the computers probably ran the toy store’s website), the cage was emblazoned with store logos. The HFT firm insisted on leaving the Toys“R”Us logos in place so that no one would know they had improved their position in relation to the matching engine by several feet. “They were all paranoid,” said Ronan. “But they were right to be. If you know how to pickpocket someone and you were the pickpocketer, you would do the same thing. You’d see someone find a new switch that was three microseconds faster, and in two weeks everyone in the data center would have the same switch.”
Replica of the zodiac ceiling in the Temple of Hathor, Dandarah, Egypt, papyrus, c. 320 BC. (Papyrus Museum, Cairo, Egypt / De Agostini Picture Library, Bridgeman Images)
By the end of 2007 Ronan was making hundreds of thousands of dollars a year building systems to make stock-market trades faster. He was struck, over and over again, by how little the traders he helped understood of the technology they were using. “They’d say, ‘Aha! I saw it—it’s so fast!’ And I’d say, ‘Look, I’m happy you like our product. But there’s no fucking way you saw anything.’ And they’re like, ‘I saw it!’ And I’m like, ‘It’s three milliseconds—it’s fifty times faster than the blink of an eye.” He was also keenly aware that he had only the faintest idea of the reason for this incredible new lust for speed. He heard a lot of loose talk about “arbitrage,” but what, exactly, was being arbitraged, and why did it need to be done so fast? “I felt like the getaway driver,” he said. “Each time, it was like, ‘Drive faster! Drive faster!’ Then it was like, ‘Get rid of the airbags!’ Then it was, ‘Get rid of the fucking seats!’ Toward the end I’m like, ‘Excuse me, sirs, but what are you doing in the bank?’” He had a sense of the technological aptitude of the various players. The two biggest high-frequency trading firms, Citadel and Getco, were easily the smartest. Some of the prop shops were smart, too. The big banks, at least for now, were all slow.
Beyond that, he didn’t even really know much about his clients. The big banks—Goldman Sachs, Credit Suisse—everyone had heard of. Others—Citadel, Getco—were famous on a small scale. He learned that some of these firms were hedge funds, which meant that they took money from outside investors. But most of them were prop shops, trading only their own founders’ money. A huge number of the firms he dealt with—Hudson River Trading, Eagle Seven, Simplex Investments, Evolution Financial Technologies, Cooperfund, DRW—no one had ever heard of, and the firms obviously intended to keep it that way. The prop shops were especially strange, because they were both transient and prosperous. “They’d be just five guys in a room. All of them geeks. The leader of each five-man pack is just an arrogant version of that geek. A fucking arrogant version of that.” One day a prop shop was trading; the next, it had closed, and all the people in it had moved to work for some big Wall Street bank. One group of guys Ronan saw over and over: four Russian, one Chinese. The arrogant Russian guy who was clearly their leader was named Vladimir. Vladimir and his boys ping-ponged from prop shop to big bank and back to prop shop, writing the computer code that made the actual stock-market trading decisions. Ronan watched them meet with one of the most senior guys at a big Wall Street bank that hoped to employ them—and the Wall Street big shot sucked up to them. “He walks into the meeting and says, ‘I’m always the most important man in the room, but in this case Vladimir is.’” Ronan knew that these roving bands of geeks felt nothing but condescension toward the less technical guys who ran the big Wall Street firms. “I was listening to them talk about some calculation they had been asked to make, and Vladimir goes, ‘Ho, ho. ho. That’s what Americans call math.’ He said it like moth. That’s what Americans call moth. I thought, I’m fucking Irish, but fuck you guys. This country gave you a shot.”
By early 2008 Ronan was spending a lot of his time abroad, helping high-frequency traders exploit the Americanization of foreign stock markets. A pattern emerged: a country in which the stock market had always traded on a single exchange—Canada, Australia, the UK—would, in the name of free-market competition, permit the creation of a new exchange. The new exchange was always located at some surprising distance from the original exchange. In Toronto it was inside an old department-store building across the city from the Toronto Stock Exchange. In Australia it was mysteriously located not in the Sydney financial district but across Sydney Harbor, in the middle of a residential district. The old London Stock Exchange was in central London. BATS created a British rival in the Docklands, NYSE created another, outside of London, in Basildon, and Chi-X created a third in Slough. Each new exchange gave rise to the need for high-speed routes between the exchanges. “It was almost like they picked places to set up exchanges so that the market would fragment,” said Ronan.
He still didn’t have a job on Wall Street, but Ronan had every reason to be pleased with himself and with his career. In 2007, the first year of the speed boom, he’d made $486,000, nearly twice as much as he’d ever made. Yet he did not feel pleased with himself or with his career. He was obviously good at what he did, but he had no idea why he was doing it.
Copyright © 2014 by Michael Lewis. Used with permission of W. W. Norton & Company, Inc. All rights reserved. This selection may not be reproduced, stored in a retrieval system, or transmitted in any form by any means without the prior written permission of the publisher.
From Flash Boys. When asked if he was surprised by the media’s reaction to the book—which argues in part that high-frequency trading rigs the market—Lewis replied, “Absolutely. I’ve never had a book get this big a reaction so quickly…The number of thoughtless responses is amazing to me.” He backed up his claims by saying that firms are using “their speed advantage to buy shares first and then selling them back at a higher price. The result is higher prices for investors in those shares. That’s rigged.” Lewis is the author of Moneyball and Liar’s Poker.