60 Minutes has to be one of the best shows on TV. If you don’t have cable you can watch the episodes for free on CBS’s website. The show, like VICE on HBO, teaches you about topics you may have otherwise never been exposed to. This past Sunday the show asked the question: Is the stock market rigged?
Let me try and make this simple: When you use the internet to place trades (buy, sell) on the stock market, that request bounces to various “hubs” / computer locations before it gets to its final destination. Think of this like the post office: your letters first go the post office closest to you, are sorted at that location, then flow on to locations that are closest to the final destination. Computerized trades on stock market work in a similar way via computer networks.
The conclusion of the 60 Minutes feature is that an elite group of investors are hijacking “trade requests” by 1) finding out what you want to buy and 2) buying the stock BEFORE your request was even seen by the the stock exchange (like the final destination of your mail). When people buy large volumes of stock, that drives up the price and ultimately means you may get half of the stock you wanted at the requested price but the other half at say, $5 more. In some cases they are buying the stock before you can get your hands on it and selling it back to you at a higher price. If you are thinking, “That’s only a few dollars”, the “hijackers” spent $300 million to gain a 3 millisecond advantage by laying faster cabling that only they can use/access. That figure alone tells you how there’s a HUGE amount of money at play. So… in case anyone has ever wondered why the rich keep getting richer, this may be one of the sources and guess what – it’s not illegal; although, the FBI is investigating (Business Insider)
The solution to protect ordinary investors comes from a company called IEX Group, which includes a telecommunications expert (high speed fiber optic networks). IEX created software that basically slows down trade requests to ensure they arrived at the exchanges at the same time. They also built in speed bumps that ensure hijackers requests for information (or snooping) are sent into an infinite loop, a matrix of sort. That means 3rd parties can’t learn about your trade and they cannot skip the line to purchase stock (a practice called front running). IEX’s goal is to restore trust to the financial markets.
If you want to learn more about this fascinating topic you can purchase the book, Flash Boys on Amazon, check out the book’s reviews at GoodReadsor join the movement to send a message to Wall Street over at I AM An Investor.