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Friday
Apr042014

Wall Street At Sixes & Sevens

9/11 occurred the week after we were in New York 10 years ago (and stood on top of WTC 1!). The "prime-mortgage" scandal developed in the few weeks we were here six years ago, and this week the latest scandal to hit Wall Street with potentially similar world-wide consequences has hit the headlines. Does anyone detect a pattern here?

I remember well that my warnings about what I had been observing in New York went unheeded at the first Council meeting of that term in 2007, and outlandish growth rates suggested by Waikato University "experts" were adopted regardless - a mistake that our Council is paying for to this day. 

Primarily as a result of the sudden loss of confidence in Wall Street six years ago (WFC), and the world-wide consequences that are still in evidence throughout financial markets (and incidentally, still used as an excuse for being unable to achieve TCDC development contribution targets), NY Stock Exchange spawned a dozen or more exchanges - many operating 'in-house' at Goldman Sachs, Morgan Stanley etc., under far more relaxed regulatory control - even to the extent of in-house brokers bidding against one-another.  

What the World is only finding out about this week following the publication of "Flash Boys - A Wall Street Revolt" by Michael Lewis, is that this opened up a way for some very smart operators to exploit their ability to obtain a micro-second (yes - microsecond!) jump on the market, and thereby shave cents form multi-billion dollar purchase and sale orders precisely as they are placed across several markets simultaneously.

The book was published this week, and author-previewed on the NYT finacial front page today.

It has caused a real crisis of confidence here as you can imagine as brokers, dealers, and investors have come to realise that they have been duped ever since the geeks took over (mainly Russian emigrees it appears) and used the differing lengths of fibre cable between the exchanges to gain that micro-second advantage - all that was necessary to manipulate the prices to their advantage, and literally acquire billions of dollars at the expense of other less technologically sophisticated operators.

It appears that the only reason that this came to light (but still remained secret from the public) two years ago was that a couple of other geeks - a Korean and an Irish technical whiz described as resembling an "Irish handyman" managed to penetrate inner sanctums of Wall Street to explain their theories and acquire a stake in a company specifically set up to prove what they already knew was going on behind the well protected walls of "insider" groups - mainly based across the Hudson in small New Jersey towns, but critically well positioned to expoit the fibre cable distances between the various newly established exchanges.

Read the story above to understand exactly how this particular 'sting' was carried out, and the manner in which the two geek "heroes", together with a small team of equally talented (and probably Asperger afflicted) guys (sorry - yes they were all guys!) came together and devised a simple "black box" that ensured that all orders would arrive at each exchange at exactly the same time. Would you believe it, the so called "black-box" simply used 30 miles of coiled fibre (the distance of the furthest exchange) to achieve this outcome. No doubt there are many other clever devices included, but this was the basic technique used to ensure that fair trading ensued.

Now there is a frenzy amongst all the operators who have not already signed up to the new technology, and as a great deal of investigation gets under way to see just what Federal and  State authorities can do to nail the original perpetrators of this piece of chicanery - if they can even be located. Meanwhile, our Korean/Irish duo, and their collaborators are well established as the 'go-to' geek shop to whom the pin-striped and harassed denizens of the 'Street' who have again been exploited through technology they barely understand, indicating just how vulnerable they and their systems are in this brave new World.

What is frightening is the actual level of trading that has been affected, and the unknown (as yet!) consequences on markets throughout the World that have relied on market "purity." In this case, it is primarily the really large institutional traders that have been targeted, but the consequences will automatically flow through to the main boards throughout the World.

 

 

 

 

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