The Wall Street Code - VPRO Documentary (2013)
Ultra fast computers and advanced mathematical formulas ... have far surpassed humans in the area of stock trading. Some algorithms seem to be alive. Algorithms are quietly waiting for your actions at Apple ... or your pension money is in the market. The only ones who fully understand this system are its architects: algorithm developers. Haim Bodek is one of them. After discovering strange misdeeds, he embarks on a crusade ... against this complex system. This goes directly against Wall Street's unspoken law of silence ... and its confidentiality. Here is what awaits you. It's like a rule: never blame others, the market, traders ... it is always your fault, it is your code that is wrong. On Wall Street, you are necessarily scammed unless you are the scammer. On Wall Street, there is a culture of confidentiality. It doesn't happen, going to the SEC. Welcome to Backlight. You will discover every nook and cranny of our financial markets. It is played to a penny, for an action. That's all. When a single tick, the listing step, or a price changes ... this is where the game starts. When this tick varies, the world is divided among the winners ... and the losers. The machine behind the big financial markets ... mathematical model facts ... data centers and kilometers of fiber optic cables ... is camouflaged under technological complexity and confidentiality. The creators of this financial system are new Wall Street employees: quants ... mathematicians and physicists ... responsible for a technological revolution. Haim Bodek is a quant. Specialized in artificial intelligence, he worked for Hull Trading ... and Goldman Sachs. He knows the system from the inside, he participated in its creation. One day I was called and advised to contact Haim Bodek ... because he had information about high frequency trading ... a subject that we dealt with at the "Battle of the Quants". So I called him. Listening to Haim Bodek speak was like opening Pandora's box. He entered the system to gain access to a series of files ... containing information that is incredible, according to the public. No one was talking about order types until Haim came along. I heard what Haim was talking about: order types which, if used correctly ... can guarantee profit. Several people in the audience knew this, they would curl up ... they wondered who he was, and why he was revealing all this ... why he wasted our opportunity ... to generate income in the financial market. There were quite a few Russians. One of them came up to me and said: "I know what you are doing. I am with you ... "if you ever need help, someone ... "I have contacts." I said to him, "Am I okay at a conference as of?" And these are just the reactions of others. I said to myself : "Look, it's just geeks who did this ... "I don't think I'm going against the crowd or anything like that." 2011, the high frequency trading company of Bodek, Trading Machines ... went bankrupt. According to Bodek, this is because of the wrong type of order ... or the way he told the Exchange to execute his order. This is not the installation I had before. But hey, it will be fine. When we launched Trading Machines ... we knew which machines were slower ... we knew which companies were slower than us ... and which ones were faster than us ... because we negotiated with these companies. Were you as fast as the others? No, we were faster than them. Take a second ... it looks like it's a lifetime of transactions ... between these algorithms that we do not even see. It was Bartt C. Kellerman who invited Haim Bodek to tell his story ... at the "Battle of the Quants", a seminar during which analysts discuss ... high frequency trading, among others. When you buy a stock, you buy it at a price ... and the next person who buys it has to pay more. This margin is the advantage ... that many of these THF organizations could benefit from. These are tiny amounts. But if the action is repeated millions of times, it creates huge income. 10 years ago, these analysts created a model, used in the market ... then they would go to the beach to relax ... and counted their money at the end of the day. Bodek has created an algorithm for Trading Machines ... supposed to guarantee an income. A slot machine that withstood the financial collapse of 2008. But overnight, the algorithm stopped working. I began to observe behavior on certain exchanges ... that were strange. This algorithm did not allow transactions ... even if he varied the price ... no one was trading the shares. I go back and find out what code has changed. There are millions of codes. The pattern I see has nothing to do with all the anomalies I have seen. It's like a rule: never blame others, the market, traders ... it is always your fault, it is your code that is wrong. It took 12 months from that day ... to be explained to me. And it was explained to me in person. That's why I didn't find out about it before. I was there looking for what mistake we had made. I went to a seminar, organized by this scholarship ... and I said, "I'm sorry, I have a problem." Who were you talking to? - A type of activity development ... whose job is to improve growth on the stock market. He explained to me that my order was systematically disadvantaged ... because I was using the wrong type of order. I am not going to blame the asymmetries in the financial market for what happened. But I must say that I wasted a year of my life ... looking for something I could have learned over a drink. What was your first reaction? I was humiliated. I wondered how I could not have known. Bodek thought he understood the inner workings ... of our automated financial markets. But he did not follow social codes ... from the world of high frequency trading. Some traders had found a way to put their order first. Bodek started out as a pioneer in automatic trading ... in Chicago, at Hull Trading. The process we went through to hire people was very strict. It was quite difficult to get a job at Hull Trading. Blair Hull is a trading legend, a math genius. Hull made his first fortune at the blackjack tables in Las Vegas. With this money, he created Hull Trading. Along with his analysts, he was a pioneer in the automation of the financial market. In 1977, I went to the Pacific Exchange ... and I realized that all the paper on the floor doesn't need to exist ... I figured a good programmer could automate all of this in a year or two. I understood well what turn things were going to take. But it happened 30 years later. Those who entered Hull Trading did not want to work on Wall Street. They entered to be surrounded by very intelligent people ... to solve incredible problems. It wasn't seen as a job on Wall Street. I never would have thought of applying to an investment bank. I'm more of the world of Google, not that of Goldman Sachs ... even if it went well, at home. Our research on the origins of the technological revolution ... that has affected financial markets in recent decades ... led us to an even more legendary trader: Thomas Peterffy. We have everything here, the American flag, nature ... We are 50 minutes from New York, the weather is nice, that's good. At 21, Petterfy fled Communist Hungary. He is one of the first to see the enormous potential ... automatic trading. With his company Interactive Brokers ... its net worth is estimated at $ 6 billion. He receives us in his "office". I have the first touchscreen tablet ... that I created in 1983. Those who were on the floor used it. It was connected to a battery. And here you could display options ... with the strike price and the expiration date. There were the offers. Thus, the negotiators of the prosecution could know the state of the market. And thanks to these tactile keys ... Is it a touch screen? - Yes. What year? - 1983. How did the others do? The rest of them, well, they were using their brains. Did you patent it? No, I don't believe in patents, I think patents ... prevent people from inventing new things. So, have other people copied you? Of course, others have always copied me. But it's nothing, it moves the world. If there was a computer on the floor in early 1980 ... it was not directly connected to the price in real time. My computer was in the office. I was going up by the elevator ... I launched my computer, went back down, executed the transactions ... then I walked, went up, restarted the computer and came back down. I couldn't get a price in real time. The first time we had an option on the floor ... to enter an S&P 500 price, we had a "human meter". It was a person watching the screen ... and increase or decrease the price to make sure it was the same. These were the rules the stock market followed to ensure ... that people weren't going to switch to automation. We found a way to join the cable ... the keyboard was connected to ... and we used the functions of the keys of a computer. So it was much faster, we didn't need to use the keyboard. A NASDAQ agent came over and saw that and said, "You can't do that." I asked him why, he replied: "Because ... "according to the rules, all orders must be entered on the keyboard." So we decided to create ... a keyboard cover with pistons, rubber fingers ... going up and down and typing. The only problem was that it made a lot of noise. The next time, when the agent came back ... he heard this crazy noise. The orders were coming out. And he didn't know what to do. He stood watching for a while, then left. We never heard from him again. In the 90s, the establishment of Wall Street realizes ... that it is lagging behind the technological revolution. Just before the turn of the century, Blair Hull sells his business ... as well as its employees ... to investment bank Goldman Sachs, for half a billion dollars. As Hull was bought out, I was able to get involved with Goldman. We often joked about it in Hull. We all had personality tests. And the type of personality I was assigned ... was basically that of a mad scientist. For about 9 months people worried ... from the fact that I work in a bank. I spent a good part of my life, of my childhood ... surrounded by physicists in physics laboratories. What did your father say when you started working at the bank? I think he wasn't very happy about Goldman. In this universe, people were exceptional. I remember that I met, at small parties, at the age of 8 ... so-and-so who won the Nobel Prize. My father used to say to me, "Come and shake their hands." You should know that some had created nuclear bombs. These people thought that science would make the world a better place. And that the way to make the world a better place ... was to understand, create and discover. In the world, people are watching high finance and should be thinking: "Why use your intelligence like this?" "To always earn more money than the others, is that it, the genius?" The team of geniuses in mathematics and physics ... who chose to work in finance automated 70% of transactions ... and allowed 50% of them to be completed in milliseconds. This is called high frequency trading, or THF. THF has nothing to do with the economy. It's about understanding how networks work ... how they plant, how to make them plant ... and how to get them to crash to your advantage without being discovered. Eric Hunsader's company, Nanex, sells financial data. Out of curiosity, he looks for anomalous patterns in the data streams. He knows what's going on in the financial markets, down to the millisecond. Eric, where are you taking us? I'll take you to the CME premises in Aurora, Illinois. The CME is in downtown Chicago. Yes, as far as the New York Stock Exchange is in the center of New York. This is where the machines, the data centers are. The building on the left houses the CME data center. It looks huge! - It is. Billions of dollars are traded in the futures markets. When you send orders to buy and buy, this is where it happens. What are these poles, these antennas for? It's to make it happen faster in New York. I don't recommend it, but if you climbed this tower ... if you looked in the direction that this parable points ... and if you had a telescope, you could see the next one. I thought they were using fiberglass, fiberglass cables. It's more direct. For the speed of light, we speak of distance. And in fact, light travels faster through air than through fiber. Everything is played out to a nanosecond. You just have to be faster than the others. It's really not that great. There is a relay there. Several things can cause signal loss: the fresnel effect, atmospheric conditions ... or a child's balloon that takes off at the wrong time. Trading Machines, Bodek's company, also made a profit from THF. If it had been a fair game ... if I had really lost, I would have blamed myself very much. I would have taken care of my ego, I would have shown humility. I knew from my own judgment where I had screwed up and not. Trading Machines, Haim Bodek's THF business ... closed for good in January 2011. I had heard of Trading Machines, but I did not know Haim. I thought I could meet him. We arranged to meet soon after. It was a few months after Trading Machines closed. It's no coincidence that Bodek started talking to Scott Patterson ... a reporter for the Wall Street Journal. Patterson has followed high frequency trading closely for years. Without knowing each other, Bodek and Patterson both have ... analyzed the conflicts of interest between the THF industry ... and Stock Exchanges for a certain period. We ended up in a Starbucks in Manhattan. And I remember precisely, towards the end of our conversation ... Haim said something about ... illegal action in the market. He thought that was part of the reason Trading Machines had closed. I had an organization chart with all the people ... the highest placed in THF, in my bag ... and other data that was part of my business information. He had worked on it a lot, but it was very vague. Did you give him these documents? I let him take a look at it. I told him, "You have to tell me what it is." I have spoken so many times in my career to people who say they know one thing ... which may be illegal, something rigged at one point. But they don't say more, it's still very vague. I remember the first interview I had at his place ... we sat down, it must have been 10:30 am. And we started talking for 7 straight hours. I didn't eat anything, I had to drink a glass of water. I remained seated, listened to Haim, and took notes. My computer battery ran out, I took notes by hand. Because he really said it all. I'll try to explain this to you with a metaphor. It's a circus. I'll tell you the facts through comedy. But unfortunately it looks like this. Here is a concert hall, let's say it's Metallica playing. I like metal, so it's Metallica playing in this concert hall. The ticket office opens at 6 p.m. So I'm going to stand in line. After a while, people arrive, I am no longer the last in the line. There are resellers. They are also in the queue, with me. I recognize them by their t-shirts, they all wear the same. They are also in close collaboration with the Stock Exchange, the concert hall. What kind of collaboration? Maybe one of them brings a lot of volume. That is, he buys a lot of tickets. Obviously, he sells them to spectators. One has a lot ... another dealer owns 10% of the room. A third dealer doesn't have much ... but it largely has another room ... and he has a seat on the board of directors of this room. So there is a very close collaboration ... between these dealers and the concert hall. Tickets for Metallica sold black. I will draw a parallel between the opening of the ticket office ... and when a price can change, in the financial market. At 6 p.m. sharp, that's what I'm going to attend. Absolutely all these resellers ... will literally teleport, in a picosecond. They are all there, in front of me. How come ? I ask someone who answers me: "They are very fast." I said, "No, they teleported. They were behind me." There is no difference between an order type and the one wearing the t-shirt. You add a code to your order saying, "Respect me, please." How did you hear about Haim Bodek? I met him at Blair Hull's, he invited me to dinner. What did you think of him? He's great, he knows everything, we started talking about work in 5 minutes. Did you notice the same thing as him in your data? No, we don't know who executed an order unless ... We do not know who is carrying out the orders. But he knows who executed his. And he knows in which market. He thought his order must be the next to be carried out ... but it was not. It's impossible to know. When they started explaining to me, it was easy to understand the rest. But if you don't know there are resellers ... who will use certain types of order to overtake you, buy tickets ... and resell them to those in the queue .... If you don't know that a considerable number of transactions are taking place ... if you don't know the inner workings ... you believe what you see on the price feed. Who is organizing this? - He's not a businessman ... who created these characteristics. Very few people have the technical skills ... to create these characteristics. Less than 10 people. 10? - Less than 10 people. Do you know them all? I know several personally, but not all. I know their work well. What was the function of the algorithms you designed at Citadel? I can't tell you that. I'm really scared of the Citadel lawyers. Dave Lauer was a trader and analyst at Allston and Citadel, THF companies. He testified as an expert at the Senate committee hearing ... on high frequency trading. Like Bodek, he is one of the few insiders ... who spoke about their experiences. At the top, there is the THF ... and trading for own account in the big banks. These are the main ... This is the part that everyone is trying to observe or integrate. Below, there is the Bourse. And the economic model of the stock markets is about volume. The stock markets are doing everything to attract THF ... in their premises, and therefore, to attract volume. Couriers are those who transmit orders to the Stock Exchanges ... and they earn money from the commissions of their "buy-siders". At the bottom of the pyramid, there is the "buy side" ... which brings together pension funds and investment funds. These are the investors, those who are there ... because they think a business has a solid foundation or a future. The amount of money generated by all these parts ... represents the cost ... - Yes, it is the cost of transactions. When an investment or pension fund executes a large order ... what is this order called in traders' jargon? It's money given ... it's easy money, it's a piece of cake ... this is what is expected. These algorithms are used to detect what is going on. It's about understanding when institutions buy and sell. They are waiting for my pension money to reach ... Yes, they will sting you a bit. It's death slowly. We put you aside ... when this order goes through the system. You have to be on the other side of the deal to make money. It's been like that for a long time, people are used to it, they accept it. They know they are being scammed. On Wall Street, you are necessarily scammed unless you are the scammer. Those who put their money in pension and investment funds ... they don't understand what's going on. If they understood that the banks ... take their money and report it as profit ... they would do something. But the problem is, it's too complicated for people to understand. I found it funny when the problem of order types arose. Obviously a lot of people didn't know ... that these markets offered special order types. 90% of financiers do not know how the American stock market works. Before, it was the brokers who owned the stock exchanges. They integrated new companies into the financial market ... in the hope of selling the shares of these companies to their clients ... and obtain a fee for this sale. These companies would grow, be successful, and all would be well. However, what is different in all this ... is that these scholarships were acquired in majority ... by companies with private capital. They are not necessarily intended ... to develop small businesses and have them go public ... but rather to generate monthly income. High frequency trading ensures a profit for every trade. So if we manage to carry out transactions frequently ... the gains generated allow to create a profit. These THF companies benefit from the complexity ... because they understand it, their function is to study the market structure. They understand and exploit market inefficiencies. The scholarships have passed ... places where companies attracted investors ... to data centers where wars are waged by algorithms ... who trade at the speed of light. An invisible world which, during a sudden collapse ... the infamous flash crash of 2010 ... saw $ 862 billion evaporate ... in minutes on the US financial market. Wow! Almost 1000 points! We call it a capitulation. They are going to suspend the transactions, we cannot stop the sale. For me, the Flash Crash was a defining moment. I couldn't ignore it. I was upstairs at the THF. All was well, finally, the markets had suffered a decline of 2.5%. We saw the riots in Greece on television. Every time they showed the riots, the markets went down. I remember watching, every floor was broadcasting CNBC. I saw that the Dow Jones index had lost 100 points ... I said to myself: "Too bad", and I continued to work. A minute later, I see he has lost another 100 points. I get up and go to the futures traders desk. They are very agitated, they do not know what is going on. They had a lot of orders in the market, it's chaos. 100 more points are lost. The CEO of the company comes running up and shouts: "Stop everything!" They push the buttons, they turn everything off. We are all grouped around these two screens. On a screen, we look at the accounts ... this is the futures market, people are ready to buy ... and others for sale is the market. As we look at the screen, the orders start to decrease ... orders are canceled, they decrease further, they disappear from the screen ... and then there is nothing more. There was no longer a market. For a few seconds there was no more market. We are all seated, we observe the void. We have no idea what will happen. I thought something horrible had just happened ... something indescribable, the market was gone. I called my negotiation office and said: "What is happening ?" They replied: "We don't know." I said, "What are you doing? Are you expanding your markets?" They said that's what they were doing. I thought there was just that to do. Let’s wait for it to stop. We were almost nauseous, we were worried ... we didn't know if the world was going to stop. Even the attacks of September 11 did not have this impact. Things are back to normal, the market has started again ... it suddenly recovered, activities resumed. Personally, I changed after that. That day, I stopped believing in capitalism ... finally, to the capitalism that we had built. I had lost confidence in this system. My friend has a doctorate in climate science, he worked at Harvard. Next to me, there was a doctoral student in bioinformatics ... on the other side, a semiconductor designer ... behind me, someone who had a master's degree in math from MIT. These people mobilize their impressive gray matter ... and use it to earn money in a THF system. I couldn't justify that anymore. They should have worked in research ... against cancer or climate change. And there they were, earning a fortune. Were the markets, their efficiency, their stability improved? That day, we knew not. It's bad. There you know you have to stop. It took us all day to do that. This algorithm brought in $ 200. It's back to 471 now. It balances out. It goes down. Are you taking care of the options? Yes, but that option ... - You take care of it. The market is closed. I just bought this stock from Facebook and the rate has changed, what a fool! What a moron ! Now I have 500 Facebook contracts in the overnight market. I thought it was 3 a.m. We run hedge funds here. We run a community of traders. We started from nothing. I'm from Los Angeles, our main trader is from Boston. We decided to come here and try to make a fortune. This is Bryan Wiener. He was head of traders at Trading Machines ... which was headed by this man, Haim Bodek ... the "killer algo trafficker" is what he is called here. He teaches us the microstructure ... and we use it to try to become better traders. Me, I have fun watching these guys challenge the machines. And they're getting there, it's fascinating, given what's going on in this industry. Peter Zhang and his friends rented an apartment in Manhattan ... to launch hedge funds. They have just started working with Haim Bodek ... to develop an algorithm that simulates the daring behavior of a trader. Charlie lives here. It was supposed to be an office ... it has become a tropical jungle. He lives there quite well, he has his own fan, his own bathroom. Anand is our main trader, he has the biggest chamber in the world. This is the master bedroom. Obviously, there is everything you need, it's a very large room ... he pays a big chunk of the rent. Most of the time, after working, when you're exhausted ... we sit on the sofas. We're still together, that's where we hang out ... this is also where I sleep. Here is my quilt. I should tidy up a bit. - Where does Haim sleep when he stays? When Haim stays, he sleeps there. We contacted him by Twitter, we called him ... he looked like a genius on the phone. He was told he had to come here ... to see our work, which he would love, that we could partner with. He disembarks, he walks at full speed. He's wearing a suit that's too big for him, and he's like, "Hey, how's it going?" Anand has prepared a list of questions to ask Haim Bodek. I tell him, "Okay, we'll do this." And we see that Haim is doing a special thing, we call it "doing the Haim". He does not stop, the genius is released. He is well respected, he has a lot of experience. He has an impressive curriculum. But no one forgets that he was a high frequency trader ... and that his system has failed. That's why the industry has a certain image of him. Some say he is not credible ... that this or that does not happen anymore, today. But there is no evidence to prove it. After speaking to Scott Patterson, who posted Bodek's revelations ... in his book "Dark Pools" ... Bodek decided to go to the US financial market authorities, the SEC. On Wall Street, there is a culture of confidentiality. It doesn't happen, going to the SEC ... and reveal to them what is going on internally on Wall Street ... how things work. You're an outcast if you do that. And I say to myself: Everything will disappear. Someone's gonna talk, it's gonna disappear overnight. These are just a few lines of code, the basics. Everything is artificial. Bodek's complaint is registered by the SEC market authorities. The investigation has been going on for 2 years now. The SEC does not give details on its progress. The SEC took no action, and it's been two years already. And we know very well that they tend to impose fines on the stock markets ... and to ensure that things are running smoothly. So either nothing happens or it's so complicated that it takes years. It is obvious that trading companies are much more sophisticated ... than the SEC. I think they are very smart. They can go to the SEC and explain why they want some type of order ... why it's useful for the rest of the market, and sound very credible ... without saying that it will allow them to rake in millions every day ... and that it will guarantee them savings. I think proprietary trading companies take advantage of the rules. We created rules that shouldn't have been created. And we've created order types that are closely watched by the SEC. I don't think you can criticize the THF companies ... who followed the rules. Can we really expect financial authorities to adapt ... state-of-the-art technology? The flash crash was followed ... many computer problems. Like those that took place during the public offering of Facebook ... the crash of Twitter, when we announced explosions in the White House ... or the time Goldman Sachs lost $ 100 million ... in 17 minutes due to a faulty algorithm. In a universe surrounded by silence and confidentiality ... no one seems to understand what is going on or control the situation. The market, the interactions in the industry between these companies ... to extremely complex technological systems ... their operation ... make the whole stock system, high frequency trading ... and technologies, very complex. The flash crash is a perfect example. There is no cause and effect to determine. It is useless to wonder what is the cause of the flash crash. It doesn't make sense in the context of a complex system. If the same things happened again, the same way ... there is no guarantee it would cause a flash crash. This is the nature of a complex system. Is it true that many traders do not understand the market? I don't think anyone understands. This is another characteristic of complex systems: they are truly beyond human comprehension. Because we ignore ... We understand very well what our algorithms, our technology do ... but once there is interaction with all the other systems ... it is very difficult to know what will happen. What did your father say when he found out you were an informant? What I have done is consistent with the values instilled in me. Didn't he tell you: "I warned you"? I really think it's consistent with his view of finance. When you make the front page of a newspaper, you are supposed to keep a copy. The title : "A way to outperform others for high frequency traders." About Wall Street Culture ... I think people don't realize how fearful there is. There are a lot of people on Wall Street who think ... that they are very determined and deserving. But at the level of daily life ... fear is constant. If we don't listen to the right music ... when parking in the parking lot ... Literally? - Yes, there is so much fear. The hierarchy is very marked, especially in investment banks. For them, I did the scariest, most unimaginable thing ever. The idea of being in financial distress ... to have his reputation tarnished, to be rejected ... it's their worst nightmare. It was on the rise yesterday, tomorrow it will. There isn't a rule that says: Don't sell short on day one? The only rule is: Don't sell short on Tuesday. It was a courier who was walking his dog who told me that. What is difficult is not really to be exonerated ... it's already done. The problem is what follows. Where am I going now?