Chris Blackhurst: Of course the flash boys of Wall Street have behaved awfully, but they've not acted alone over high-frequency trading

Midweek View: In truth, it is the entire system that should be in the dock and needs urgent overhauling

Some of the most engaging lectures on my law course at university concerned insider trading. They came under the subject of company law, and they took us into a world of nefarious, colourful activity, of whispered tips and leaks, and dodgy characters who tried to steal a march on everyone else. There was, as well, a philosophical, discursive element that centred on whether insider dealing was a crime because it was difficult to ascertain who was the victim. Indeed, it was only made illegal in the UK in 1980.

Years later, as a journalist, I remember devoting many hours to the pursuit of an alleged insider-trading ring involving a well-known political figure and his dentist. We never got to the bottom of the claims, and for all I know they were hokum, but they kept us occupied and entertained. The story was that he was picking up all manner of confidential tips from his connections and passing them to his dentist, who would trade away on his behalf and make a killing.

How times have changed. This week, the US author Michael Lewis is in town to promote his new book, Flash Boys, about high-frequency trading (HFT), and the talk on TV and radio is of traders using powerful computers and complex algorithms to manipulate the markets to their advantage.

Like Mr Lewis's previous work, the bestselling Flash Boys is a compulsive, entertaining read. He has mastered the art of taking a seemingly dry subject – one that could not possibly sustain the average reader over one page, let alone a few hundred – and by finding a cast of wonderfully maverick characters, and portraying a David versus Goliath narrative, the little man taking on the giant corporate, makes it as exciting as any movie.

But while the attention in the reviews, and on-air discussions mostly focuses on the evil, nasty, giant banks that pump zillions into building state-of-the-art, world-crushing IT systems, the real villains of the piece barely merit a mention. That is not to criticise Flash Boys – it's brilliant, but in a knockabout way.

The popular thesis has been helped by New York Attorney General Eric Schneiderman, who calls HFT "insider trading 2.0". His office has launched an investigation into the practice. The FBI is already on the case – it's been looking at the HFT firms for a year.

It all seems a long way from my dusty lecture halls and the pursuit of a dentist. That was amateur stuff compared with today's "insider trading 2.0".

However, as ever where City greed is concerned, it is not that simple. Yes, the bankers are behaving awfully, engaging in an activity that has no socially useful function whatsoever, lining their pockets first and everyone else can go hang. We've been here before, though. Who was to blame for the last banking crisis? The bankers who flogged sub-prime to punters who could not afford to repay, or the regulators who saw the selling unfolding and chose to do absolutely nothing about it? I would argue they were both responsible.

Similarly, on the perennially thorny subject of bankers' bonus payments, is it the bankers wanting to earn as much as they can or the shareholders that never do anything to stop them who are at fault? Only last week, the Barclays' annual general meeting saw 34 per cent of the bank's shareholders fail to back its remuneration package. This was hailed as some sort of triumph in the campaign to curb bankers' bonuses.

Since when is 34 per cent a victory? When it concerns supine investment managers who don't want to upset the share price. Of course, the bankers must take the rap but, equally, they've not acted alone: too often, investors and regulators (them again) have turned a blind eye to their avarice. And, human nature being what it is, their desire to make hay should not come as any surprise.

So it is with HFT. How do the traders or "algos", in reference to their reliance on algorithms, get their information quicker than anyone else, details upon which they know they can commit millions in a nanosecond? Three ways. They locate their trading platforms as near as dammit to the exchanges' own systems. It removes any prospect of delay: they're right there, often in the same warehouse building.

In Wall Street's case, these premises are frequently sited in units across the river in less expensive New Jersey. Mr Lewis writes how, as a result, one New Jersey data facility was able to charge trading firms tens of millions of dollars over a few years for a service that would cut their trade times by a few thousandths of a second.

"Wall Street was, once again, a place. It wasn't actually on Wall Street now. It was in New Jersey," he writes.

Second, they use all manner of state-of-the-art equipment to connect their premises, including fibre optic cabling, microwaves and lasers. Mr Lewis describes the work of Dan Spivey, a former futures trader who chased ever-faster trading speeds and ended up boring a hole through the Allegheny Mountains to lay a straight line of fibre optic cable from Chicago to New Jersey.

The cable connected the Chicago Mercantile Exchange with the Nasdaq stock market's operations. By being straight, it was able to shave off milliseconds for the orders that traders sent back and forth.

Third, they pay to get ahead. There is nothing duplicitous or underhand about this: they pay for their own data feeds. While everyone else relies on the public feed, the securities information processor, or SIP, the modern equivalent of the old ticker tape that used to churn out stock market news to brokers, those who can afford it are able to access something quicker and better.

Their feed arrives faster and contains more solid information, such as all the prices being offered, not just the best ones. That detail is fed into their computers and they can get ahead of the rest of the market. Often, they can use a sliver of information to detect a large order in the offing, an "iceberg".

For the exchanges these private feeds are big business, and more lucrative than the traditional public service. Nasdaq, for instance, now makes more money from the private or proprietary data feeds than it does from the SIP. From 2006 to 2012, its "prop" data revenues more than doubled to $150m (£89m) a year.

It can't be coincidence that exchanges have been hit with complaints that their public SIPs have been neglected and are not as reliable and have fallen further behind the super-slick private feeds.

If someone is willing to sell, why are the HFT operations at fault for agreeing to buy? Mr Schneiderman's "insider trading 2.0" is a nice soundbite and may look good and tough on paper, but in reality, where is the crime? How can high-frequency traders be committing an offence if they strike a deal with an exchange for the fastest possible data feed?

When he looks to put on the handcuffs, Mr Schneiderman could do worse than begin with those in the exchanges who supply a smarter product, at a price, than the public ones. In truth, as with sub-prime and bonuses, it is the entire system that should be in the dock and needs urgent overhauling.

With exchanges so willing to help them, the flash boys are not so flash after all. It's David versus Goliath all right, but a battle in which Goliath has been armed by a careless David.

Start your day with The Independent, sign up for daily news emails
Life and Style
Baroness Lane-Fox warned that large companies such as have become so powerful that governments and regulators are left behind
techTech giants have left governments and regulators behind
News
Keith Fraser says we should give Isis sympathises free flights to join Isis (AFP)
news
Life and Style
'Prison Architect' players decide the fate of inmates
tech
Life and Style
A picture taken on February 11, 2014 at people walking at sunrise on the Trocadero Esplanade, also known as the Parvis des droits de l'homme (Parvis of Human Rights), in front of the Eiffel Tower in Paris.
techGoogle celebrates Paris's iconic landmark, which opened to the public 126 years ago today
News
Cleopatra the tortoise suffers from a painful disease that causes her shell to disintegrate; her new prosthetic one has been custom-made for her using 3D printing technology
newsCleopatra had been suffering from 'pyramiding'
News
people
Arts and Entertainment
Coachella and Lollapalooza festivals have both listed the selfie stick devices as “prohibited items”
music
Sport
Nigel Owens was targeted on Twitter because of his sexuality during the Six Nations finale between England and France earlier this month
rugbyReferee Nigel Owens on coming out, and homophobic Twitter abuse
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Ashdown Group: Trainee Consultant - Surrey/ South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Recruitment Genius: Client Services Assistant

£18000 - £20000 per annum: Recruitment Genius: A Client Services Assistant is ...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor