This is the floor of the New York Stock Exchange
on Wall Street 20 years ago.
But today, it looks more like this.
Because stock trades are
barely made by people anymore.
They're made by these guys.
Computers with artificial intelligence.
The machines have taken over.
Welcome to America Uncovered.
I'm your host, Chris Chappell.
When you think of the stock market,
you of course think of people who make money
by finding honest companies
with good prospects,
and investing in those companies over the long term.
Or you think of this.
[people screaming]
The truth is,
neither one is accurate anymore.
The guy who told you to
find honest companies with good prospects
he still probably finds a plumber
by flipping through the Yellow Pages.
Sorry old man.
The stock market is run by computers now.
Also, have you heard of Google?
But it's not masses of
screaming people trying to sell
orange juice futures, either.
Now the real trading floors look more like this.
Wow.
Feel the rush.
What I'm saying is,
the majority of all stock trades
are now being done by computers.
Including computers run by
artificial intelligence programs.
Some of them perform only
simply buy and sell transactions,
which take advantage of price differences
between two different stock markets
like the exchange in Chicago
and the one in New York.
Other computer programs are
incredibly complex.
Some of them are even programmed
to do things to manipulate prices
like flooding the exchanges with
fake offers which change the bidding price,
and then retracting those offers.
This is called "spoofing."
And it's all done in fractions of a second.
And these computer programs are
making huge sums of money.
Obviously, the computers themselves aren't
trying to get rich.
Machines don't want money.
They just want the power
to control the human race.
And of course, they want to throw wild parties.
It's we foolish humans who,
in our quest to get as rich as possible,
have gradually over the past two decades
handed over more and more
control of the stock market
to computer software.
Today, the floor of
the New York Stock Exchange
is mainly just the set backdrop for financial news shows.
The actual trading is happening here.
I know, it looks like one of those
ugly office buildings along
the New Jersey Turnpike.
Because that's exactly where it is:
Secaucus, New Jersey.
The New York Stock Exchange
and other exchanges have set up shop inside.
Interconnected servers here are processing
about 10 million messages per second
to facilitate trades that are happening
faster than a human can blink.
This is called High Frequency Trading.
Trading brokerages pay
huge sums of money
to set up their own servers inside.
Because being physically closer
to the exchange allows them to make
stock trades faster than their competitors.
Even if the difference is only a few microseconds,
it's an enormous competitive advantage.
That's is the topic of the book
Flash Boys by Michael Lewis.
He talks about how one company
spent $300 million to build a fiber optic cable
to connect the Chicago exchange
with the New York exchange
based in New Jersey.
To reduce the time it took to transmit data
by 3 milliseconds,
the company spent months drilling
through the Allegheny Mountains
to make the cable as straight as possible.
But once they completed it,
cha-ching!
Brokerages forked out billions of dollars
for the right to access that cable,
because, like I said,
those few milliseconds were
a huge competitive advantage.
That is, until someone else built
a pair of microwave dishes in each city
to transmit the same data.
It was a few milliseconds faster.
So that rendered their $300 million dollar
fiber optic cable instantly worthless.
The point is, in the modern stock markets,
speed is everything.
The markets are dominated by computers
making high frequency trades
thousands of times a second.
Combined, the world's stock markets
are worth about 70 trillion dollars,
give or take.
I mean,
what's a few trillion bucks between markets,
am I right?
But don't worry.
Your money will be fine.
Maybe.
See, in the decades before
high-frequency trading became popular,
the US stock market had a lot of ups and downs.
Like the market crash in 1929
that kicked off the Great Depression.
Or the one in 2008
that kicked off the Great Recession.
Or the one in 1987
that you probably don't know about,
that was the same year we got
Never Gonna Give You Up.
Which, to be fair,
has had the most lasting impact.
[singing] Never gonna give you up
Never gonna let you down
But those three big
stock US market crashes
were all caused by human error.
A few people started selling,
and then other people panicked,
and then a huge wave of selling caused a market crash.
Fortunately, now that most trades
are being done by computers
with artificial intelligence,
it's fixed the human error problem.
I mean sure,
there was that flash stock market crash
back in 2010 that was probably
caused by computer programming errors.
But those problems have been fixed, now.
So these kind of flash crashes don't happen anymore.
Well, ok, there have been a few more since then.
But those problems have been fixed as well.
Now flash crashes only happen
12 times a day and
we can't prevent them.
So if high frequency trading
has so many problems,
why do the stock exchanges allow it?
Money!
You didn't think the stock exchanges were
nonprofit organizations, did you?
The stock exchanges,
like the NASDAQ
and the New York Stock Exchange,
they make a small percentage of every trade.
So the more trades that are made
every millisecond by these computers,
the more money they make.
Plus, they make money by selling
data streams containing critical realtime price data.
Plus they rent out server space in their facilities,
so brokerages can be physically closer,
and therefore microseconds faster,
than their competitors.
So whether the market goes up or down,
the exchanges make money.
But does high frequency trading
provide any value to the markets as a whole?
Maybe.
Some argue that because high frequency trades
are so prevalent,
they provide liquidity to the market.
That is, they help keep the money
easily moveable when it needs to be.
In a sense this is probably true…
until it's not.
Because a lot of computers are programmed
the same way to interpret sell-offs,
so they all react in the same way.
And that causes an ever bigger sell-off.
In other words,
liquidity evaporates when it's most needed.
Actually, these computer programs
tend to act a lot like human traders,
only faster.
They have the same reactions to market changes.
And some of them are programmed
to do unethical things,
as regulators struggle to catch up.
And that shouldn't be a surprise.
Since it's stock traders
who programmed the machines.
Well, it's more like they hired
the nerds they beat up in high school
to program the machines.
The point is, high frequency trading is just
the technological evolution of human trading.
Yes, it's the beautiful future we all imagined.
Inside a warehouse in New Jersey.
But let's say we want to
reduce the negative effects
of high frequency trading.
How would regulators go about doing this?
There are a few options:
One solution would be
simply to make it illegal.
But the logistics of this would be a nightmare.
What constitutes high-frequency?
What effect could this have
on more legitimate active traders?
In fact, some practices,
like the spoofing that is believed
to have led to the flash crash in 2010,
have already been banned.
Hillary Clinton and Bernie Sanders
both proposed financial transaction taxes in 2015.
In Sanders' plan,
trades would have been taxed at 0.5%.
While this would have certainly been
prohibitive for high frequency trading,
it might also hurt more traditional investors
and pension plans.
Another option is to tax only trades
where the buying and selling
of a single asset happens
in less than a certain amount of time,
say, one second.
This would definitely reduce
the fastest high frequency trading.
But I'm sure programmers
would figure out how to make trades
in as close to one second as possible,
which would negate
most of the benefits of the regulation.
And finally regulators could continue
to go after specific practices that are abusive,
like spoofing,
but not stop high frequency trading in general.
This is largely a reactionary policy,
but the least invasive.
At the end of the day,
traders are going to try to whatever they can
to make money.
And some of them are going to do things
that are...not ethical.
So even though
the days of Wolf of Wall Street are gone.
The spirit remains?
Thanks for watching this episode
of America Uncovered.
Once again, I'm Chris Chappell.
See you next time.
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