Unnatural, but they do have these weird powers in the Financial Markets right now, and the powers are powers to explain complicated things to people, the power to kind of engender trust in others. But the last reason its called flash boys is i knew i wanted flash in the title. A l when i because the markets have taken this term, flash crashes and flash orders and flash trading. And i had a title that was kind of an inert title. I thought i was going to call it the flash trap. I was driving with my kids in the car one day, and they said thats really dumb. This happened pretty rapidly over the last six or seven years where the 13 public stock exchanges are all scattered through new jersey. So they know that and there is only a narrow second advantage. They know that we have yesterdays presence. So now we are talking about the divorce rate. And so theres a lot of unfairness in the system. So that is the problem. And that problem, nobody really knows how big the problem actually is in terms of sums of me. They are essentially being taxed out of investors by wall street intermediaries. Because of these milliseconds . Could yes we met this is something that you write in your book. You write that over the past decade the Financial Market has changed too rapidly for our mental picture of them to remain true to life. The picture that i bet most people have in the market is still a picture of a human being than a human being might have taken. And it a quicker case with alpha males and colorcoded jacket hollering at each other. That picture is dated and the world it depicts his dad. Estimate of the picture that i kind of had in my head when i got into this book. A great sense of what happened. It was only three or four years ago they started hearing this phrase. So its really only been in the last decade that the market has become fully automated. Especially mashed inside of computers rather than human beings on the stock exchange. And its funny. Because it is a problem to describe this. But what this new world is, as you can see, you can see how hard it is for people to get their minds around not just the stock market at all Financial Markets. You watch the tv to see the reports of what is going on. People on the new york stock exchange. The old pictures have been used because the new picture hasnt been drawn. So one of the things i would hope to do, is to leave the reader with a sense of a different sort of picture. And the problem is in order to generate back, you almost have to imagine time the way a computer does. The computer can do this in the time it takes to make one. Its kind of like geological time. But what can be done in america. Host viewer if you were to draw that picture today, would you draw at wall street . Guest i would draw in new jersey. The exchanges are all housing very heavily guarded data centers. And when you go in them, you see there black boxes and ones that is the exchange itself. And the buyers and sellers are connected because the buyer and seller agree to meet at that price. And then you have the boxes of the highfrequency traders who paid 50,000 a month to connect a line directly before everyone office is not what is frontline . Guest the idea is almost like someone who figures out that the show will be sold out, they run up and buy tickets at the box office and then they double the price like it to get skelter. End it with the stock market, what happens often in that they are faster than machines and they are able to anticipate orders. And this includes big and testers. And so its really important. And actually highfrequency traders now are making decisions by improving things with the timing of milliseconds, microseconds. A nano second is a millisecond of a microseconds. And so my point is that their ability to divide your intentions and ask about it create this opportunity. But it happens quite a lot. And what is interesting to me about this story about this young man, he finds himself being talked about and even the most sophisticated investors in america, for example, he finds that everyone understands that there is a front runner going on. But no one understands why and so bill atman, a Hedge Fund Manager in new york often buys and tells big chunks of companies told me that he said before that the main character in the story came to his office and he thought he had insidertrading issue. He was thinking of buying some stock and he would try to buy it and then sell it back for a higher price. So that just captures the flavor. People think learning what you want to do before you do it and doing it to your disadvantage. Host Michael Lewis is our guest in his book is called flash boys a wall street revolt. He is also the author of moneyball and we have him lie on booktv to take your calls. 202 at 585 if you cant get through, sunday tweet and you can make a commenn her facebook page. So what is your history in the Financial Markets . Guest my personal history . Host yes. Guest it was brief but lucrative. I stumbled into a job at Salomon Brothers when i was 24 years old in 1985. And i was trained for six months and i spent two years and at the time i was essentially a derivatives expert. As well as bond salesman. So this is when the Financial Markets were studying Financial Options and it was becoming the rage. My job was to explain them to investors so i was given a crash course as to what the stuff was. And we go out and prioritize. I quit in 1988 and i wrote about the experience working on wall street. Since then i have been an interloper, and i have written about a lot of other things. My family, my High School Baseball coach. Politics. But since the financial crisis i found myself drawn back into wall street to write big narratives. A book called the big short which is about the credit crisis. A book called boomerang, which is about a way it expresses itself in different cultures around the world that shows you something about the cultures and flash boys, which is about how the stock market has evolved since the current crisis. And so my interest in this is different than when i was working on it, obviously. And so they are, what seems to happen is that because of my history of writing about wall street, i have had some access to these narrative stories that have happened to emerge in this time. And i think wall street at this moment is a rich day of material. Host one of the themes throughout is a federal regulation called the Regulation National market system. What is that matt and where did it come from . Guest it was regulated in late 2007 and the response to the fear of unfairness in the market. The possibility caused by the fragmentation of the market. And the stock market was basically to new york stock exchange. You can trade it in one place or the other, and that has changed. The stock market is now urging public exchanges and 40 something public exchanges run by Goldman Sachs and morgan stanley, which you really cant see and you can participate in the sense that you are a big investor. Can give the order to Goldman Sachs and they make the ability to execute this. But you cant see it in real time how it fits into the larger trade and the marketplace. So the market is fragmented and you can really see what is going on. So in order to protect investors in this, the sec says it is against the rule for a broker to trade outside the whatever the best bid or offer it. So lets say that you want to buy shares in microsoft. And if you took a conglomeration of all the market prices are out there of microsoft and the fiftysomething markets that there are and you add it all up, the market is 2999 or 30. And some are willing to sell at 30. The brokers are not allowed to execute your order at a price higher than 30 because there is an offer they are somewhere in the market, though it was to protect investors from being cheated by the complexity of the system. But the problem is with reg ms, why the story begins with it, is how to best bid offers are calculated. They are populated slowly. So it takes a long time for all of this information to be gathered. Leyna host are you talking a day or a week to. Guest we are actually talking milliseconds. But the technology is slow and wall street has an interest in making it faster. Its about market, that official market is a still market and the people who have faster access to information, all of these exchanges it gets executed and microsoft will collapse the next millisecond. In the highfrequency trader can now buy it and sell it back to at the a price of 30. So that is what happens. So the meaning and intent is regulated. And this includes the complexity of the market. And they are creating to market that insiders pay to see. And once that happened, the gap opens between this old and stale official price and the insiders knowledge. Includes billions a year, no one knows. The poses i have been is what my main character calculated from the individual predatory strategies. Once they are made by the traders for faster information, the right to trade against those orders that are done, all they know is the slow market, everyone is in on it and they get paid a lot of money about highfrequency traders. And honestly they are getting very rich. System is basically okay. We are having a hard time figuring out what is going on in the stock market. So they dont really feel the pain but it is vast. And so no one on wall street has any interest in exposing or talking about it and this is why we finish it. The stock market has really become incredibly secretive and why take a detective to figure this out. How on earth does it operate . Has people on the inside, they really dont want to talk about it very much. Host one more question. This is about the culture of wall street. Ronan says it is a whole industry and in reading the book i notice he is a wall street person. But i notice that the fword is thrown around a lot. Guest yes, every time that i come on cspan i hear about that. I have to defend the purity of the language. But it is true. In some weird way, this world of tech and trading is ridiculous. Ive said many times just put in the women in the decisionmaking jobs. But everything would be cleaned up and fine. But the women would not do be with the men are doing. Or something about testosterone and connecting to the markets. But ronan, the name is irish. But a lot of them are immigrants. Ronan is an irish guy in his whole life, he discovers Investment Bankers and financial people and he wants nothing more than to be a wall street person and he spends 12 or 13 years on wall street and he cant. Arguing that they call themselves highspeed traders, yet he works in fiber optics. The boxes that you buy to make your trains go faster. They call it speed in a box. And he finally gets hired and is paid a Million Dollars a year to be a big figure on a wall street trading floor. Then after about a year he says why did i even want to be here . And he becomes almost instantly dissolution. Host our first guest is on the phone. Caller hello, something that you probably know about, level two quotes, my feeling is that i used to be able to look at that and make a decision as to the depth of the market. But it changes so quickly and its my contention that these highspeed computers are corrupting information. Guest okay, when you say that you are trying to make a decision, what are you looking at when you look at this . And who is providing with the information. Caller [inaudible] host what you do for a living . Caller i am retired. Host but you are an investor or trader . Caller i used to be, but im not anymore. Host what is able to quote . Caller it is on an investment screen, you will be a list of any stock and they will show you a list of the orders often in pennies. One hundred dollars plus 10 cents. And they will tell you how many shares are offered on its side and that is to be able to see that on a steady basis and i could digest the information. And now these numbers change the way. Besides changes so quickly that the information is useless to me. Guest theres a big discussion here. What you really want is the subject of my book here. But the exchanges and able to highfrequency traders to use quotes tactically to buy or sell stock so they will be looking at highfrequency traders will spook the market and they will make it look like they want to buy a lot of shares, looking like theres a lot of demand out there. If they are able to look at out that anytime they tried to act on it its gone. And that in itself isand that im with traders and they are trying to defeat each other about what the market really is. And its a different problem spawned by this. And many people have to make the exchange itself or it the software is incredibly complicated to satisfy the needs of the traders and all of the tactics that they want to deploy. They create instability in the system and this is why it was one of the things that was interesting. One big thing, Goldman Sachs, when presented with the story of the main character that they have to tell, they have a choice and in exchange that is simple and fair with the sole purpose and not getting one trader or the other, but Goldman Sachs basically said that this is a moment of trust because we actually think that what has been done in the u. S. Stock market to accommodate highfrequency trading is creating conditions and if we dont make right choices with their exchanges, that this will happen at some point we will get blamed for it. And its all a result of changes of funding of the market. Early just to accommodate and maximize profit. Host we have an email that says the frontrunning is illegal, why is writing software for it not illegal. Guest one of the questions i asked myself in the story his wife is available and wiser and not more outrage about the subject. It wasnt that nobody had noticed it. A lot of people have really noticed that someone had not cried out about it. But it was that war numbed by two things. And the stock market has been booming. Whatever skinner is really isnt noticeable in the context triples. Everyone is making money and the second thing is this point, which is in this question. When its done its not just a liability, people have a sense that there is not willful human action behind it. And they also have a level of complexity and they actually need to parse the algorithms so create a smokescreen and i think an internal moral defense and i think they will direct something that they will never do them of if they actually had to physically do it. Host linda emails and saying what you think of collecting a small fee and then applying this to the federal and state needs, pennies would be turned into the lands of dollars turned into the lands of dollars guest the issue of levying and maybe this is a good way to distort the market. But as a solution to this particular problem, any sort of tax and it may actually get the bad guys and we may get some satisfaction there. But it will have all types of situations. And there is a solution. This is what is so great in the story. Its like a choice that society is being presented with. A very small part of our society. But its actually in all of our Financial Markets. But that market is so important with who we are and the choices between fairness and unfairness in this exchange has been built. And it is part of the solution to the problem which is transparency. People understand how the stock market is being handled and people are being given a choice which way to direct the stock market orders and if they choose whatever market is fair, it will gut the system and go forward. Host we have a tweet, do we really need hedge funds and derivatives and leveraging . Guest know, do we need them . Well, we need love and food and water. But do we need hedge funds and derivatives . Host and leveraging. Guest well, he is going to the complexity of it. So i think this is a very good point. A useful discussion. If you look back that has occurred since the early 80s, you can see that things were created. Collateralized obligation, specialized access for highfrequency traders. Masquerading as efficiencies but are innovation. And they are complicated to the people that were making more money than anyone else. And then we have this metaphor. Every ton of aspect of the economy always seems like kind of a good thing. Because it is true that any innovation in the Financial Sector can be maligned. It seems like its progress, but its not progress. I would not say or list as a malign influence the structure of a hedge fund. Its a structure for a money manager to use. Depending on the money manager, it can be useful. But the problem is that we have a little bit of a taste for it and we dont recognize the social cost of that. So that is a problem. Some of the derivatives, if there could be a watchdog who had to if you introduce the government to the process, you introduce a lot of other problems. But if you wave a wand over wall street and you never have created these default swaps, we would all be better off. Host in the cbs news sites on the story from 60 minutes, i dont know if you had a chance to look at some of the comments that people made on the story. Heres one. I like 60 minutes, but this piece is a crock. They 80 if it is true, it affects large buyers of mutual funds. However, i can limit anything i put in by price and if i dont get it thats fine by me. And what i got from the show, we are talking a few pennies a share. Guest lets talk about this. His point is there are already damages. So no doubt there has been incredible and we are much better off because of computers trading in the stock market than we were before it was automated. And so the problem is technology flowing to investors to customers and people that make telephone calls and they are incredibly cheap compared to where it used to be. Wall street has captured some of the benefits for the elf, totally unnecessary by introducing this inefficiency in the market. Well, then what is the cost of document what is the cost of letting wall street insert itself to buyers and sellers of stocks and take out a few pennies. What you could say is it is not that big of a deal. And its not that different than what was before. Over the market, a few pennies a share, its probably not even that come and accept many billions of dollars per year. So what is that . Ten to 20 billion per year. Attacks on it. If your tax levied on the economy levied by the richest people in the economy. About 20 billion, im already starting to get a little worked up. And then i think, what have they done in order to cure this . Structuring the market in order to make it possible. Well, they compromised this and it is a collaboration of nathan exchanges and made it much less stable than