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Volkswagen has the most tdi clean diesel models of any brand. Hurry in and get a 1,000 fuel reward card and 0. 9 apr for 60 months on tdi models. Kroft this month marks the fifth anniversary of the current bull market on wall street, making it one of the longest and strongest in history. Yet u. S. Stock ownership is at a record low, and less than half of Americans Trust banks and financial services. In the last two weeks, the new York Attorney general and the Commodities Futures Trading Commission in washington have both launched investigations into High Frequency computerized stock trading that now controls more than half the market. The probes were announced just ahead of a much anticipated book on the subject by bestselling author Michael Lewis called flash boys. In it, lewis argues that the stock market is now rigged to benefit a group of insiders that have made tens of billions of dollars exploiting computerized trading. The story is told through an unlikely cast of characters who figured out what was going on and devised a plan to correct it. It could have a huge impact on wall street. Tonight, Michael Lewis talks about it for the first time. Whats the headline here . Michael lewis stock markets rigged. The United States stock market, the most iconic market in. In global capitalism is rigged. Kroft by whom . Lewis by a combination of these Stock Exchanges, the big wall street banks, and High Frequency traders. Kroft who are the victims . Lewis everybody who has an investment in the stock market. Kroft Michael Lewis is not talking about the stock market that you see on television every day. That ceased to be the center of u. S. Financial activity years ago, and exists today mostly as a photo op. This is the stock market that lewis is talking about, the one where most of the trades take place now, inside hundreds of thousands of these black boxes located at more than 60 public and private exchanges, where billions of dollars in stock change hands every day with little or no public documentation. The trades are being made by thousands of robot computers, programmed to buy and sell every stock on the market at speeds 100 times faster than you can blink an eye a system so complex, its all but invisible. Lewis if it wasnt complicated, it wouldnt be allowed to happen. The complexity disguises what is happening. If its so complicated, you cant understand it, then you cant question it. Kroft and this is all being done by computers. Lewis all being done by computers. Its too fast to be done by humans. Humans have been completely removed from the marketplace. Kroft fast is the operative word. Machines with secret programs are now trading stocks in tiny fractions of a second, way too fast to be seen or recorded on a stock ticker or computer screen, faster than the market itself. High frequency traders, big wall street firms, and Stock Exchanges have spent billions to gain an advantage of a millisecond for themselves and their customers, just to get a peek at stock market prices and orders a flash before everyone else, along with the opportunity to act on it. Lewis the insiders are able to move faster than you. Theyre able to see your order and. And play it against other orders in ways that you dont understand. Theyre able to front run your order. Kroft what do you mean front run . Lewis means theyre able to identify your desire to buy shares in microsoft and buy them in front of you and sell them back to you at a higher price. It all happens in infinitesimally small periods of time. Theres speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds. But its enough for them to identify what youre going to do and do it before you do it, at your expense. Kroft so it drives the price up. Lewis so it drives the price up, and in turn, you pay a higher price. Kroft Michael Lewis is not the first person to allege the stock market is rigged, or that High Frequency traders are front running the market. But he was the first to find Brad Katsuyama, who is the first to figure out how it was being done. Lewis a very unlikely character, a trader at the royal bank of canada, a young canadian man named Brad Katsuyama realized that the market that he thought he knew had changed. The market seemed to be willing to sell a stock. But the minute he went to buy it, someone else bought it, the stock went up. It was as if someone knew what he was doing before he did it. Kroft back in 2008, katsuyama was 30 years old and running the royal bank of canadas stock desk in new york with 25 traders working for him. Every time one of them tried to buy a large block of stock for a client, their order would only be partially filled and the price of the stock would go up. It kept happening over and over again. Brad katsuyama the best analogy i think is that your family wants to go to a concert. You go onto stubhub, theres four tickets all next to each other for 20 bucks each. You put in an order to buy four tickets, 20 bucks each, and it says, youve bought two tickets at 20 bucks each. And you go back and those same two seats that are sitting there have now gone up to 25. Kroft whatd you think the problem was . Katsuyama i had no idea. I couldnt get answers. Kroft at first, katsuyama thought it must be that the technology at r. B. C. Was slow, until he went to stamford, connecticut, and paid a visit to one of the largest hedge funds in the world. Katsuyama the same things that i was experiencing as a trader, one of the most sophisticated hedge funds in the world was also having the same problem. Then the light bulb goes off. You say, holy cow, this is, this is a huge problem. Kroft you were determined to get to the bottom of it. Katsuyama yeah. Kroft why . Katsuyama laughs because it just didnt feel right. It didnt feel right that people who are investing on behalf of Pension Funds and Retirement Funds are getting baitand switched every single day in the market. Kroft katsuyama suspected that the problem had something to do with plumbing, the way the trades were routed through fiber optic cables from his trading desk in Lower Manhattan to the 13 public exchanges in northern new jersey. But no one would tell him exactly what happened to his orders once he hit the buy or sell button. So he put together a team of technical experts, traders and, most importantly, an Irish Telecom guy named ronan ryan, who was an expert on high speed fiber optic networks. Ronan ryan i knew nothing about trading until my first day at r. B. C. , when i sat in that threehour meeting on algorithms. I called my wife afterwards, and im like, holy crap, i have no idea what they just said. Kroft ryan had done work for the High Frequency traders. He knew what they were building, and he knew about the colossal amounts of money they were prepared to spend. He told brad about a Company Called spread networks that had laid a highspeed fiber optic cable from the futures market in chicago to the exchanges in new jersey. They spent 300 million just to shave three milliseconds off the fastest route, and were leasing access to High Frequency traders at 10 million a pop. Lewis from Brad Katsuyamas point of view, when he heard they were willing to spend that kind of money for milliseconds, it told him the sums involved were vast. That was one of the first questions he said he had. He says, all right, im getting ripped off, everybodys getting ripped off. But what does it add up to . And i think when he heard the story of spread networks, he realized this is tens of billions of dollars were talking about. Kroft ronan ryan also knew where all the cable was buried, and had detailed maps of the fastest routes from the financial district in Lower Manhattan to the various Stock Exchanges in new jersey, all calculated down to the millisecond. Ryan so i would sit there, roll out maps, and roll out this data center as a box and a line going through it. And they had no idea what i was on about. And then id be like, hey, are you guys aware of where these data centers are located . Of course youre arriving there at different time intervals. Kroft for brad, the maps turned what had been an abstract idea into something he could actually see. The first place his orders were landing was the Bats Exchange across the river in weehawken, new jersey, and High Frequency traders were lying there in wait. Lewis brad realizes, oh, my god, thats how im being front runned. Im being frontrunned because my signal gets to the Bats Exchange first, and they can beat me to all the other exchanges. Kroft it only took a tiny fraction of a second for brads trade to reach the next exchanges on the network, but the high speed traders were able to jump in front of him, buy the same stock, and drive the price up before his order arrived, producing a small profit of just one or two pennies. But it was happening to everyones trades millions of times a day. Ryan that adds up. Kroft you make it sound like a skim. Ryan what else would you call it . Lewis one Hedge Fund Manager said, i was running a hedge fund that was 9 billion, and that we figured that the, just our inability to make the trades the market said we should be able to make was costing us 300 million a year. That was 300 million a year in someone elses pocket. Kroft is this illegal . Lewis no. Thats the thing thats so shocking about all this. It should. Kroft well, you used the word front running. Front runnings illegal. Lewis this form of front running is legal. Its legalized front running. Its crazy that its legal for some people to get advance news on prices and what investors are doing. Its just nuts. Shouldnt happen. Kroft ronan knew the only way to beat the High Frequency traders was to take away their milliseconds advantage that allowed them to sniff out slower trades and beat them to the exchange. He had an idea how to do it. Katsuyama and he said, youre probably better off trying to go slower, which means send the order to the exchange located the farthest away first and send the order to the one thats located closest to you last. So stagger when you send them out with the goal of arriving at all places as close to the same time as possible. Kroft katsuyama and his team developed software that did just that, allowing the orders of royal bank of canadas customers to reach all of the exchanges at the same time, cutting the High Frequency traders out of the equation. Katsuyama and essentially, our fill rates went to 100 . We couldnt believe it when. When we actually figured it out. Kroft so you beat speed by slowing it down. Katsuyama yeah, as crazy as that sounds. laughs kroft katsuyama and his team went out and began selling and explaining what they had discovered to the big mutual funds, Pension Funds, and institutional investors, people who had suspicions that they were being front run but didnt know how. And nobody had really bothered or tried to figure this out until Brad Katsuyama came along. Lewis it was in nobodys interest to, correct. I spoke to dozens of investors, big investors, famous investors who. Who said that, when Brad Katsuyama came into my office and laid out to me how the market was rigged, my jaw hit the floor. I mean, i knew something was wrong, i just didnt know what it was and no one had told us. Katsuyama part of those meetings led us to believe, holy cow, this is. This is really something. Because some of the most sophisticated, largest Asset Managers in the world, this is the first time they were hearing this story. Kroft and some of the most famous names in the american stock market heard the pitch. Lewis the capital group, t. Rowe price, fidelity, vanguard, i mean, it, one after another. He was in their offices. They said, this man walked in. Why is he going to know how the stock market operates . And. And at the end of the hour, they said, oh, my god, he understands. Kroft Hedge Fund TitanDavid Einhorn of Greenlight Capital is one of the believers. Was he able to show you how your orders were being front run . David einhorn oh, yeah. They had. They got the marker and the white board and started drawing maps and boxes, and wires and locations. And yeah, we went through it in some detail. Kroft did you find it interesting . Einhorn it was. It was. Kroft clients like einhorn encouraged brad and his team to do something bigger. Thats when katsuyama, a conformist even by canadian standards, decided to do something radical. In 2012, he quit his highpaying job as head trader at r. B. C. And went off with some of his team to start their own exchange. You were making good money at royal bank of canada . Katsuyama yeah, right. Kroft millions of dollars . Katsuyama right. laughs i guess. I guess Everybody Knows that now . Right, yeah. Kroft why did you want to go off and walk away from that job and start a Stock Exchange . Katsuyama yeah, wasnt an easy conversation to have with my. My wife, thats for sure. It almost felt like a sense of obligation to say, we found a problem. Its affecting millions and millions of people. People are blindly losing money they didnt even know theyre entitled to. Its a hole in the bottom of the bucket. Kroft they set out to build an exchange funded exclusively by large traditional investors. They called it i. E. X. , the investors exchange, and quietly launched it in october with the support of some of the biggest players on wall street. And it comes with builtin speed bumps to eliminate the advantage of high speed predators. Lewis and the way they did it was they coiled 60 kilometers of fiber optic cable between themselves and the High Frequency traders computers. They call it the magic shoe box, and it looks like its got fishing line in it. But essentially, a High Frequency trader, if he tries to react on the i. E. X. Exchange, his trade goes for 60 kilometers until. So hes. Hes in east jesus. Kroft so it gets there the same time as everybody else. Lewis it gets there same time as everybody elses. Kroft do you think they can game you . Ryan i think that theyll try to game us. I think the fact, though, that weve gone and met with the majority of the biggest High Frequency firms to explain what the magic shoebox is doing, and that people havent said, oh, thats rubbish, that wont work. Weve had many ask us for a backdoor, to be honest. So that says something that itll work. Kroft the exchange is off to a strong start, although it is still very small with lots of powerful enemies that like the status quo and are trying to starve i. E. X. By discouraging customers from u