Money Bots | High-Frequency Trading | Scam | Full Documentaries

[Music] the 5th of February 2018 at 3 p. m. local time the Dow Jones plummets as though the stock exchange has been hit by lightning it loses more than 1500 points in a matter of minutes never before in the history of the index have American stocks lost so much in a single day approximately $2,000 billion vanish in a puff of smoke and New York is not alone the collapse spreads like wildfire to Frankfurt Sydney Tokyo Panic erupts nobody knows what has caused this disaster there is no discernable real world economy reason there are no New Economic predictions no unemployment statistics the only explanation that is offered sounds strange apparently the trading computers were too fast [Music] how is it possible that a fringe development of automated stock trading the astronomic acceleration of computer systems could almost cause a worldwide financial crisis in Berlin Gard schik campaigns for more transparency in the financial sector essentially high frequency trading significantly reduces the time that a stock is held before being sold sometimes it's just milliseconds or even microc seconds highfrequency trading is the opposite of long-term investment which is what stock markets were actually designed for access to stocks also became a lot faster the quality of the investment was no longer the deciding motivation for buying or selling all that mattered was who could react the fastest highfrequency trading is performed exclusively by computers not people these computer systems are completely autonomous essentially they are Waring Bots high frequency Traders Place their computers as close as possible to stock change computer systems a process known as collocation proximity and high-speed connections are a deciding factor for example a pension fund wants to buy 600,000 shares at a price of $950 their order goes out to various stock exchanges when the order arrives at the first stock exchange a highfrequency trading system detects it and immediately places its own orders for the same shares with all the other exchanges faster than the pension fund can thanks to its high-speed systems the highfrequency trader is able to buy up all the shares at a price of $99.

50 then sell them to the pension fund for $951 the highfrequency Trader has earned $6,000 within a few milliseconds and with no attached [Music] risk highfrequency Traders do not have to be active in the markets permanently their advantage is most effective when crises disasters or political decisions cause strong price [Music] fluctuations essentially highfrequency Traders benefit from crisis and are constantly waiting for the next one to occur in the beginning the intention was to use greater predictability and faster infrastructure to increase the stability of financial markets in fact the opposite has occurred automation has made them more vulnerable after all there is no electronic system that cannot be [Music] hacked I had a bot you know a trading engine was running in Frankfort remotely but it was being controlled from London what happened in this particular case is that an internet related outage caused us to lose control over the engine that was in Frankfurt and I remember for a couple hours uh trying to validate that the engine itself was um demobilized it turned out my engine was actually live I had actually designed a feature that said if you break connection with the Mother Ship stopped trading but that feature had a parameter and it was off I had this engine that was basically uh trading it could have lost you know it could have lost 30 million dollar right it it lost a few hundred thousand uh but it was uh it was a terrifying experience Heim bodek is a Trader and commerce software developer in Stamford Connecticut he played an important role in the development of automated stock trading his idea of using computer algorithm Ms to process information as efficiently as possible is one of the foundations of modern stock trading a second prerequisite for success is a high-speed data connection the French businessman Stefan tiik knows all about fast data transfer his companies McKay brothers and Quincy data are based in Paris and California and operate the fastest data connection between New York and Chicago the homes of America's most important stock exchanges Stefan tiik and Heim bodek are players in a global battle for the best computer software and the fastest data networks this contest began a long time ago in the casinos of Las Vegas [Music] at the end of the 1960s a new generation of scientists recognizes that it is possible to use computers to increase its luck at the tables Pioneers like Edward Thorp and Blair Hull develop algorithms that allow them to count cards when playing blackjack and to make predictions DNE farmer takes a different approach in the 1970s the physicist makes roulette his field of expertise Bama and his team begin to [Music] play they soon discover that it's possible to predict the course of the ball if one knows its current position and speed and then we embarked on building a computer that would allow us to do this now this was 1976 when we got started so you have to realize at that point there were no personal computers or anything like that in Pennsylvania's Al leany mountains Stefan te's company is working on making the fastest data connection between New York and Chicago even faster for [Music] an algorithm is a rule for answering questions algorithms provide the foundation for Farmers bets at the casino [Music] a computer is required to process algorithms quickly at the time however these are large expensive and slow this begins to change in the mid 1970s the 6502 microprocessor had just come out same microprocessor that the guys from Apple used to build the Apple computer DNE found team designs a computer around the same processor the initial version of it was under the armpit there was a pack of ablea batteries under the other armpit uh switches in the shoes wires running up and down an antenna around the shoulders the antenna would transmit the signal to a second person who would then place the bets from the moment the creier spins the ball until until the ball until the bets get closed there's typically about 10 seconds that pass 10 to 15 seconds um so we had to be able to take the data for the rotor and the ball and get the prediction four to 6 seconds ahead of when the bets got closed so that the better had enough time to reach over and place the vs so we had to have the prediction coming pretty fast the computer we had ran very slow by modern standards but because it was you know carefully coded machine code we were able to get the answer out in a matter of a fraction of a second do Farmer's computer became the stuff of Legends it wasn't just any computer it was the first computer built into clothing while Steve jobes and Steve wnac were creating the original desk top computer DNE farmer was building one in a shoe farmer himself becomes an icon for people working in the field of computer-based predictions farmer and his team eventually decide that their winnings at the roulette wheel do not justify the risks they are taking they return to more serious scientific Fields farmer finds himself at Los Alamos where he investigates methods of predicting the weather among other things then the world changes or at least the world of money now let's go to the financial desk in New York and to Bill Harley to find out what's happening on Wall Street s there's only one word to describe what's happening and that is panic the Dow Jones Industrial Average is off almost 200 points it is down by 191 had been down on all right now volume 345 million shares incredible day on Wall Street the Dow Jones Industrial Average right now down 27153 points putting the Dow below the 2000 Mark the Dow right now at 19752 during the 1987 stock market crash investors attempt to dump their shares in a panic their Brokers eventually begin to ignore the frantically ringing telephone the authorities decide that more trading should be left to computers as people simply are not reliable enough the New York Stock Exchange remains America's largest but Chicago becomes the center of new Financial Technologies the hull Trading Company is one of the Pioneers in the field of big data and Market predictions in the early 1990s the company is considered a measure ing stick by many [Music] Traders like DNE farmer Hull trading company's founder Blair Hull had originally put his mathematical skills to the test in Las Vegas where he counted cards at the blackjack tables in the 1970s he is one of the first to recognize the potential of automated Financial trading in 1985 he founds his own company in Chicago the center of us derivative trading himim bodek joins Hull's team in September of 1997 quantitative analysts are also in high demand in Europe the best emerge from the universities in Paris mathematicians are welcome additions to the market as our physicists like Stefan te come while we were doing the roulette project our friend Rob Shaw came over and said I just found out about this amazing thing of chaos so we went up to the lab and we looked at the simulation on the analog computer and we were just amazed because you could see that even though there were deterministic equations was making this random looking set of patterns on the screen and so we got completely fascinated by that and we um we created algorithms for find finding identifying patterns in nature that are described by chaotic [Music] Dynamics do farmer devotes himself to studying patterns that allow predictions to be made one of his areas of study is meteorology farmer and his team in Los Alamos are able to expand the time frame forec precise hurricane predictions from 2 days to 5 this gives Emergency Services valuable time to evacuate people in [Music] danger every time I would talk about this somebody would say well have you applyed this to the stock market and so I kind of got tired of saying no meanwhile I heard about the efficient markets hypothesis which says that stock markets are inherently unpredictable it was a very popular Theory at the time and I didn't believe that so Norman and I once again left he left his job at University of Illinois and I left my job at lamos and we gathered with some other uh younger scientists and a business guy and started a company to use computers to predict the stock market this was in 1991 and we called ourselves prediction company [Music] [Applause] Contin the Paris Stock Exchange is not the only empty shell even Wall Street is little more than a movie set these days this interaction data center is located in an anonymous building on the outskirts of Vienna Austria the company has 13 such collocation centers throughout Europe more than 100 internet service providers five internet exchanges and important cloud services have computers stationed here as does Vienna's Stock Exchange the exact location is kept secret and there is no official confirmation of the presence of Stock Exchange computer community of Interest time is of the essence for for this reason the Vienna stock exchange's most important server over which deals are made isn't located in Vienna at all it is in Frankfurt in the race to buy or sell it's important to be as close as possible to the main server of the main Stock Exchange proximity Is time and time is money in the 1990s us trading is divided between the New York Stock Exchange on Wall Street with its traditional trading floor and its traditional companies such as IBM and General Motors and the electronic stock exchange NASDAQ the European Market's actually went electronic first and many of us who were part of that transition from floor to electronic markets we kind of uh were groomed in the European markets first and then we came back to the States matter of fact YX is quite interesting to me uh looking back because it was the first exchange where where I found um you know basically a cheat to [Music] exploit I got a lot of credit and I got a you know a big promotion for finding a cheat on on the urix exchange to get prices faster than we should have and um you know years later when I hit the front page of the Wall Street Journal for my whistleblowing against direct Edge um a former colleague from Hull uh contacted me by email and said hey what you turned on a direct Edge is very similar to what we were doing on your X and uh I had been a whistleblower for a year and had not really acknowledged that I was guilty of the same type of thing that I had turned in you know I just hadn't equated the two and it it it made me realize how difficult it is for people to really see what they're doing uh in our industry when we founded prediction company we didn't know anything about financial markets our method was to look for patterns in the data and uh when we found those patterns then we would design a trading system that would make bets based on the patterns what do you think let's go we learned some lessons from wette one lesson was that you've got a B big the stock market also to make a good model you don't have to predict very well if you're right 55% of the time if you make enough debts then you can make a pretty good profit and unlike roulette where if you start to win they can just throw you out or threaten to break your kneecaps um the stock market they don't kick you out for winning so we actually took us about 5 years before we really found something that genuinely worked in a consistent way but once we did that it work very well and uh so prediction company traded subsequently for about 25 years uh though I left in um 1999 my goal had originally been to do it for 5 years and make some money and then go back to doing science research it took me eight years so we ended up selling it to UBS in about 2006 for $100 million speed is not only essential when operating a stock exchange investors and Traders also have to react quickly those who are first to recognize price differences between stock exchanges can use this advantage to make a lot of money at the turn of the Millennium the large Banks realize that they are falling behind their competition in 1999 Goldman Sachs buys the hull Trading Company for half a billion dollars Hull was supposed to be become like the backbone of you of Goldman and it really didn't and it really was a very very um different culture at Goldman than than at Hall and and many of the my people I related to and didn't feel at home dissatisfied with the investment bank's business practices a number of former Hull Trading Company employees leave Goldman Sachs in 2003 bodc joins UBS which is planning to to open a new trading floor in Stamford he is tasked with creating the infrastructure from the ground up I remember the first time I heard about high frequency Traders um the I was in the elevator with a person who's um you know very very senior in the business now and he was complaining about how they would interfere with you know the the trading profits of the desk he was running but that they didn't make that much money and that was that was just so interesting is that this strategy class made a huge amount of volume but but not much money at all and we were like why would people do that you know why would you do all that work and uh make such a small profit many were surprised by the rise of highfrequency trading the financial journalist Jennifer Neil kept a close eye on developments from the very beginning s [Music] trading a a while the explosion of highfrequency trading in the early 2000s continues Heim bodek is developing new trading strategies for his employer UBS he calls it size game his algorithm follows a simple logic because large orders are given preferential treatment by the stock markets the money bot dynamically increases its order to remain at the Forefront and push out competitors however there is a catch he has to ensure that the artificially inflated order never actually takes place if you put huge orders out there of that size and they all trade you will go pretty much instantaneously belly up okay um I won't go into details but it happened to other firms um it's it's a game of chicken in a way we had to write algorithms that said if you traded 30,000 contracts you didn't want to trade those 30,000 contracts so try to dump them immediately on another exchange where some other market makers still quoting 30,000 contracts so we we created all the this algorithm and this kind of war in terms of getting the largest what we call participation rate it turned into this horrible game of chicken and hot potato where you quoted more than you than you really should in in any responsible Manner and then if you actually got hit which happened you needed to dump it on other people before um before they realized that the Hot Potato was coming it was as stupid as you can get it was it was just stupid so the algorithm that I designed was powerful enough that everybody else had to match it and that actually brought down the market system the market data system of the US options Market to the brink of like collapse basically and it was so cool for me I was like I just like literally just love this uh I could see how many months it took for another firm to realize what I was doing and try to introduce the same algorithm them and it took 3 years for seven firms to figure it out Heim bodex size game turns him into a financial Rockstar however he knows that he can't play the game forever it is time to strike out on his own I walked out with the team and I set up trading machines it was a uh 2007 and it was uh designed to be you know a Ferrari but an independent Ferrari to me you know for me what was really a dream is to be independent I didn't realize it was going to turn into an odyssey bodc leaves UBS at a time when the stock markets in the USA and Europe are changing dramatically part of this is due to the highfrequency Traders the large investment funds are angered by the fact that the small flexible high-speed Traders are constantly snapping at their heels the banks begin to set up internal exchanges which allow trades to take place in [Music] secrecy more than 40 of these so-called dark pools are established as alternatives to the 13 regular stock exchanges in the USA alone the movement of investors into the dark pools forces the stock markets to cater to the highfrequency Traders and they soon make up the majority of Trades some estimates put the number as high as 70% before long the banks themselves cannot resist the temptation of the high frequency money and open up the dark pools to high frequency trading speed is all important [Music] we launched right before the financial crisis we launched basically into it we traded through it we scaled out uh all of our algorithms on and memberships on major exchanges pretty much hit what I call full footprint and we went to uh half% US market share pretty much overnight and uh things were going very well uh until May 2009 when um things mysteriously stop stopped [Music] working we built a system that would basically measure that the trades that we intended to do were in fact uh profitable and that were the trades that the the machine should be doing over the period of 2009 um I started seeing uh changes the stock trading that we did changed quite a bit over that period of time and what happened was um I you know kind of bought into the what I think of now as a myth where people say oh that that exchange is toxic and and and uh you know without you know that's just kind of a blanket term right you know I'm getting screwed on that exchange that's what being toxic means so what I what was happening um is uh I would keep redirecting our trading towards the exchanges that were less toxic uh and then there were n so the the last exchange uh to go toxic was was direct Edge uh in May of 2009 uh I was out of the I was you know away from the office and uh for a week and I came back and there was this dramatic change that was so severe that it uh basically took the business from modestly profitable to Flat in order to confront the problem Heim bodek immediately buys faster connections and price feeds he optimizes his codes but the problems increase he watches powerlessly as the blood drains out of his company facing bankruptcy Heim bodek encounters a drunk direct Edge salesman at a [Music] party he just told me and he outlined three major abuses he I got interested and I remember taking out a napkin I don't know where we found the pen or something but I wish I had this napkin still I'm you know I'm like what this do you mean it works like this and he explained to me these very very sophisticated uh abuses and um he said to me that they' built all the stuff to attract high frequency Traders but they hadn't done a good enough job so now they were going to make new high frequency Traders and I was invited in the club to become a new abuser it was 20 minutes of work to fix these problems that I been chasing for half a year and this guy could have just told me half a year ago and you know if he had told me much earlier I prob it probably wouldn't have crossed my mind how wrong it was but I was so angry you know it was very clear to me that you either used the cheats or you were a victim it was designed there was no middle ground you you you could not be innocent once bodek discovers the reason for his company's failure he he embarks on a last ditch attempt to save it however he is too late trading machines enters bankruptcy during the turbulance of 2010 and 2011 for the first time Heim bodek is forced to confront the realities of high frequency trading do you think the high frequency trading industry wants to say well we're using uh you know undocumented special order types and an obscure exemption and regulation NM nms to get to the top of the queue no they're going to tell you they're faster than you and that was you know that's a false flag let's say or or I don't know what the right term is but uh you know the red herring speed is uh a red herring for for um for a lot of of tricks that my industry has developed to get ahead of other people the activities of the high frequency Traders remain hidden from view for a long time in 2010 something happens that suddenly lifts the veil at 2:32 p. m. on the 6th of May 2010 the US financial planning company wadell and Reed places a huge buying order for forward contracts valued at $4.

1 billion using an automated execution algorithm it is a huge order and extremely promising for highfrequency Traders the money Bots immediately begin to buy and sell at lightning speeds and without letting up share prices immediately begin to collapse approximately 3. 5 million Shares are affected and more than 200 companies lose their entire Share value in the matter of minutes nobody knows what is happening 13 minutes later the Chicago mertile Exchange is forced to stop Trading so much liquidity has been sucked out of the market that it's in danger of total collapse after a break in trading of 5 Seconds the market calms down again the cause of the events of May 2010 is never fully resolved experts assume that the collapse began at precisely 2:42 p. m.

and 44 seconds when the money Bots had bought up the maximum permissible number of contracts and simultaneously had to change their position a digital Stampede which caused the market to implode the stock exchanges immediately question the veracity of this explanation instead 5 years later a loone Trader in the UK is convicted of having destabilized the stock market from his basement this scapegoat allows the exchanges Banks and high frequency traders to continue playing their game in 2013 another crash is caused by a fake tweet Syrian hackers successfully used the Associated Press account to fake a terrorist attack on Barack Obama just one fabricated report is enough to cause turbulence in the financial markets once again the severity of the event is soon brushed aside part of the reason would appear to be that nobody really knows why the markets are increasingly acting strangely the largest flash crash to date happens on the 5th of February 2018 its impact is felt around the globe D Farmer's Journey from the casinos to Los Alamos and onto Wall Street eventually takes him to Oxford where he now studies stability in complex systems like the financial [Music] markets I think part of what happens in Flash crashes though we haven't gotten the bottom of flash crashes as well as we should their algorithms running and they're just reflexively doing something and they go on right right on doing it even though it would be better to stop because that's what they're programmed to do and they don't have time to think about it anymore than that running a trading system that literally cares about microseconds that means you have to write code that's extremely spare uh your signal hits your machine your machine can at most run a few lines of code and then it has to make a trade you have to do everything super quick you can't think of about it Prett much when I say you I mean the machine can't think about it Prett much I do think we have to worry that as markets go faster and faster we're opening up the possibility for an instability as a result of the collective interaction of the high frequency Traders with other parts of the market and we're doing that for no no useful purpose it'd be one thing if we were taking these risks because it gave us something that was valuable doesn't give us anything valuable just makes a few people rich and they get rich in a crazy way they get rich by you know collocating servers next to the stock exchange and writing algorithms that trade on the instantaneous glitches of the other orders hitting the markets critics of highfrequency trading have spent years in Brussels trying to achieve eu-wide regulation the privatization a of markets encouraged by the eu's 2004 miid 1 directive results in stock exchanges having to look for new clients a similar regulations did in the USA as a result highfrequency trading gains an increasing foothold in Europe's markets regulations pertaining to highfrequency trading that were passed by the EU parliament are overturned at the last possible Moment by the finance ministers in the Council of the European Union [Music] 201 [Music] the EU Parliament agrees on a holding period of 0.