Chapter Two, Page 23-55

  • This chapter compared and contrasted how the Royal Bank of Canada(RBC) and the stock market in the U.S functioned, and Brad Katsuyama’s story, as he explored electronic trading as well as the changes in how the stock market works and the effects of those changes. Katsuyama also exploited the corruption, in hopes of establishing RBC as “the only broker on Wall Street not conspiring to screw investors”
  • “What people saw when they looked at the U.S stock market-the numbers on the screens of the professional traders, the ticker tape running across the bottom of the CNBC screen- was an illusion. “That’s when I realized the markets are rigged. And I knew it had to do with the technology. That the answer lay beneath the surface of the technology.”
  • The issue explored in greater depth this chapter was the change in how the stock marker works. Katsuyama had problems with as well all of the RBC stock market traders who worked for them. Their problem was being unable to judge market risks. For everyone, as soon as they bought any shares, the offerings to buy the stock would disappear and the share price would instantly move. Katsuyama’s picture of the market changed, similarly to the idea presented in the Introduction that the world clings to its old mental picture of the stock market because its comforting. The stock market was becoming more and more controlled by computers, and the people controlling the computers, half the time they didn’t understand how the computers work. It is presented in the book the idea that replacing people with machines enabled the markets to not only become faster but also become more complicated. I think that this concept is extremely important because of the implications of a more complicated system. A more complicated system would lead to less people understanding it, such as the people controlling the computers not understanding it, and it was mentioned that when Katsuyama explained certain concepts to professional investors, their eyes would glaze over and Katsuyama would eventually skip it altogether. This says a lot about the understanding of professionals and people in the business, which was a concept discussed in the earlier blog posts. Again, I think that all this points to the idea that corruption is higher up than we originally think. Also, the issue with the prices of the stock changing when an order placed was an issue with the time it took for those signals to go back and forth- milliseconds, fractions of the time it takes you to blink your eye- was costing traders overall $160 million a day. The money cost overall was so small it was hard to notice or measure. Which is important because it shows how clever the people who changed the market structure are. The people at fault for this was never discussed, and I would be very interested in learning who, and why, did this. This goes back to the line that was laid and discussed in chapter one, that cut down the time it took for the signals to go back and forth. Katsuyama and the RBC took a different approach, with “Thor”, which delayed the time it took for the signals to go back and forth, but very precisely delayed the signals. Therefore, the time it takes the signals to go back and forth equal for every exchange. One thing to be noted here is that Katsuyama and the RBC could have very easily made money off of their understanding of the new market structure, but chose not to in hopes of validating themselves for investors.
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One thought on “Chapter Two, Page 23-55

  1. It’s nice to know that someone was still trying to do the right thing when it would have been so easy to take advantage of the situation, which is what the vast majority of banks did and the reason why there was such a precipitous crash. Interestingly enough, I was listening to the market report on NPR, which is great by the way, and they were talking about how the conflicts in the Middle East and Ebola raging in Africa has really affected the market negatively, including in the US. This might be something to look into as well. Most banks probably do some sort of research on global events and how they influence markets. I don’t want to take you off course, but it also seems relevant based on this post.

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