We are going to take a look at flash trade, on you speed beats training. This is real money, you are the most important part of the show. Tell me whats i dont your mine by tweet me or on facebook. Com al see always velshi. The battle over mefrequency trading is gaining force. There is a lawsuit filed against 14 brokerage firms, 16 Securities Exchange and 12high speed traders. Defendants include the new york Stock Exchange, nasdaq, Jp Morgan Chase and bank of america. The lawsuit claims they and other firms routinely engaged in quote, ma minute los angeles tiff, selfdealing and deceptive conduct. Among other things it says that provided details of their clients offer to his buy or sale stocks to highspeed trading firms which profited at the expense of providence and its investment funds. No comment from any of the defendants. The suit says the alleged scheme allowed some Market Players to get nonpublic data that gave them an informational advantage to manipulate the u. S. Securities markets. Now, the claims providence is making willing have to be proved in court, but this suit is just the latest blow against a group of traders who come to dominate the stock market. Highfrequency trading accounts for half of the 7 billion shares of stock that are traded on u. S. Stock markets every day and most americans dont understand how it works. And that is a problem. Because the stock market is where much of your 401k, pension, or moval Fund Portfolio is probably invested. Thats probably the reason everybody from the Just Department to the fbi, to the new York State Attorney general to new york stop exchange are looking in to highspeed trading to see if it has an unfair advantage the publics worries about the hightprebgd is a trading is fueled by eye new Michael Lewis book flash boys and the assertion that the stock market is rigged. It word rigged appears several times in the lawsuit filed the buy the city of providence, specifically the suit says the defendants misconduct rigged the market and manipulated the price at which shares were traded. Thats something that providence will have to prove. In the meantime its important to say that word lying rigged are loaded with judgement and dont really describe what is going on in todays stock market and thats why i want to understand so we are taking a long look at the facts behind the highfrequency trading so that you can judge for yourself. Right now i want to give you a sense of how much the market has undergone a complete transformation as speed has become the holy grail of traders and the t to start our story leo back to december of last year. Back on december 5th, 2013 something remarkable happened at the closing bell. On that day a Company Called you would at that salon cosmics and fragrance released its earnings reports milliseconds after 4 00 p. M. That report fell short of expectations. Market data term says highfrequency trading computer instantly sold 14,000 shares of you would at that stock at about 121 each. Totaling 1. 6 million worth of stock. At 4 00 p. M. And not quite one seconds. Ultas stock closed at 118 a share. Losing 3 in less than a second n that rapid sale out of utlta stock. Traders could have pocketed as much as 28,000, it was a feat only they could have pulled off and its all specifically legal. Highfrequency traders and their complex computers operating at the speed of light have turned what happened on the floor of the no one Stock Exchange in to little more than theater. Look behind the curtain and youll see why people cant compete. The only ones that can participate in a half a second are these machines. Humans cant receive that information to act on it in that time frame. Than nanexs founder say critic of highfrequency trading. Hes watching y involve. Its spread to hundreds of firms spread across the globe, from new york to chicago, london and hong long, highfrequency trading is so flashed its not measured in seconds its measured in milliseconds. Thats one second chopped enough to a thousand little parts, it takes 300 milliseconds to blink. 200 milliseconds to recognize a written word. Do you know how long it takes a mespeed trade to go trade 150 tiles, one single millisecond. So forget about investing fundamentals like price to earnings ratios or even diversifications these days if you are not trading at those speeds, you are toast. Its not just speed. Highfrequency tradeers have theitraders havetheir own specie its a complicated formula called a black box a algorithm that can cost half a million to 10 each. They scour the market from cues including what stocks other investors want to buy or sale, stock prices moving higher or lower, changes in Trading Volume on are or a disappointing earnings report. They digest and react to key words in earnings releases. Twitter feeds and news reports all in the blink of an eye. 10s of thousands of times a day often generating profits of just a fraction of a pen i per trade. But that all adds up. If you have annal ga rhythmic code that can do that, literally hundreds of thousands and millions of times per day, it prints money. Highfrequency trading firms, some of them have even bragged in the press that they have never had a losing day. Highfrequency trading helps set prices for think had everything thats traded. Stocks, bonds, futures, options, commodities. It affects everything from apples stock to the price of gas. Orange juice to the price of mortgages. And some people think there is nothing to worry about like jim the former chief economist of the securities and Exchange Commission. Are the markets broken . I would say absolutely not i can think back 150 years ago when the tell graft was invented you had many issues the same arise, and computers, telephone came to the trading area. Mom and pop focusing on the longterm, being an investor , but but others are calling for more regular days saying highfrequency traders have an unfair advantage over regin investors, they are investigating their relationship with exchange, bart the out cooing commissioner of the Trading Commission calls traders who hughes highfrequency trading programs, cheetahs, pun intended he worries that they and their highpowered technology are running wild in the market. Technology is great. We all love technology, i dont want technology out of markets, but currently, there are no rules or regulations zero row on cheat a and i am concerned that these people are negatively impacting it. Regulators say highfrequency trading contributed to a flash crash where the Dow Jones Industrial average fell a shocking 1,000 points in five minutes previously he races a trillion dollars in market value only to recover a few minutes later. On on april 23rd, 2013, High Frequency trading al ga rims reagent today a hacked twitter account which said president obama had been injured in an explosion. The false report fueled a flash crash of several minutes then erased 121 billion of value from the s. And p500 before it rebounded the real fear is next time the market wont recover from a flash crash and hundreds of bill billions of dollars will be wide out in a matter of minutes. The complexity of highfrequency trading makes it hard for some us to understand why we should Pay Attention to somewhat of she is tradessers are doing. By getting in the middle of trades thanks to their speed highfrequency traders are charging the equivalent of a slight toll on everyone transaction. And that toll is paid by the big Institutional Investors who manage your money in mutual funds or pension funds. Now taking individually the toll is very small, but taken together, critics say amounts to death by a thousand cuts. Well, the keys to success in todays stack market, speed and location, thats why i went for a first hand look at wall street. By wall street i mean new jersey, take a look. This highsecurity building behind me is the new york Stock Exchanges data center. Its here. Not on the floor of the new york Stock Exchange, where almost all the trades take place. Check this out, this is one key part of the technology involved. Fiberoptic cables, more of my indepth coverage of flash there is an arms race going on in the financial world right now and this fiberoptic cable is one of the weapons of choice for highfrequency traders. You will not believe the amount of money they are willing to spends on cables and other technology to shave just a few milliseconds off their trading times. The stakes are huge and highfrequency traders know the key to profits is speed and they are ready to pay big bucks for the privilege of being first in line. Back in the 1920s, you would have to wait about 20 minutes at a ticker tape to see the latest information about a stock. Now Trading Information is almost instantaneous, traveling at nearly the speed of light. In fact, its so fast, only the Fastest Computers can keep up with the pace. Visit the Trading Floor of the new york Stock Exchange and its almost completely an a knack rah niche. Humans hadnt needed anymore, the vast majority of stocks arent traded here. To begin to understand how the stock market really works you need to go across the hudson river to new jersey. Now the markets are almost completely computerized Data Networks and server farms at identify key sites in ne new jersey are where most trades actually happen. I am in new jersey, about 30 minutes from manhattan, this building behind me is the new york Stock Exchanges data center, its here not on the Stock Exchange where almost all the trades take place. If you are a highspeed trader and looking for a fraction of a seconds advantage you have to be as physically close to this farm as you can be. Thats called colocation, you pay to have your server in that building. And only the biggest players can do that. That shorterrer distance matters even its only a few feet. According to one estimate having a connection that is just one millisecond faster than your competition could mean an extra 100 million a year for a highfrequency trader. Critics charge that this special colocation access offered by the exchange is a form of front running. Buying a stock before you do and then sailing it to you for a higher price. And its drawing the scrutiny of state and federal regulators who are concerned that it might provide advantages unavailable to regin vest stores. Highfrequency trading is computerized trading that depends on speed over Everything Else to be successful. In order to participate in that environment, you have to get direct feeds from all of the exchange. Now one of these exchange costs you 60,000dollar a month. Just one. To get the participate at that level, there is very few that can. But the need for speed doesnt end with colocation. Highfrequency traders are willing to pay for any micro second advantage that they can get. Even one between two different exchanges. Right now, for example, there is a fiberoptic cable linking the new york Stock Exchange servers in in new jersey and nasdaq servers in another part of new jersey. But in the next few weeks a new higher speed Laser Network will begin to link the exchange. The laser itself looks a lot like wally and uses technology original developed for the department of defense. When our network goes live, it will have the time it takes to move price information between the two locations. Putting it it in empirical terms it takes about a 780 micro second round trip time and bring that to about 360 micro seconds. Just to put that in perspective. Thats a. 00036 of a second savings. Immaterial per acceptable to you and me, but potentially worth millions to a highfrequency trader. This extends to the time it takes stock information to travel between the london and new york Stock Exchange. Currently there are 12 fiberoptic cables crossing the atlanta, the last one being engineered over a decade ago. But a new fiberoptic route is being plotted that will follow a little bit trait straighte stra. We managed to shave off building the new cable straighter than the existing cables 500kilometers off that route. Off this submarine cable making it five milliseconds faster than the fastest cable today. Building a new trans atlantic fiberoptic cable isnt cheap. Cost for this new cable and its five mel second advantage for the highfrequency traders, about 200 million. Whats so fascinating about the cable is the information is traversing only through these little fibers here so of all this cable, the relevant part are these six typier pairs that you are looking at. Everything else is just to protect these fiber pairs and carry power to amplify the signal. Its absolutely fascinating to think that 5,000kilometers of this cable linking the two continue continent. And it doesnt end there. There is even talk of con strucking a Laser Network across the atlantic using air ships. We have loosely coined it as an air bridge. It is a succession of 30 blimps or highaltitude platforms that would be gio stationery at 70,000 feet. Talking to one another over this same Laser Technology and that would connect new york to london. And it would do it in 30 milliseconds versus 60. The price tag for this trans atlantic air bridge that will save 30 milliseconds, 500 million. Fiberoptic cables, lasers that look lie wally and futuristic air bridges that span the atlantic are all part of what highfrequency traders call the rice to zero. An everincreasing competition to eliminate the time it takes to make a trade. Now the players in this world arent afraid to spends big money. Last year they paid about one and a half billion dollars on technology to increase trading speeds. Thats sphaoerl double whathaty spent in 2009. Trader are willing to paille lot it make a the love coming up next the minds behind the machines that make highfrequency trading happen. I am talking about the math geeks trained to make speed beat strategy. After years of doing have you vy nothing but regulators are if you think a degree in science, engineering or math isnt sexy, think again in those skills are considered totally hot by wall street firms that design complex highfrequency al ga rims the mathematical formulas generating profits and controversy. Quantitative analysts write them. And some colleges are training the next generation traders by offering degrees in financial engineer, to better understand this phenomenon, lets go all wait back to 1984 and a consult movie called revenge of the nerds. In revenge of the nerds, math and science students are depicted as dweebs who are perpetually tormented by the jobs. But everybody back then the nerds understood the tremendous power of computers which they could leverage to their benefit. Whats your name . Judy. Hi, jude, gilbert. That was 30 years ago. The matter of high plaintiff frequency versus al ga rim trading is timing. Today they are using their skills to join the ranks of the financial industry. The Stevens Institute of technology has a magnificent view of manhattan and a campus that looks like it belongings in new england but dawned be fooled by that collegiate setting. What goes other here at stephens could help shape many of the fortunes that are made across the hudson river on wall street. Stevens institute of Technology One of 100 colleges and universities in the United States that offer degrees in financial edges engineering. Classes are called but at the heart of these programs is the ability to create highfrequency trading algorithms or black boxes, which can generate millions in profits for highfrequency trading firms. The highfrequency trading algorisms are very much in demands. Students who are capable of producing those might actually go on their own with the spirit of entrepreneur ship and create their own hedge funds in. Just and niche eberle who is one of the 197 masters students at stevens. We can design our own block boxes. Having a successful black box is an atm in a sense that its always generating you money and you dont necessarily always have to be there. Which is the best part. So your bank account constantly increases. Across the hudson river, New York University as has an even more prestigious financial program. Its not at the respected attorneys school of business its next door at nyus institute of mathematical sciences. This is a very Competitive Program to get in to. This year we got roughly 900 applications for a class size of about 40 students. So we often jokingly say, its more difficult to get in to this program than it is to get in to harvard. The professor was at Goldman Sacks before coming to nyu. He says there is no substitute to being in the Financial Capital of the United States. If you want to learn quantitative finance and you want to learn from the best, this is the place to be. These students agree. And are willing to spend 50,000 in tuition over 18 months to study financial engineering. Why . Well, maybe because graduates have gone onto work at credit swiss, Morgan Stanley and Goldman Sacks and earn a Median Base Salary of 85,000 their first year out of school. But more impressively, a few years down the line with a little experience under their belt, a quant might command a salary of a quarter Million Dollars with a bonus i have 500 or more. The rewards could be a sense of achievement, you have done something great and also the money that comes with it. Because this is financial industry. You know. If you did something great, it can be measured by returns. I can do this bipartisan. With a 100 percent placement rate for students in the mathematics and finance program. It seems like the opportunities on wall street are almost limitless for students with the degree in financial engineering. And in the end, it may be the nerd who have the last laugh. Dan, how fast are we going. I have the old Cruise Control sets at 35. I have written two books explaining how to make you a better investor and nothing in my books competes with the algorisms you learn as a highfrequency trader. Now that you know whats behind highfrequency straighting you are probably wondering what regulators and Law Enforcement have been doing about the industry. The unfortunate answer is not much until recently. To get an idea of just how feeble the oversight has been, lets go back to the flash crash of may 6th, 2010. On may 6th, 2010, the dow jones steel average briefly lost a whopping 998 points. Almost a trillion dollars of value only to regain most of those points a few minutes later. The securities and Exchange Commission issued a report five months later largely blaming highfrequency traders for the crash. But calls for tighter regulation fell on deaf ears, the sec didnt feel compelled to take anymore action towards highfrequency trading until two years later on september 14th, 2012 when they fined the new york Stock Exchange 5 million. That fine settled allegations that the exchange was sending valuable trading data to some highfrequency traders ahead of other customers. Flash forward to march 18th, 2014, eric new yorks top Law Enforcement states that hes decided to end up a broad investigation in to the u. S. Stock exchange siting unfair advantages provide buying trade i venues to highfrequency traders. In my view the dang tore market stability posed by highfrequency trading still requires a lot more work on our part. On march 30th, financial journalist Michael Lewis generate aid firestorm of debate in advance of release of his book flash boys. Saying point blank that the markets are rigged and highfrequency traders are chiefly to blame. The Stock Exchange have become unfair places for investors. The next day, march 31st the fbi revealed that they have been conducting an investigation to see if ohio frequency firms were engaged in Insider Trading. Four days later on april 40 u. S. Attorney general eric holder had this to say about highfrequency trading. I can confirm that we at the United States department of justice are investigating this practice to determine whether it violates Insider Trading laws. So where has the sec been on highfrequency trading since they fined the new york Stock Exchange back in 2012 . Mary joe white the chairwoman of the sec told congress on april 1st that her agency has been actively investigating possible wrongdoing by highfrequency traders. And we currently have, i cant talk about specifics, but a number of ongoing investigations regarding various market integrity and structure issues, including highfrequency traders and automated trading. So we are very much focused on any abuses in that space. Yet the real problem is that the sec doesnt have the resources or the manpower to do their job and conduct thorough investigations on highfrequency traders. Mary joe white confirmed as much in her testimony. In 2001, the sec had 19 examiners per trillion dollars in Investment Adviser assets under manager. Today, we have only eight. More coverage is plainly needed as the industry itself as acknowledged. Until recently, bart chilton was a commissioner of the commodity futures Trading Commission, economy firmed with us that under funding a chronic problem for financial industry regulators. Regulators are overburdened with work. Regulators dont have the resources to do the job. Currently there are people in markets that are getting away with crimes because regulators dont have the resources to pursue them. It remains to be seen if regulators have the appetite or resource to his address the larger systemic problems and smoke out all of the bad players in a financial world now dominated by highfrequency trading. The week ahead is a busy wouldnt this show i am heading to los angeles for the annual milken global conference, thats where thousands of top executives, policy makers and philanthropists will be to address todays toughest economic and social challenges, thats next week on real money 7 00 p. M. Eastern time, 4 00 pacific right here on al jazerra. That is our show for today, i am ali velshi, thanks for joining us and have yourselves a great announcer this is al jazeera. And a warm welcome to this al jazeera news hour with me, david foster and these are some of the stories we are concentrating on in the next 60 minutes, a court in egypt sentenced more than 600 to death and among them the spiritual leader of the muslim brotherhood. The u. S. Threatens more sanctions against russia accusing it of stoking up separa separate separatism