Transcripts For BLOOMBERG Charlie Rose 20140403

From our studios in new york city, this is charlie rose. A journalistwis is and a big bestselling author. Chronicles his experience as a bond seller more than 20 years later he revisited finance and the Global Economy with the big short. Is latest is flash boys a wall street revolt, a look at High Frequency trading. Here is what 60 minutes reported sunday night. What is the headline . The stock market is rigged. The most iconic market in global capitalism is rigged. By a combination of the Stock Exchanges, the big banks, and highfrequency traders. Who are the victims . Anybody who invest in the stock market. Michael lewis is not talking about the stock market on television every day. That exist today mostly as a photo op. This is the stock market he is talking about. The one where most of the trades take place now, inside hundreds of thousands of these lack boxes located at 60 exchanges where billions of dollars in stock change hands every day with little or no public documentation. Trades are being made by thousands of computers programmed to buy and sell every stock on the market at speeds 100 times faster than you can blink an eye. All butex it is invisible. I am pleased to have Michael Lewis at this table. Does this book exceed your expectations . As a story that people are galvanized by . Yes. I was worried about it. I was worried because the subject matter is complicated. With the big short, i had ace door he that was similar a story that was similar. People had the financial crisis, they needed it to be explained. This is a looming crisis. Something that may happen. On wall street, but it is so subtle, if people are not aware of it, i worried it would not resonate a little bit. You expect this book will change behavior because you have said if this does not change behavior, i dont know what im doing. Some point, like at what do you have to do to get people to address the problems in our Financial System . With institutions that are too big to fail. I do not understand how you have a group of people operating by different rules than the economy. That people could think it was right to organize the stock market as a twotiered thing with the some people having special access and advance word of prices and everybody else is taking it. It is shocking. So i feel like, i guess i feel like all i can do is be the messenger, or find the messenger to tell the story. If people care enough to do anything, what is the point . To writeof things about. Wall street is the gift that keeps on giving. But why write books about wall street as opposed to Something Else if this is going to be nothing but entertainment . Many people say that what you have shown is one part of what is wrong with wall street and the Financial System. There are a lot of other things that are wrong. The bigu look at headlines since the financial crisis, you see a pattern and there is a is systematic rigging of the market. Britain, scandal in the rating of Foreign Exchange like one after another. Commodities manipulation. Like what isels happening more generally and the question is why. Why now . I think there is a reason for it. This story shows it in a detailed way. A largegy has come into extent, eliminated the need for what wall street used to do. We do not need people to bring buyers and sellers together. Together inbrought a single box without people. 50 ighfrequency trading is of what happens on the new york Stock Exchange. These sources of revenue are being eaten away by information technology, the street has to find ways to sort ofrevenue, it is the rigging of markets is a response to the klein of the usefulness of the institutions at the heart of capitalism. How did you find the story . It was curious. I have sent three times i will book about another wall street. They keep walking in the door. This started when i got interested in the story of a russian Computer Programmer who had left Goldman Sachs, sent himself some computer code, and was arrested by the fbi and was before hiso jail conviction was overturned. Where did you think that story would lead you . Did you think there must he a lot of money involved in something was going on about those codes if Goldman Sachs was so concerned about losing him . Was whenne thought they arrested him, the besecutor said he should denied bail. He should be kept in prison because this cody he took, it globalused to undermine financial markets. I thought to myself, Goldman Sachs is the right hands . How much worse could they get . And you are telling me there is code that could be used to sync the markets . What is this stuff . When he was sentenced to six or seven years, and you saw the up, andl crisis coming you see the one person from Goldman Sachs sent to jail after the financial crisis is the guy Goldman Sachs once in jail, all of that seemed material. I did not know where it was going to lead. The first question i had after i was,n touch with sergei what is highfrequency trading . Around but thrown like a lot of creations it is created and everybody pretends like they know what it means but in fact nobody understands. It was a term that really only entered into discourse when sergei was arrested. He was described as a highfrequency programmer. It was never explained. I needed somebody to explain that to me. That led me to the subject, i called some investor friends and i said do you know what highfrequency trading is . They said, kind of, sort of. The people is explaining this to us. They said brad is the guy. He is trying to figure it out. Yes, this young man. He was at the royal bank of canada. Tohad taken upon himself find out how the stock market worked. That was the question. It was not working fairly. Because he was a traitor of stocks, he ran the stock market all the008 when craziness is happening in the financial sector, he notices a change in the market. That upprofound change to that point when he went to buy 100,000 shares of microsoft and it was scattered across 13 public exchanges in new jersey, he would look at his screens and it would be 50,000 shares offered at 20. He could hit a button and get the shares. In 2008, the shares would vanish. It was as if someone knew, there was a ghost in the machine. Someone knew what he was trying to do before he got to do it. They did it and sold it back at the higher price. It was likethought a computer glitch. He was banging the side of his machine. He thought it was his machine. ,t took a while to figure out and visits to other Money Managers, to realize it is a systemwide problem. Something has gone screwing in the market. Story of the book, his investigation, how this newly automated, this computerized stock market functions. You go out and look at problematicat is and may be evil or fraudulent or illegal and then all of a sudden you find some good guys trying to do better than the system. Part of this is my own indolence. Indolent . Left itis sense, if you to me to figure out what was going on, i would never figure it out. I needed someone to figure it out for me. The fact that someone had bothered to do this, this canadian person, who had no business becoming the expert on how the United States stock market is functioning. Are we talking about 2011 . 2008. Problems start 2009 he figured out a partial answer to his problem. He figures out what happens. This is the amazing thing, he is , he is in his desk southern manhattan. When he hits his button to say by 50,000 shares of microsoft, that signal is going out the lincoln tunnel and the First Exchange is created by highfrequency traders and they pick up the signal. Let me interrupt you. It is going to a bunch of other exchanges. Through light traveling fiber. Physical distance matters. That happens to be the closest exchange. The traders are waiting to find out what he wants to do. They have built faster routes and they race ahead of him, they buy what he wants and so back to him. That simple. But it took him assembling a team of unlikely experts to figure out where the fiber was. He is the person who pulls out the maps. The fiberhere all of is laid. He has spent his life helping highfrequency traders get faster. He does not understand the trading side of it. He is brought in by brad and the first thing he says is the reason this is happening is fiber runs like that. They are waiting there. How did they do it . The highfrequency traders have set up their systems so of what get a signal brad is trying to do. Or any investor. Can beat the ordinary investor to everything else. It is the first one he discovers. He takes this First Insight and ends up discovering a series of auditory activity. Bradkes it, i think of theuyama is presenting world with a choice. He could have joined the band of brothers and become a highfrequency trader. Have gone into the kingdom rather than telling everybody else about taking them. That is right. He was making millions. He could have made more money. Instead his first reaction is going on a Public Information campaign. Im going to talk to Money Managers and explain to them how the stock market is rigged. Story, youre the asked me where i clicked in, i realized after couple of years hadrivate investigation, he set himself up so he could walk into the biggest Money Managers and tell them how the stock market was working. How does that happen . One question i had for you, had people looking into this . Did this occur to other people before he did . Yes. He ends up with the more satisfying description and explanation. He was the only guy who had handson information and sign of wall street banks willing to share that. And brought in people like ronan ryan and others. A crowd of characters to explain. The smartestnto Money Managers. He walks into bill ackmans office. In, we me when he walked knew something was wrong. They knew the market was no longer the market. Whenever they tried to do something, it was as if the market knew what they wanted to do. Bill ackman said i thought i had a leak. That was the problem. He said it was bigger. They knew what i was trying to do in the moment. Here is what is important, it is a millisecond. It is not hours later. They get that information seconds before the buying comes in. It is not seconds. The difference between the me,et the investors, you, the guy with a 401 k , bill ackman is seeing, the speed of that market and the speed of the highfrequency traders is a couple of milliseconds. From thenough time Computer Point of view. One of the reasons the world has organized itself this way is this echo system has sprung up around traders making these profits. Their have a hard time getting their mind around how a computer perceives time. Thoseow a couple of seconds is for computer. How much can be done in that time. So it seems like everything is instantaneous to the naked eye. When you are on your account buying stock, seems like you got it right away. That is not what happens. , the rightwas sold to execute your order was sold by your broker so they could exploit it. In the information value is being sold. Hundreds of millions of dollars a year. This is not your point, but some people said there are proprietary lines going in. A lot of people have paid for extra fast lines. Exchange, the public Stock Exchange, nasdaq, are 13 of them. A significant source of their revenue since the speed war started has been selling special access to the highfrequency traders. , theey supply the Public Public sees one price and the highfrequency traders did a fee for which they pay a lot of money. 50,000. If you back away from the ecosystem and look at the money traderse highfrequency pay the Stock Exchanges for special access. Actually locating their computers as close as possible to the Stock Exchange, the actual computer. Pay the banks and brokers to direct orders onto is exchanges in a way that disadvantageous to the customers to behave in ways that enables the firms to exploit them and the firms also pay for the right to execute orders. The incentives are screwed up. Are basically owned by intermediaries. Theve got, it is stock market has a purpose. It is supposed to take investment dollars and get into the hands of enterprise. It is a means to allocate capital. This is a separate beast. A market run by intermediaries for intermediaries. We have rent katsuyama Brad Katsuyama who figures this out. He went to some of the Great Investors of our time and there jaws dropped. Did anybody say, i have known this . People had suspicions. One Hedge Fund Manager said to me i thought i had a 300 million problem on a 9 billion fund. We figure the cost of this frontrunning it might have been frontrunning. They did not know what it was generally. As time goes on, more and more people, there is a wariness. Happensed to him, what is, so this goes beyond the spread of information. The truth is that they feel this guy is the only one giving them the truth. Trust, which is the scariest commodity on wall street. There are not of not a lot of guys saying this is the only guy i can trust. So it comes back. On whatrt to do tests brokers are doing. They contribute to his understanding of what is going on. And they push him. Need to do isyou create a Fair Exchange for us to operate. So he figures the game out. Hes got what they are doing. Does he go to the fed . Does he go to the attorney general of new york . He does. Before i tell you how this he hes, first this guy, is 31, he is young. He has been in the states since 2000 two. Recently married. A little baby. As you can a radical imagine. He is canadian. He is conformist by canadian standards. The thenot want to leader of a movement. He does not want to start a revolution. Ruleslleague plays by the and is likely to run the royal bank of canada one day. That is what he is going to do. Cause forced onto him. He shows his superiors all of this stuff and they do say before you start educating investors about the stock market, we have to tell the sec. They go to the sec. It was incredible. He describes all of his findings , and he said the room was divided. There were older guys who were staffers who were outraged, disturbed right what they were hearing. The young guys seemed to be sympathetic to the highfrequency traders. That is so clever. It was all legal. Left the wilderness by this. So bewildered the bank did a study to find out how compromised the sec was. Shock, moreo their than a couple hundred staffers had left the sec to work for firms or lobbying firms. Gives up. Ks, he im not going to get anything done. It is too complicated and even if you say everybody is wellmeaning and nobody is corrupt, the truth is that whenever a new rule is made, clever people find a way to get around it. Tooou should never place much faith on governments role in all of this. Is there a Market Solution . Can you create incentives in the market for a fair market to arise . So he says i will create an exchange. It takes him a while to figure out that is what he needs to do. He quits his job and creates the only Fair Exchange. That is a technical problem. An exchange on which no one is faster than the exchange. No one can find out what is happening in race people to other exchanges. So they wrestle with the technical problem. The other problem is the social problem. The political problem. Stock this rigging in the market and the mishandling of customer orders is only possible because investors dont pressure wall street. They investors have a hard time figuring out what banks are doing with their stock market orders. Very hard time getting the information. They are not willing to start a fight. The big money manager firms have been reluctant to call them Goldman Sachs and say stop doing this. The interests were two intertwined. So he had to go to the people say youle savings and have a responsibility. This is the problem. It is true, up until now you have not had a choice. You cant yell at Goldman Sachs. All of the exchanges are a problem. We are creating a place you not going to get screwed. Every dollars going to stay. You have to organize yourself and have a responsibility to go to war with wall street. When i heard this part of the the story kept coming to mind was the lord of the rings, organizing the fellowship. So what does he do . What is the means to create a loving a level Playing Field . The technical thing is what they need to do is slow down highfrequency tradersability to trade and to respond. Every other Stock Exchanges putting their machines next to the Stock Exchange machine. So they get the fastest information and can respond to it. They know prices for we do. So they call it the magic shoebox. Fiberoptics of inside of a shoebox. Like a fishing reel. And so when someone tries to trade, it goes around and slows it down. The effect was to put them somewhere in long island. They effectively banished the highfrequency traders some distance and then they had to route fromally fast their exchange to all of the others. So if a customer order came on to buy 10,000 shares of microsoft, and they only had 5000 for sale, they could get to them on behalf of the customer before the highfrequency traders. They dug a highfrequency system for their exchange. And guess who is investing, Goldman Sachs. No. This is important, they identified the fact all of the other exchanges are owned by highfrequency traders. They will be owned by investors. Mutual funds. David einhorn. People who are actually managing money. All they want is a fair place to buy and sell stocks. Queerre is no pressure to the game in favor of intermediaries. But Goldman Sachs did, this is where the story thickens. Time theychs at the are putting the russian in jail for stealing their highfrequency trading code, they think they are going to get into the game. That is why they care so much. They had a change of heart. Something is going on. Something interesting right now. An argument about our role in society. Can we function as an institution of people do not trust us . Are they losing the trust of the public . I think they lost it way back. Do they need to get it back . It is partly a practical argument. You could argue reputation does not matter anymore. All that matters is the brute force of the Financial System. When Michael Lewis tells me debate is going on, i assume somebody has told him. Yes. Debate ism of this the argument around how they should behave in the stock market. Some new guys came in and took over Goldman Sachss stock market business and they looked at the way goldman conducted itself and the way the exchanges were rigged and they said they had two observations, one is a corruption. There is a scalping going on that is unpleasant and probably will look bad if anybody figures it out. They thought the stock market that has grown up, all of these designes, a lot of it for the benefit of highfrequency traders roaring ahead. Very unstable. They said to me the flash crash in 2010, nasdaq shutting down, various outages, there is a pattern. Symptomatic, they said to me. If we dont do something, there will be a flash clash crash. We know if that happens among Goldman Sachs is going to be blamed. What is the solution . Thiscanadian guy who has Fair Exchange, very robust, were going to throw our weight behind it. Sachs, that was not universally popular. Morgan had come in they are going to use the exchange. They dont want to have they are going to take their customers and ordinary invest yours and send them to the exchange so they cant be exploited. So that cost wall street a lot of money. I dont know how much, 10 billion a year is being scalped. Intermediation is happening. Andding in between Buyers Sellers when they could come together at a better price without anybody in between. They can take away a lot of money. Some of that money would have been Goldman Sachss money. It is a decision to sacrifice shortterm profits. You are saying this is a bigger debate then highfrequency trading. It has to do it with how we conduct our business and what is at risk for us. Theirnd they figured out business is hard to do without people trusting them. They figured out they cant really compete for a lot of reasons. The high training game is affected by smaller groups of people than big banks. So they cant play in that game anyway. Out if they figured whole stock market jumped onto exchange, goldman would enjoy a relative advantage to a lot of the other banks. They can compete in other ways. , the interesting thing is this conversation is taking place in this market. How would you characterize the people who run Goldman Sachs . Taught metsuyama something. He had to go into these banks to persuade them and a lot of them did not want to do it. They were doing whatever they can to torpedo the Fair Exchange. Be ere him, i would he seems to think, and i think he is right, the banks are different factions, different people have different incentives. So these reformers inside Goldman Sachs, why are there incentives different . Face customers every day. They know these customers. They are in their late 40s. Their careers are at a different stage. The bonus is not driven by how much they make, that kind of thing. They have a different incentive than maybe some other people. All firms are that way. There are arguments of how we behave in the financial market. A harbinger. An is it tends to lead the street. The most respected. Yes. I think it is fascinating they made this call to help reform the stock market at the same York Attorney general announces an investigation of highfrequency trading and all of this and then the fbi reveals he was on television with me this morning, the attorney general of new york saying just that. He had been monitoring it and he whatoing to accelerate they were planning to do. Partly because of your book. This i dont know, i will take your word for it. Im sure these investigations have been going on for a while. They are not sure about investigation. Are, we have figured this out. Is there a dollar amount on how much the highfrequency traders were making because they could front run this thing . No. I do not know the answer to that. I can tell you Brad Katsuyamas exchange has tried to generate some numbers and they have identified strategies to determine how much might have been made from that one. It is many billions a year, whether it is 8 billion or 30 billion, hard to know. The only other way to guess, private information. Some part of their activity will survive in the stock market. There is no doubt some useful companies are performing. You can see things like how much they are spending. It is billions. Are there Companies Bidding on this already . I dont know. It is one day old. There is enormous he could see about this book. It was not even in the catalog. Subjects operate in such as stealth. The whole thing. The book was stealth because the subjects were. The book was a secret because the truth is 60 minutes decided they wanted to do something with it. They had their own will. Own rule. We wanted to let them explain this. What does 60 minutes mean for a book like this . A Great Television program. Croft, who did the piece, also did a piece on the big short. I watched him frame the conversation in a way the Television Audience could grasp. It was very useful. People kind of got it. He made it visual. It is a very big deal in terms of communicating the story. I am sure it sells a lot of books, but i dont know how many. You really admire Brad Katsuyama. You view him as heroic and brilliant. Biggerink bravery is the component. He is very smart. I think he is an american hero. I do. People, people in wall street do not go after people in wall street. He has created a war on wall street. He has done it in the best spirit. He could have stayed in his job and made millions of dollars a year and ignored the world around him. And maybe one day ran the bank. He is not a bombthrower, anything. He is not a radical. Working athis while the bank. He conceived the idea at the bank. And in abliged touching way. He is smart enough to know how ostracized he might be if he went on this crusade. He had to make the decision that if this does not work, i have to assume i will never work on wall street again. Sacrifice. A big you are young. Imother part is that not going to do this myself, because i understand it. Im going to expose it and tell me why do strong. Im going to try to tell the truth. Clarityg to introduce in the financial market. There was nothing illegal about this . I dont know the answer to that. I dont know what is being done. The attorney general is trying to figure out what is the legal what is ely go. Illegal. Defense, theu the First Defense of highfrequency traders when you say how do you justify this activity is everything we do is within the boundaries of the law. I inc. They are within the rules and they may be. So this cast of characters who Brad Katsuyama surrounds himself with, ronan ryan. One more name, christopher. Bowlerman, alln whole bunch of them. All of them, it is not that they are saints. They are going to make money. Are never graded is going to work out. It is a risky thing to do. Even now. They put themselves at odds with their industry because they found something that bothered them. I thought that was great. Street rallying to that cause. There was a pattern. Not all of them, but a lot of them are immigrants. Irishman, canadian, a russian. Chinese. Who came to the country with an idea of how the country operates. Insistlmost as if they it operates the way they hoped it would. I find it extraordinary. I find the behavior extraordinary. Has anything you have learned since the book and the 60 minutes appearance changed your perception of the facts . I am stunned by the reaction to the book. Just a little stunned by the reaction. I feel like maybe some of the, you have a Reform Movement in wall street. I feel like it has recaptured some of the energy of the occupy wall street movement. Fact i haveen no learned that i thought, i wish i had known that. Some people are going crazy. There is a craziness about it. Any accusations about you . Like what. There was a story, a bank the i owned a stake in company. I have heard a number of things. Is easy. N me i only tell one side of the story. I told Brad Katsuyamas story. Grasp, int seem to interviewed dozens of highfrequency traders and people at exchanges and in the banks. I am telling the story through the eyes of these characters trying to figure out how the market works. Iny are teaching the reader their own journey. I am not ignorant of all the other points of view. There is a passage in the book that lays out what highfrequency traders would say in their defense. There is not much to say. What do they say . Everything we do is in the bounds of the law. We add liquidity to the market. When they say liquidity, you should run for the exits. What does it mean . The market. Ume to so does a frontrunner. We narrow spreads between the, so they used to be much bigger, now they are smaller. It is deceptive because what breads isounces the the technology that allows them to narrow and the market is an illusion. You go to act and the market moves. So it is not like i dont know all of the other side of the story, im trying to present the true side of the story. A on the one hand, and on the other hand. Nobody would say there are two sides to the story. The other side is not that compelling. There is a lot of predatory activity going on in the stock market. Demonstrated, it is breathtaking, you should know this. One question, is it much more widespread than what we are just talking about here in terms of the rigging of the u. S. Financial system and wall street . In terms of how people can influence results . In ways that give them a decided advantage that may be illegal . Leave legality off to one side. The existence of these firms is a matter of market reading. Been allowed have to run their course in 2008 and most of these banks would be out of business. In,he government stepped what is that, that is rigging the market to save the firms . That is not what most people would think. I am saying many people in their daily lives are subjected to Market Forces and nobody comes in and saves them. At the same time, those who a new, tim geithner has book called stress test, and the argument will be he saved the Financial System and they had to do that because if it had collapsed, we would have all gone down. Ecially the people there is a really good argument for that. The people on the receiving end of that get a strange message. It is like somebody badly parented, dont Pay Attention to what im doing, do what i am saying. Fail, unlesst you youre too big to fail. So get bigger. Notion, if you have a Million Dollars in the bank, they are your partner, 100, you are a debtor. Yes. And so from that, it is not that surprising if the banks on the one hand, if the message is subject toe not ordinary forces, you will not fail and we will orchestrate will not happen one way or another. It is not surprising they turn around and view markets has something to be fiddled with. How long did it take you to write this book . Part, theed the first gathering of the material, i started maybe september of 2012. Gathering stuff for it. I did not start writing it until september. Is the writing part easy for you . The hardest part is the structure, finding out how to tell the story. Once i get the voice and have the story flows, it goes quickly. I go at a pace of about 20,000 words a month, which is pretty good. , you you have a character have struck gold. Story of hisl his search. Everybody dreams of a great narrative. You take them on an adventure to solve a puzzle. That is what you did. I is and that is why i wrote the book. You would have been investigative reporter. The same thing with billy beane. System. Had a we have to search whether it will work with the oakland as. Yes. The same thing with the big short. Figuring out the financial crisis, how it happened. The other thing is your family, youre being a father and parent. What interests you now . You wrote about the president. You now or how will you find your next subject and when will you start looking . Next, aw what im doing drama for showtime. About wall street in the 1920s. How was it then . Periods rhymes nicely. There is a way of writing about wall street through them. Bookhe subject matter of a starts with magazine articles. Like this one. It spiraled into Something Else. And with the russian in prison, will you go back to that story . He is in this. Is unlikely, he is now out of prison. His conviction was overturned. The answer is no. I seldom go back. There is also this question,one is how fast the velocity of change within the world that you have been looking at and how vulnerable is it to toack from someone who wants disrupt the system . That is true. You stick a shovel in the butnd, maybe that is true, i came away from the story with weifferent feel and it was are owned worst threat. It is not some terrorist coming to disrupt our markets we have to worry about. It is ourselves. It is what we do. Out of avarice . Out of opportunism. I guess it is greed. , in pursuite that of success without thinking about the purpose of what one is doing. And so, anyway, we dont need to screw uprrorists our financial markets. Is there a sense you dont want to be defined as a financial writer . As want to be defined somebody who is curious about the way the world works . I think that is how i think about myself. A job at solomon brothers when i was 24 years old. Was borne big short this. I think some of the books have been an accident of the direction of my life. I do not think of myself as a financial writer. I think of myself as a writer. And the world of finance has provided rich material. Because it has everything in which bringsmoney, jealousy, rage, revenge, all of those other shakespearean qualities. This is one of the great arenas of american ambition. Wall street, hollywood, a wallul of arenas and street is maybe the hottest of them. It does generate this material. Thank you. Michael lewis. The book is called flash boys a wall street revolt. This is talking stock for wednesday, april 2, 2014. Todays theme is keeping it. 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