When you hear a wall street person say liquidity run for the exits. What does that mean. He buys from someone and sells to someone else, doubles the volume in the market. We narrow spread, which is between the bid and the ask and the market. It used to be much bigger and now theyre smaller which is an indication of liquidity. But its deceptive claim. Rose Michael Lewis for the hour, next. Theres a saying around here you stand behind what you say. Around here, we dont make excuses, we make commitments. And when you cant live up to them, you own up and make it right. Some people think the kind of accountability that thrives on so many streets in this country has gone missing in the places where its needed most. But i know youll still find it, when you know where to look. Captioning sponsored by Rose Communications from our studios in new york city, this is charlie rose. Rose Michael Lewis is here. He is a journalist and he is a big best selling author. In 1989 liars poker lit up wall street. His experience as a salesman at bonds brother. He visited finance and the Global Economy with books such as the big short and boomerang. His latest is flash boys, a wall street revolt. This is a microscopic look at how frequency trading. Here is what 60 minutes reported on sunday night. Whats the headline here. Stock markets rigged. The United States stock market, the most iconic market in global capitalism is rigged. By whom. By a combination of the Stock Exchanges, the big wall street banks and High Frequency traders. Who are the victims. Everybody who has an investment in the stock market. Michael lewis isnt talking about the stock market that you see on television every day. That seems 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, are 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. Trades are being made by thousands of Robot Computers programmed to buy and sell every stock on the market at speeds a hundred times faster than you can blink an eye. A system so complex its all but invisible. Rose i am pleased to have Michael Lewis back at this table. Welcome. Thanks for having me back. Rose does this book so far exceed your expectations as a story that people are galvanized by. Yes. I was a little worried about it. I was a little worried about it because the subject matters complicated. And with the big short i had a story that was kind of similar. Someone saw, the people who saw what was happening and describe what was happening to an ordinary reader. With the big short, people had the financial crises they needed to explain for them. This is a crises kind of a looming crises, something that may happen. And its a raw on recall street and the stock market but its so subtle people arent completely aware of it. So i worried that it wouldnt resonate a little bit. Rose you expect this book will change behavior because you have said if this doesnt change behavior, then i dont know what im doing. I do feel like at some point what do you have to do to get people to address the problems in our Financial System. I mean, i think that i mean it starts with institutions that are too big to fail. I dont really understand that. How you have a group of people operating by different rules than the rest of the economy. But the people could think it was right to organize the stock market in a kind of twotiered thing with some people having special access and advance word of prices and so on and so forth and everybody else just taking it. Its just shocking. So i feel like i been guess i feel like all i can do is be the messenger or find the messenger, find the characters to tell the story. If people actually care enough to do anything about it, then whats the point. There are a lot of things. There are a lot of thing to write about. There are a lot of Great Stories in the world. Wall street happens to be a gift that keeps on giving. There are some wonderful stories to tell here but why write books about wall street as opposed to Something Else if this is going to be just furthering but entertainment. Rose theres also this. People say what you have shown is only one part with whats wrong with wall street and the Financial System. There are a lot of other things there that are wrong. Look if you looked at the big headlines since the financial crises, you see a pattern. And the pattern here is theres kind of a systematic mettling in the market. The Foreign Exchange rates, commodities and manipulation. This is a piece of what seems to be happening more generally and the question is why. Why is this happening now. I mean i think theres a reason for it. I think that this story kind of shows it in a very detailed way that technology has to a large extent eliminated the need for what a lot of wall street needs to do. We dont need people to bring buyers together to sellers of stocks. They can be at the end of a [singing]al black box without other people. Rose trading now is 50 of what happens on the new york Stock Exchange. The point is like the all sources of revenue and profits for wall street are being eaten away at by information technology, the street has to respond by finding ways to capture revenue, to, its sort of the market is in response to a decline in the natural use f ulness at the heart of capitalism. I think thats true. Rose how did you find the story. It was curious. I said three times i was going to write a book about wall street and they keep walking in the door these stories. This started when i got interested in the story of sergei, a russian computer, he was a High FrequencyTrading Program at Goldman Sachs. And was pretty instantly arrested by the fbi and ended up being sentenced to year in jail and spent a year in jail before his conviction was overturned. I followed that paper in the paper. Rose why did you think that story would lead you. Did you look and say if somebody might do this there might be a lot of money involved and theres something going on here about those codes if Goldman Sachs was so concerned about losing them. One was when they arrested him, the prosecutor said he should be denied bail. He should be kept in prison because this code that he took, if it gets into the wrong hands can be used to manipulate or undermine Global Financial markets. And i thought to myself, Goldman Sachs is in the right hands. How much worse could the hands get. Then i thought youre telling me theres computer code that can be used to sink the Global Financial markets. How can that be. What is this stuff, High Frequency trading. Then when he was sentenced to six year or seven Year Prison Sentence and you saw this financial crises coming down which Goldman Sachs had a lot to do and you see that the one person from Goldman Sachs who gets sent to jail after the financial crises is the guy that Goldman Sachs want to put in jail. All that seemed to me material. I didnt know where it was going to lead. But the first question of course i had after i got in touch with sergei and he agreed to talk to me and tell me his story and let me tell his story is what is High Frequency trading. The term gets thrown around. But like a lot of wall street creations it gets creations and everybody pretends they understand what it means. In fact nobody really understood what it meant. It was a term of art that really only entered in the public discloser when sergei was arrested. He was arrested as a high frequent e Trading Programmer. There must be something called a High FrequencyTrading Program. I needed someone to explain it to me. That led me to the subject. I called some investor friends and disiend what High Frequency trading is. Kind of sort of but the person who walks through our office and explains this world to us, it is more shocking than you know is brad. Rose thats what they said. Yes. He was still at the royal bank of canada had taken upon himself to find out how the stock market worked. Rose because he thought it was not working fairly. Because he himself was a trader of stock. He ran the stock market Trading Department at the world bank of canada. In 2008 when all the craziness is happening in the financial sector, he notices a change in the market. Its a very profound change that up to that point, when he went to go buy 100,000 shares of microsoft. It was scattered across 13 public exchanges in new jersey. He would look at his trading screens and there would be 50,000 shares of microsoft offered at 20 a share. And he could hit a button and he would get the shares. It started around 2008. When he hit the button, the shares, he would get a few and then the price would go up. Its as if someone knew. There was a ghost in the machine. Someone knew what he was trying to do before he actually got to do it. Rose they did it. They did it and sold it back to him at a higher price, thats right. So he first thought, he first thought that its like a computer glitch. He thought it was a bang on the side of his machine calling tech sport. He thought it was his machine. It takes him a while to figure out and visits to Money Managers and people who are in the stock market to realize, its a systemwide problem. That something has gone screwy in the market, what is it. This is a story of the book. The story of the book is his investigation. One man trying to figure out how this newly automated, this newly computerized stock market actually functions. Rose see but thats a signal trait of yours. You go out and look at something thats problematical and may be evil or may be fraudulent or may be illegal. Any of those. And all of a sudden you find some good guys trying to figure it out or trying to do better than the system. Well you know, part of this is my own slough and indo lens. Rose are you slotful and indo length. If you left it up to me, i would never figure it out. I need someone to figure it out for me. Rose you could tell their story better than they could. The fact that someone, this canadian person who had no business thinking im the one who is going to become the worlds expert on how the United States stock market is actually functioning. Rose were talking about 2011 12, arent we. Well his problems start in 20 on 078. By late 20 09 he figured out what happens. This is amazing. So hes sitting, his computer desk, his desk his trading desk is in southern manhattan. And when he hits his button to buy 50,000 shares of microsoft. That signal is going out the highway out the lincoln tunnel and the First Exchange is the basque exchange which is created by High Frequency traders. They pick up the signal. Rose let me interrupt you one second. Its going to that exchange and going to a whole bunch of other exchanges. Right. Its like traveling through fiber. Its like physical distance matters and it happens to be, that happens to be the closest exchange. The High Frequency traders are sitting there waiting to find out what he wants to do. They have built faster routes from that exchange to all the other exchanges. They race ahead of him. They buy rose what he wants. What he wants and then they sell it back to him at a higher price. Rose that simple. Its that simple but it took him assembling a team of unlikely experts to figure out like where the fiber was. Rose man, i love ronan ryan. He pulls off the mask. He knows where all the fiber is laid. He spent his life until then helping High Frequency traders get faster. But he doesnt understand the trading sign of it. Ronan ryan is brought in by brad. The first thing he says is the reason this is happening, he pulls out his map, the fiber runs like that. It just gets there first and theyre waiting there. Rose how do they get there first somebody asks. Because they built their own fiber connection. Thats right. Everything, the High Frequency traders have set up the system so that they can get, the minute they pick up the signal what brad is trying to do or any investors trying to do, they can beat the ordinary investor to Everything Else in the market. Just one form of predatory activity theyre engaging in but its the first one he discovers. He takes this first and discovering a series of the form of predatory activity. But he takes it. One of his main decisions on this. I think brad has to be someone who was presented with a steers of choices and he made the right choices and then hes now presenting the world with the choice. Well get to that. But he could have just joined the band of brothers and become High Frequency trader. Rose he had the keys to the kingdom. He could have gone into the kingdom instead of telling people what the kingdom is like. Yes. He became one of the people. Rose hes already he could have made a lot more money. Instead hes going on a Public Information campaign. Im going tuukka are talk to Money Managers. People to manage money and explain to them how their stock market looks rigged. And this is where the story, you asked me kind of when i sort of clicked in and said this is a book. I realized after a couple years of his own private investigations, he set himself up so he could walk into the biggest Money Managers in the country, tell them how the stock market is working and their jaw was on the floor. So how does that happen. Rose just tell me theyre all surprised because one of the questions i had for you hadnt people been looking into this, hadnt this question occurred to other smart people before he did. Yes. He just ends up with a more satisfying description and explanation than most other people. Rose was he the only guy he was the only guy who is working at wall street who had the sort of information you had inside a wall street bank that was willing to share that information. Rose and brought in ronan ryan and others. A crowd of characters who could explain where the fibers at. Rose so he walks into the smartest Money Managers. He walks into bill atmans office the hedge fund manager. Bill told me when he walked in there we knew something was wrong. Most, everybody knew something was wrong. They knew the market was no longer the market it was an illusion. Whenever they tried to do something, it was as if the market knew what they wanted to do. I said i thought i had only Insider Trading problem, i thought i had a leak. When i wanted to go buy something. Rose someone was tapping my lines. They thought it was bigger. They knew what i was trying to do in the moment. Rose heres whats important to understand for me. Its a millisecond, its not weeks later its hours later, they said it the second. Its seconds. The difference between the market that the investors that ordinary investors, you, me, the guy with the 401 k , bill atman is seeing, the speed of that market and the speed of the High Frequency traders is a couple, its just a couple milliseconds. Thats enough time from the Computers Point of view. Rose exactly. Everything else is frequency. One of the reason the world has organized itself this way so quickly is kind of an ecosystem sprung up on wall street around High Frequency trades and making these sort of scalping profits is that people have their hearts and minds around how computer perceives time. How slow a couple millisecond is for a computer. How much can be done in that amount of time. So it seems like everything looks instantaneous to the naked eye. When youre on your Charles Schwab account or in trade account and your button says buy and you think you got it right away. Thats not what happened. What happened was your order got sold. The right to execute the order was sold by your broker to a High Frequency trader so they could exploit it. The information value, what youre doing is being sold, i mean its hundreds of millions of dollars a year business. Rose this is not your point in the book but some people raised this question. There are proprietary lines going in. So a lot of people had paid for extra fast extra special lines. Yes . Well, each exchange, the public Stock Exchange, the new york stock he is change, nasdaq, direct edge, whatever the exchange is, theres 13 of them, a significant source of their revenues since the speed war started has been selling special access speed to the High Frequency traders. So they supply the public, the public sees one price, the High Frequency traders see them, theyre going to see from the exchange a directive for which they pay a lot of money. 50,000 or 80,000. If you look at just the money flows, the High Frequency traders pay the <