The book of the year in finance is shaping up to be Michael Lewis’ Flash Boys. It tells the story of a group of equity market traders at the Royal Bank of Canada (RBC) who not only watched high frequency trading (HFT) done by others around them in the industry change how the world’s stock markets behaved, but decided this was a bad thing. For example, in 1999, at the height of the dot com boom, there were 1,000 price quotes a second on US stock exchanges. That seems a lot, except when you compare the number to what is happening now. There are 2m quotes a second, with more than 90% originating from high-frequency traders. Basically this means they are getting to any shift in prices before other participants in the market. HFT in that sense is like a tax on trading, with the proceeds gained by those operating HFT and taken away from other equity investors.
The fallout from Lewis’ book is growing. The revelations about how HFT has been exploited have already led to Goldman Sachs closing down its high-frequency business and it’s not just the industry that is responding. The FBI, the US Department of Justice and the New York Attorney General are all investigating the behaviour of HFT firms. For the banks this could become a very big problem. HFT takes place in the markets that Mom and Pop invest in, rather than in more esoteric financial markets. The impact on reputations could be severe. And there may be financial consequences too. The £16bn fines in the UK resulting from the mis-selling of PPI – another mass market product – have exceeded any fines related to LIBOR fixing or questionable trades in foreign currency.
But, unlike previous scandals, among the ‘flash boys’ there is the potential for a culture change meme to appear at the same time: RBC-nice.
RBC-nice were the words used by the RBC team to describe their culture. They only hired people to their trading desk that they thought would fit in with that culture and, though their trading desk was on Wall Street, they turned away Wall Street traders that they thought wouldn’t fit in. Despite the opportunities for short-term reward placed before them by HFT, this was a team that not only remained un-corrupted themselves but set about trying to stop the corruption they saw around them in the industry. While the offers made by LIBOR traders to buy their collaborators bottles of champagne may be remembered as among the worst examples of City excess, RBC-nice may just be the first banking culture change meme that we come to think about for a more positive reason.