Dark Pools

Video: The Wall Street Code

November 11, 2013: 2:31 PM ET

A Goldman Sachs/UBS "quant" turned whistle blower says the stock market is rigged.

FORTUNE -- "It's really a circus," says Haim Bodek, before he launches into an elaborate metaphor about Metallica ticket scalpers to describe how high-frequency trading (HFT) computers get their hooks into big pension fund investments (the "dumb money" in Wall Street parlance) before anybody else can.

Bodek, a so-called quant (or quantitative analyst) who has held key positions at Hull Trading, Goldman Sachs and UBS, is famous among traders for having broken the Street's omertà and complained to the Securities Exchange Commission in 2011 -- after his own HFT firm, Trading Machines, crashed and burned -- about the secret "order types" that allowed rival algorithms to jump the queue and push him out of business.

Bodek is the lead character in Scott Patterson's 2012 Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System. And his scalper metaphor is the centerpiece of The Wall Street Code, Part 2 of Dutch director Marije Meerman's excellent video series for VPRO Backlight about the effects of HFT "bots" (artificially intelligent trading algorithms) on the electronic stock and options markets.

Her 50-minute video is now available on YouTube, and Bodek's metaphor begins at the 24-minute mark.

Imagine, he says, that the stock market is like a music venue that has booked his favorite heavy-metal band:

Bodek. From

Bodek. From "The Wall Street Code."

Metallica is playing at this concert hall. The ticket counter opens at 6 p.m., so I'm going to go and stand in line. After a while, other people come in after me, and I'm no longer at the end of the line.

There are these scalpers. They're in line with me also. I can see them, because they're all wearing the same T-shirt. They also have a very very close relationship with the exchange, uh, you know, with the venue.

What is that relationship? Maybe one of [the scalpers] brings a significant amount of volume to this. (What does that mean? He buys a lot of tickets. Of course he sells those tickets to other customers.) Another guy actually owns 10% of the venue. A third guy... he doesn't have a lot of volume. He's not big on this venue. But he's big on another venue, and he's got a board seat on this venue.

So there's a very very close relationship between these scalpers and this venue.

When the ticket counter opens, I'm going to equate that to the moment when a price can change in the stock market. And at 6 p.m. on the dot, this is what I'm going to witness: Every single one of these guys is literally going to teleport. In one picosecond, they are all ahead of me.

How did that happen? I ask some of the people, and they say, "Oh, they're really fast."

And I'm like "No. They teleport. That guy was behind me. How does he get ahead of me?"

"There really isn't any difference," Bodek concludes, "between an order type and being the guy who wears the T-shirt. You just put a little code on your order and you say 'hey, don't treat me badly, please.'"

There's no particular Apple (AAPL) angle here. But the company's options are the most heavily traded derivatives on Wall Street. If Haim Bodek couldn't beat the system, what chance do ordinary Apple investors have?

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