>> from our studios in new york city, this is "charlie rose." >> michael lewis is a journalist and a big best-selling author. in 1989, it 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 high-frequency 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. so complex it is all but 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 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. it is a rot 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 don't know what i'm 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? it starts 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 two-tiered 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? >> a lot of things to write 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. >> if you look at the big headlines since the financial crisis, you see a pattern and

the pattern is there is a systematic rigging of the market. the libor scandal in britain, the rating of foreign exchange rates, it feels like one after another. commodities manipulation. this story feels like what is 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. technology has come into a large extent, eliminated the need for what wall street used to do. we do not need people to bring buyers and sellers together. they can be brought together in a single box without people. >> high-frequency trading is 50% of what happens on the new york stock exchange.

>> if these sources of revenue are being eaten away by information technology, the street has to find ways to capture revenue, it is sort of the rigging of markets is a response to the decline of the usefulness of the institutions at the heart of capitalism. >> how did you find the story? >> it was curious. i have said three times i will never write another book about 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 sentenced to jail before his conviction was overturned. >> where did you think that story would lead you?

did you think there must be a lot of money involved in something was going on about those codes if goldman sachs was so concerned about losing him? >> yes, one thought was when they arrested him, the prosecutor said he should be denied bail. he should be kept in prison because this code he took, it can be used to undermine global 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 sink the markets? what is this stuff?

when he was sentenced to six or seven years, and you saw the financial crisis coming up, and you see the one person from goldman sachs sent to jail after the financial crisis is the guy goldman sachs wants in jail, all of that seemed material. i did not know where it was going to lead. the first question i had after i got in touch with sergei was, what is high-frequency trading? the term is thrown around but 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 high-frequency 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 high-frequency trading is? they said, kind of, sort of.

the people explaining this to us the people explaining this to us is brad. >> 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. he had taken upon himself to find out how the stock market worked. that was the question. >> he thought it was not working fairly. >> because he was a trader of stocks, he ran the stock market and in 2008 when all the craziness is happening in the financial sector, he notices a change in the market. it is a profound change that up 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. 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. so he first thought it was like a computer glitch. he was banging the side of his machine. he thought it was his machine. it 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. this is the story of the book, his investigation, how this newly automated, this

computerized stock market, functions. >> you go out and look at something that is problematic 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. >> you are indolent? >> in this sense, if you left it 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? >> his problems start 2008. 2009 he figured out a partial answer to his problem. he figures out what happens. this is the amazing thing, he is

sitting at his desk, he is in 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 high-frequency traders and they pick up the signal. >> let me interrupt you. it is going to a bunch of other exchanges. >> it is light traveling through 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. he knows where all of the fiber is laid. he has spent his life helping high-frequency 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 high-frequency traders have set up their systems so they can get a signal of what brad is trying to do. or any investor. they 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 predatory auditory activity. he takes it, i think of brad katsuyama is presenting the world with a choice. he could have joined the band of brothers and become a high-frequency trader. >> he could 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. i'm going to talk to money managers and explain to them how the stock market is rigged. this is where the story, you

asked me where i clicked in, i realized after couple of years of private investigation, he had 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 been 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 hands-on information on wall street banks and willing to share that. >> and brought in people like ronan ryan and others. >> a crowd of characters to explain.

>> he walks into the smartest money managers. >> he walks into bill ackman's office. he told me when he walked in, we 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. he thought 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 market the investors, you, me, the guy with a 401(k), bill ackman is seeing, the speed of that market and the speed of the high-frequency traders is a couple of milliseconds. that is enough time from the computer point of view. one of the reasons the world has

organized itself this way is this ecosystem has sprung up around traders making these profits. people have a hard time getting their mind around how a computer perceives time. how slow a couple of those 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. your order was sold, the right 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. >> well, each exchange, the public stock exchange, nasdaq, bats, there are 13 of them. a significant source of their revenue since the speed war started has been selling special access to the high-frequency traders. so they supply the public, the public sees one price and the high-frequency traders get a fee for which they pay a lot of money. $50,000. if you back away from the ecosystem and look at the money flow, the high-frequency traders pay the stock exchanges for special access. actually locating their

computers as close as possible to the stock exchange, the actual computer. the exchanges pay the banks and brokers to direct orders onto the exchanges in a way that is 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. the exchanges are basically owned by intermediaries. so you've got, it is -- the 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. it is a market run by intermediaries for

intermediaries. >> we have 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 -- >> they knew 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. you talked to him, what happens 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. so he creates 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. they start to do tests on what brokers are doing. they contribute to his understanding of what is going on. and they push him. they say what you need to do is create a fair exchange for us to operate. >> so he figures the game out. he's 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 happens, first this guy, he is 31, he is young. he has been in the states since 2002. recently married. a little baby. as far from a radical as you can imagine. he is canadian. he is conformist by canadian standards. he does not want to the the leader of a movement. he does not want to start a revolution. his colleague plays by the rules and is likely to run the royal bank of canada one day. that is what he is going to do. he has this 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. he said 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 by what they were hearing. the young guys seemed to be sympathetic to the high-frequency traders. that is so clever. it was all legal. and he left bewildered by this. so bewildered the bank did a study to find out how compromised the sec was. they find, to their shock, more than a couple hundred staffers had left the sec to work for firms or lobbying firms. so he thinks, he gives up. i'm not going to get anything done. it is too complicated and even if you say everybody is well-meaning and nobody is

corrupt, the truth is that whenever a new rule is made, clever people find a way to get around it. so you should never place too much faith on government's 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. all of this rigging in the stock market and the mishandling of customer orders is only possible because investors don't 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 goldman sachs and say stop doing this. the interests were two intertwined. so he had to go to the people who handle savings and say you have a responsibility. this is the problem. it is true, up until now you have not had a choice. you can't 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 story, 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 level playing field? >> the technical thing is what they need to do is slow down high-frequency traders' ability to trade and to respond. so 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. 60 kilometers of fiber-optic 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 high-frequency traders some distance and then they had to create a really fast route from 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 high-frequency traders. they dug a high-frequency 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 high-frequency 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. so there is no pressure to queer the game in favor of intermediaries. but goldman sachs did, this is where the story thickens. goldman sachs at the time they are putting the russian in jail for stealing their high-frequency 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 if 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. a microcosm of this debate is the argument around how they should behave in the stock market.

some new guys came in and took over goldman sachs's 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 exchanges, a lot of it design for the benefit of high-frequency 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 don't do something, there will be a flash crash times ten. we know if that happens among goldman sachs is going to be blamed. what is the solution? this canadian guy who has this fair exchange, very robust, we're going to throw our weight behind it. inside goldman sachs, that was not universally popular. ron morgan had come in -- >> they are not going to invest in the exchange. >> they don't want to have -- they are going to take their customers and ordinary invest yours and send them to the exchange so they can't be exploited. so that cost wall street a lot of money. i don't know how much, $10 billion a year is being scalped. unnecessary intermediation is happening. standing in between buyers and 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 sachs's money. it is a decision to sacrifice short-term profits. >> you are saying this is a bigger debate then high-frequency trading. it has to do it with how we conduct our business and what is at risk for us. >> i and they figured out their business is hard to do without people trusting them. they figured out they can't really compete for a lot of reasons. the trading game is affected by smaller groups of people than big banks. so they can't play in that game anyway. i think they figured out if the whole stock market jumped onto

brad katsuyama exchange, goldman sachs would enjoy a relative advantage to a lot of the other banks. they can compete in other ways. the debate, the interesting thing is this conversation is taking place in this market. >> how would you characterize the people who run goldman sachs? >> brad katsuyama taught me 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. if i were him, i would be -- 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? they have to face customers every day. they know these customers. they are in their late 40's. 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. i think goldman is a harbinger. 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 moment the new york attorney general announces an investigation of high-frequency 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 was going to accelerate what they were planning to do. partly because of your book. >> this i don't know, i will take your word for it. i'm sure these investigations have been going on for a while. >> they are not sure about investigation. here we are, we have figured this out. is there a dollar amount on how much the high-frequency traders were making because they could front run this thing? >> no. i do not know the answer to

that. i can tell you brad katsuyama's 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 don't know. it is one day old.

>> there is enormous he could see about this book. it was not even in the catalog. >> the subjects operate in such as stealth. the whole thing. >> so 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 rule. we wanted to let them explain this. >> what does "60 minutes" mean for a book like this? a great television program. >> steve 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 don't know how many. >> you really admire brad katsuyama. you view him as heroic and brilliant. >> i think bravery is the bigger component. he is very smart. i think he is an american hero. i do. he and the people he works with. 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. >> he did this while working at the bank. >> he conceived the idea at the bank. he felt obliged and in a touching way. he is smart enough to know how ostracized he might be if he went on this crusade. 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. and that is a big sacrifice. you are young. >> the other part is that -- i'm not going to do this myself, because i understand it. i'm going to expose it and tell

why do strong. >> i'm going to try to tell the truth. i'm going to introduce clarity in the financial market. >> there was nothing illegal about this? >> i don't know the answer to that. i don't know what is being done. the attorney general is trying to figure out what is illegal. i can tell you the defense, the first defense of high-frequency traders when you say how do you justify this activity is everything we do is within the boundaries of the law. i think 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. >> rob park, don bowlerman, all whole bunch of them. all of them, it is not that they are saints.

the odds are never great it 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. people on wall street rallying to that cause. there was a pattern. not all of them, but a lot of them are immigrants. there is an irishman, canadian, a russian. chinese. people who came to the country with an idea of how the country operates. it is almost as if they insist 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. there has been no fact i have 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 said i owned a stake in the company. i have heard a number of things. the rap on me is easy. i only tell one side of the story. i told brad katsuyama's story. people don't seem to grasp, i interviewed dozens of high-frequency 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. they are teaching the reader in 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 high-frequency 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? they add volume to the market. so does a front-runner. we narrow spreads between the, so they used to be much bigger, now they are smaller. it is deceptive because what

really announces the spreads is 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 don't know all of the other side of the story, i'm trying to present the true side of the story. this is not 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. this guy 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? certainly 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. market forces have been allowed to run their course in 2008 and most of these banks would be out of business. so the government stepped in, 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 did it, tim geithner has a new 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. especially 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, don't pay attention to what i'm doing, do what i am saying. >> we will let you fail, unless you're too big to fail. >> so get bigger. >> the old 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 that you are not subject to ordinary forces, you will not fail and we will orchestrate things so it 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?

>> i started the first part, the 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. >> if you have a character, you have struck gold. you could tell his story of his search. everybody dreams of a great

narrative. you take them on an adventure to solve a puzzle. that is what you did. >> it is -- and that is why i wrote the book. >> you would have been investigative reporter. the same thing with billy beane. this guy had a system. we have to search whether it will work with the oakland a's. >> yes. >> the same thing with "the big short." >> figuring out the financial crisis, how it happened. >> the other thing is your family, you're being a father and parent. what interests you now? you wrote about the president. what interests you now or how will you find your next subject and when will you start looking? >> i know what i'm doing next, a

drama for showtime. about wall street in the 1920's. >> how was it then? >> that periods rhymes nicely. there is a way of writing about wall street through them. but the subject matter of a book 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. it is unlikely, he is now out of prison. his conviction was overturned. but, so, 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 attack from someone who wants to disrupt the system? >> that is true. you stick a shovel in the ground, maybe that is true, but i came away from the story with a different feel and it was we are own 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. it is a sense that, in pursuit of success without thinking about the purpose of what one is doing. and so, anyway, we don't need help from terrorists to screw up our financial markets.

>> is there a sense you don't want to be defined as a financial writer? you want to be defined as somebody who is curious about the way the world works? >> i think that is how i think about myself. i happen to get a job at solomon brothers when i was 24 years old. out of "the big short" was born 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 terms of the money, which brings jealousy, rage, revenge, all of those other shakespearean qualities. >> this is one of the great arenas of american ambition. wall street, hollywood, a handful of arenas and wall

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." ♪

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