A quiet cultural revolution has been set in motion on Wall Street. Not by Elizabeth Warren or Google, but by innovators determined to restore trust from within a system widely regarded as broken. First among these is Brad Katsuyama, the central figure in Michael Lewis's best-selling book "Flash Boys." Katsuyama's IEX awaits government approval of a new stock exchange that is set to upend a market that has become unmoored from its social purpose.
Once earning transparent commissions, stock exchanges now largely make their fees catering to high frequency traders (HFT). HFT firms buy special privileges from the exchanges, and some use these in dubious ways. For example, by combining superior trading with information on the trading intentions of less sophisticated investors like pension funds, some HFT firms profit by trading ahead of these investors. Such profits are a mechanistic exploitation of flaws in the system – flaws that appear to be both a regulatory accident and the product of an industry that has neglected client trust as an inviolable precept.
That financial firms have neglected the interests of their clients and society is not surprising to our generation – it is among the obvious takeaways of the financial crisis. Repeated scandals and fines following the crisis – from Libor rigging, to foreign-currency manipulation – have reinforced an already high level of distrust in financial markets.