steve croft i'm leslie stahl i'm morley safer i'm bob simon i'm scott pelley those stories tonight on 60 minutes this month marks the fifth anniversary of the current bull market on wall street making it one of the longest and strongest in history yet u.s stock ownership is at a record low and less than half of americans trust banks and financial services in the last two weeks the new york attorney general and the commodities futures trading commission in washington have both launched investigations into high frequency computerized stock trading that now controls more than half the market the probes were announced just ahead of a much anticipated book on the subject by best-selling author michael lewis called flash boys in it lewis argues that the stock market is now rigged to benefit a group of insiders that have made tens of billions of dollars exploiting computerized trading the story is told through an unlikely cast of characters who figured out what was going on and devised a plan to correct it it could have a huge impact on wall street tonight michael lewis talks about it for the first time what's the headline here stock market's rigged the united states stock market the most iconic market in global capitalism is rigged by whom by a combination of the stock exchanges uh the big wall street banks and high frequency traders who are the victims everybody who has an investment in the stock market michael lewis isn't talking about the stock market that you see on television every day that ceased 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 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 it's all but invisible if it wasn't complicated it wouldn't be allowed to happen the complexity disguises what is happening if it's so complicated you can't understand it then you can't question and this is all being done by computers all being done by computers it's too fast to be done by humans humans have been completely removed from the marketplace fast is the operative word machines with secret programs are now trading stocks in tiny fractions of a second way too fast to be seen or recorded on a stock ticker or computer screen faster than the market itself high frequency traders big wall street firms and stock exchanges have spent billions to gain an advantage of a millisecond for themselves and their customers just to get a peek at stock market prices and orders a flash before everyone else along with the opportunity to act on it the insiders are able to move faster than you they're able to see your order and and play it against other orders in ways you don't understand they're able to front run your order what do you mean front run means they're able to identify your desire to to buy shares in microsoft and buy them in front of you and sell them back to you at a higher price it all happens in infinitesimally small periods of time their speed advantage that the faster traders have is milliseconds sometimes fractions of milliseconds but it's enough for them to identify what you're going to do and do it before you do it at your expense so it drives the price so it drives the price up and in turn you pay a higher price michael lewis is not the first person to allege the stock market is rigged or that high frequency traders are front running the market but he was the first to find brad katsuyama who was the first to figure out how it was being done a very unlikely character a traitor at the royal bank of canada a young canadian man named brad katsuyama realized that the market that he thought he knew had changed the market seemed to be willing to sell stock but the minute he went to buy it uh someone else bought it the stock went up it was if someone knew what he was doing before he did it back in 2008 katsuyama was 30 years old and running the royal bank of canada's stock desk in new york with 25 traders working for him every time one of them tried to buy a large block of stock for a client their order would only be partially filled and the price of the stock would go up it kept happening over and over again the best analogy i think is that your family wants to go to a concert you own a stubhub there's four tickets all next to each other for 20 bucks each you put an order by four tickets 20 bucks each and it says you bought two tickets at 20 bucks each and you go back in those same two seats that are sitting there have now gone up to 25 dollars what did you think the problem was i had no idea i couldn't i couldn't get answers at first katsuyama thought it must be that the technology at rbc was slow until he went to stanford connecticut and paid a visit to one of the largest hedge funds in the world the same things that i was experiencing as a trader one of the most sophisticated hedge funds in the world was also having the same problem then the light bulb goes off you say holy cow this is this is a huge problem you were determined to get to the bottom of it yeah why because because it just didn't feel right it didn't feel right that people who are investing on behalf of pension funds and retirement funds are getting bait and switched every single day in the market katsuyama suspected that the problem had something to do with plumbing the way the trades were routed through fiber optic cables from his trading desk in lower manhattan to the 13 public exchanges in northern new jersey but no one would tell him exactly what happened to his orders once he hit the buy or sell button so he put together a team of technical experts traders and most importantly an irish telecom guy named ronan ryan who was an expert on high-speed fiber optic networks i knew nothing about trading until my first day at rbc when i sat in a three-hour meeting on algorithms i called my wife afterwards and i'm like holy crap i have no idea what they just said ryan had done work for the high frequency traders he knew what they were building and he knew about the colossal amounts of money they were prepared to spend he told brad about a company called spread networks that had laid a high speed fiber optic cable from the futures market in chicago to the exchanges in new jersey they spent 300 million dollars just to shave three milliseconds off the fastest route and we're leasing access to high frequency traders at 10 million dollars a pot from brad katsuyama's point of view when he heard they were willing to spend that kind of money for milliseconds it told him that the sums involved are vast that was one of the first questions he said he had he says all right i'm getting ripped off everybody's getting ripped off but what does it add up to i think when he heard the story of spread networks he realized this is tens of billions of dollars we're talking about roon and ryan also knew where all the cable was buried and had detailed maps of the fastest routes from the financial district in lower manhattan to the various stock exchanges in new jersey all calculated down to the millisecond so i would sit there roll out maps and draw this data center as a box and a line going through it and they had no idea what i was on about and then i'd be like hey are you guys aware of where these data centers are located of course you're arriving there at different time intervals for brad the map's turn would have been an abstract idea into something he could actually see the first place his orders were landing was the bats exchange across the river in weehawken new jersey and high frequency traders were lying there in wait brad realizes oh my god that's how i'm being front run i'm being front run because my signal gets to the bats exchange first and they can beat me to all the all the other exchanges it only took a tiny fraction of a second for brad's trade to reach the next exchanges on the network but the high-speed traders were able to jump in front of him buy the same stock and drive the price up before his order arrived producing a small profit of just one or two pennies but it was happening to everyone's trades millions of times a day that adds up you make it sound like a skin what else would you call it one hedge fund manager said i was running a hedge fund that was nine billion dollars and that we figured that just our inability to to make the trades the market said we should be able to make was costing us 300 million dollars a year that was 300 million dollars a year in someone else's pocket is this illegal no that's the thing that's so shocking about all this you shouldn't use the word front running front running is illegal this form of front running is legal it's legalized front running it is crazy that it's legal for some people to get advanced news on prices and of other of what investors are doing it's just nuts shouldn't happen ronan knew the only way to beat the high frequency traders was to take away their milliseconds advantage that allowed them to sniff out slower trades and beat them to the exchange he had an idea how to do it then he said you're probably better off trying to go slower which means send the order to the exchange located the farthest away first and send the order to the one that's located closest to you last so stagger when you send them out with the goal of arriving at all places as close to the same time as possible katsuyama and his team developed software that did just that allowing the orders of royal bank of canada's customers to reach all of the exchanges at the same time cutting the high frequency traders out of the equation and essentially our fill rates went to 100 we couldn't believe it when we actually figured it out so you beat speed by slowing it down yeah it's crazy as that sounds katsuyama and his team went out and began selling and explaining what they had discovered to the big mutual funds pension funds and institutional investors people who had suspicions that they were being front run but didn't know how and nobody had really bothered or tried to figure this out until brad katsuyama came along it was in nobody's interest too correct i spoke to dozens of investors big investors famous investors who who said that when brad katsuyama came into my office and laid out to me how the market was rigged my jaw hit the floor i mean i knew something was wrong i knew i didn't know just didn't know what it was and no one had told us part of those meetings led us to believe holy cow this is this is really something because some of the most sophisticated largest asset managers in the world this is the first time they were hearing this story and some of the most famous names in the american stock market heard the pitch the capital group t rowe price fidelity vanguard i mean it one after another he was in their offices they said this man walked in why is he going to know how the stock market operates and and at the end of an hour they said oh my god he understands hedge fund titan david einhorn of green light capital is one of the believers was he able to show you how your orders were being front run oh yeah they had a um they've got the marker and the white board and started drawing maps and boxes and wires and locations and yeah we went through it in some detail did you find it interesting it was it was clients like einhorn encouraged brad and his team to do something bigger that's when katsuyama a conformist even by canadian standards decided to do something radical in 2012 he quit his high paying job as head trader at rbc and went off with some of his team to start their own exchange you were making good money at uh royal bank of canada right millions of dollars right i guess i guess everyone knows that now right right yeah why did you want to go off and walk away from that job and start a stock exchange yeah wasn't an easy conversation having my my wife that's for sure it almost felt like a sense of obligation to say we found a problem it's it's affecting millions and millions and millions of people people are blindly losing money they didn't you know they don't even know they're entitled to it's just it's a hole in the bottom of the bucket they set out to build an exchange funded exclusively by large traditional investors they called it iex the investors exchange and quietly launched it in october with the support of some of the biggest players on wall street and it comes with built-in speed bumps to eliminate the advantage of high-speed predators and the way they did it was they coiled 60 kilometers of fiber optic cable between themselves and the high frequency traders computers so it's called the magic shoe box it's a box and it looks like it's got a fishing line in it but essentially a high-frequency trader if he tries to react on the iax exchange his trade goes for 60 kilometers until so he's he's an east jesus so it gets there at the same time everybody else's do you think that they can game you i think that they'll try to game us i think the fact though that we've gone and met with the majority of the biggest high frequency firms to explain what the magic shoe box is doing and that people haven't said oh that's rubbish that won't work we've had many ask us for a back door to be honest so that says something that it'll work we're up to 38.5 million shares the exchange is off to a strong start although it is still very small with lots of powerful enemies that like the status quo and are trying to starve iex by discouraging customers from using them green light capital's david einhorn is one of the investors do you think iex will survive i think it's going to succeed i think it's going to succeed in a very big way just last week iex received a strong endorsement from goldman sachs whose top executives cited it as a model for a more stable in less complicated stock market we're selling trust we're selling transparency and and to think to think that trust is actually a differentiator in a service business it's kind of a crazy thought right why is this kid why is he able to all of a sudden sit at the center of the american stock market the answer is when someone walks in the door who is actually trustworthy he has enormous power and this is the story story of trying to restore trust to the financial markets