Michael Lewis’s new book “Flash Boys,” which investigates the unfairness of high-frequency trading on Wall Street, has a great section on how John Schwall, the former RBC global head of equities product management, came to learn that Credit Suisse — among other banks — was operating a “dark pool” that allowed high-frequency traders to get in front of stock trades of less sophisticated brokers, allegedly increasing the cost of investing in stocks.
He looked it up on Linkedin — even though it was supposed to be a big secret. The takeaway is that while companies with highly sensitive information may believe their employees are keeping their mouths shut, they’re often also using LinkedIn to boast about what they’re working on.
Schwall had become disillusioned by Wall Street while working at Banc of America Securities during the period when it merged with Merrill Lynch. The deal saved Merrill, which had ruined itself in the credit crisis of 2008. Yet its employees received huge bonuses while many of Schwall’s colleagues were laid off.
Schwall went to work at RBC to join Brad Katsuyama, who was on a jihad to uncover the way high-frequency traders were cheating retail investors out of the correct prices of stocks. (Briefly, Lewis alleges that because banks with high-frequency trading operations are able to make trades quicker than regular traders do, they can “see” incoming orders at one price, and buy and sell the stock before the order is executed, so that the cost of the investment goes up for the original buyer. Dark pools — non-transparent stock exchanges run by investment banks — let this happen without anyone being able to prove that their trades were manipulated.)
While at RBC, Schwall found out from reading the trade press — and searching LinkedIn — that Credit Suisse operated a dark pool but “tried to appear as if it had nothing to do with high-frequency trading,” Lewis writes.
Credit Suisse declined Business Insider’s request for comment on Lewis’ characterization of events. But it’s a matter of public record that as far back as 2009 Credit Suisse had not been concealing its dark pool. Credit Suisse’s head of U.S. equity trading, Dan Mathisson, testified on the topic to the U.S. Senate that year, for instance. And we’re told that the bank has opt-out clauses that allow investors to avoid dark pools.
Nonetheless, Schwall began looking up Credit Suisse staffers’ resumes on LinkedIn. Even though Credit Suisse required its staff to abide by non-disclosure agreements, Lewis says, for some reason staffers listed their accomplishments on their LinkedIn resumes. Lewis writes that Schwall started by looking for Josh Stampfli, “who had joined Credit Suisse after seven years spent working for Bernie Madoff.”
Stampfli was apparently the executive in charge of electronic trading at Credit Suisse and ran the bank’s dark pool. Lewis writes:
The Linkedin searches became a new obsession. The former Madoff employee’s profile led him to the people who worked for the former Madoff employee, who led him to the people who worked for them, and so on. Even as Credit Suisse tride to appear as if it had nothing to do with high-frequency trading, its employees begged to differ. Schwall dug out dozens of examples of Credit Suisse’s computer programmers boasting on their resumes about “building high-frequency trading platforms” and “implementing high-frequency trading strategy,” or of experience as a “quantitative trader on equity and equity derivatives: high-frequncy trading.”
Credit Suisse claimed that its dark pool had nothing to do with high-frequency trading, and yet it employed, in and around its dark pool, a mother lode of high-frequency trading talent.
By the time he’d finished, Schwall had built the entire Credit Suisse dark pool organisation chart.
You can see Josh Stampfli’s resume on LinkedIn right here: