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Back in 2009, the world economy was in a state of deep stagnation, but in the U.S. state of Illinois a small army of 2,000 construction men armed with spades and drills couldn't have been busier.

Working in secrecy, they were installing a 827-mile-long underground fibre-optic cable between Chicago and New York. There were already cables linking the two cities, but this one was different.

The 1½in-wide plastic tube containing 400 hair-thin strands of glass had to travel in a straight line, even if that meant passing it through mountains and under car parks and rivers.

Traders use super-fast broadband connections to gain a competitive advantage on their rivals (stock image)

The slightest kink in the route would incur the wrath of the project's boss, who would exasperatedly tell engineers that even deviating by the width of a road would cost him 100 nanoseconds — or a millionth of a second — in the time it took for data to travel from one city to the other.

Installing the cable was to cost £180 million, but the investors behind it were convinced it was going to make them very, very rich. For they had calculated that using this cable rather than the existing, less direct, ones would cut the time it took to send a message between the two cities from 17 milliseconds to 13.

That's a fraction of the time it takes to blink very quickly, yet the minuscule time difference is enough to allow sophisticated computer programmes to exploit profitably tiny price differences between the Chicago and New York stock exchanges.

These split seconds saved in the transmission of information, an industry expert  calculated, were worth an astonishing £12 billion a year to those who knew how to exploit them. The new superfast cable would be used by around 200 trading companies, and its owners were asking each potential client to pay more than £8 million for the privilege.

Welcome to the extremely lucrative world of 'high-frequency trading' (HFT). This involves the electronic buying and selling of shares at speeds thousands of times faster than any human can manage. Incredibly, these high-frequency deals now make up half of the trades on America's public stock markets.

The high-speed computers and internet connections shave milliseconds off the time it take to trade which can lead to major profits

Yet according to an incendiary new book, Flash Boys: Cracking The Money Code, by leading financial journalist Michael Lewis, high-frequency traders are using the superspeed technology not to improve efficiency but to skim off 'incalculable billions' from pension and investment funds, damaging national economies in the process.

In effect, he says, the technology enables these traders to manipulate the markets in their own favour.

The way they do this is fiendishly simple. Cables such as the New York-Chicago one are coupled to superfast computers which allow the high-frequency traders to see the orders placed by everyone else on the stock exchange — from ordinary investors like you and me to the biggest pension funds — milliseconds before the deals close.

Those milliseconds are all the high-frequency traders need to jump in ahead of the original purchasers, snap up whatever those ordinary investors were trying to buy, thereby pushing up the price a little, and then selling it to the buyer for a profit.

While this may not be technically illegal, according to Lewis, it is certainly unethical.

The world of High Frequency Trading while not illegal is viewed by some as unethical

His depiction of these traders as a new breed of financial parasite has inflamed passions on Wall Street and in the City of London.

Some bankers and traders have accused Lewis of over-stating the evils of HFT. But others agree with him, arguing that high-frequency traders are able to buy too many unfair advantages over ordinary investors, not just with those super-fast cables but also by paying stock exchanges for market information on planned share purchases a fraction of a second before they happen.

Last week, one of Wall Street's most senior brokers, Charles Schwab, called HFT a 'growing cancer' that should be made illegal. Traders have created a 'technological arms race designed to pick the pockets of legitimate market participants', he said.

Now, the FBI has just announced it will investigate whether high-frequency traders are guilty of insider trading.

American author Michael Lewis  is a former London broker whose previous books, Liar's Poker and The Big Short, have also exposed the banking world's misdeeds.

Flash Boys reveals that today's high-frequency trading rooms are deathly quiet. Nobody screams 'Sell! Sell! Sell!' or frantically waves slips of paper, because it is computers that do the actual trading as opposed to people.

Since the advent of high-speed computers, the sound of traders on the floor shouting 'sell' is a thing of the past in places like the New York Stock Exchange (pictured)

And these super-powered mainframe computers use sophisticated software allowing them to sift through acres of financial data looking for price discrepancies and split-second trading opportunities which they can then automatically exploit. The price movements might be tiny but, with millions of trades each day, it adds up into a multi-billion pound business.

The traders — many of them maths and physics graduates — spend their days sitting in front of a bank of computer screens, staring at endless figures scrolling in front of them to make sure the machines don't slip up.

Whatever the morality, HFT is now a major force in markets across the world: high-frequency traders are even battling for an edge on the trading communication links between London and New York.

A new super-speed fibre-optic cable is being laid across the Atlantic, taking a more direct route than existing cables. Again, the time saving — just 5.2 milliseconds — is minuscule but, for those who trade in both the U.S. and UK, potentially worth millions.

So how, exactly, does HFT work?

Say you want to buy 50,000 shares in Marks & Spencer. You place your order — either electronically or over the phone — to a broker or bank, which then tries to find the best price by getting its computer to search the various stock exchanges.

But the computer request from the broker or bank takes a small amount of time to reach those exchanges electronically. In that small time delay, the HFTs pounce, buying the 50,000 M&S shares, which pushes up the market price very slightly, and then selling them to you for a profit at the higher price.

In 2006, one man set out to find out exactly what the high-frequency traders were up to. Brad Katsuyama, the hero of Michael Lewis's book, was a mild-mannered banker who worked for the Royal Bank of Canada in New York, who simply couldn't understand what was happening on his computer screen.

He would find thousands of shares available for sale at a certain price. But when he pushed the 'buy' button, he might be able to buy a small percentage of them at the right price — only for the rest to have become suddenly more expensive.

When other traders told him the same thing was happening to them, Katsuyama began to suspect they were being manipulated. But how exactly? The solution, he eventually discovered, was laughably simple. The closer a broker was to a stock market's computer base, the quicker it would receive his message.

The FBI (pictured) has launched an investigation as to whether High Frequency Traders have been guilty of insider trading

And so, when he put in an order for shares that had to be met by several exchanges — there are 13 different exchanges in the U.S. — only the closest one to him in geographical terms would sell the shares at the original price.

At the same time, the computers of high-frequency traders would be able to see his intention to buy shares in that particular commodity, and — exploiting their split-second advantage — would buy up those shares at the exchanges that were further away, then offer them back to the original buyer at a higher price. Thus the buyer — whether a private investor or a giant pension fund — would end up paying more.

High-frequency trading can happen anywhere, but it works best when there is a fragmented market — in other words, not one but lots of exchanges, preferably some distance away from each other.
In Britain, for example, the London Stock Exchange is in the City, but there are six others. BATS Global Markets, a U.S. company, built one some miles away in the Docklands area of the East End. Another, Chi-X, has been built west of London in Slough. The New York Stock Exchange also has a British branch in Basildon, Essex.

Each new exchange has been linked to the others by — guess what? — new high-speed cable links.
If you were of a suspicious turn of mind, says Michael Lewis, you might notice that these new exchanges are always located a 'surprising' distance from the original one.

His implication is clear: exchanges are being set up at least partly with an eye on how they can be exploited by high-frequency traders, who will pay for the privilege of having access to the fastest electronic links.

Last July, the UK's Financial Conduct Authority fined a corrupt America-based HFT operator, Michael Coscia, $903,000 (nearly £600,000) for deliberately manipulating prices on trades spanning the U.S. and the UK — its first action against a high-frequency trader.

This week the European Union vowed to launch the toughest-yet clampdown on these so-called 'flash boys', bring in new rules to force traders to have their precious algorithms — the programmes running automated trading — tested and regulated.

Critics say there are many more corrupt traders out there, but high-frequency trading is so murky it's difficult to know who's doing what. Now, Michael Lewis's explosive new book is putting pressure on authorities to investigate HFT further.

'He's managed to make everyone in this business incredibly defensive and look incredibly bad,' a former high-frequency trader told me yesterday.

If this row has exposed one glaring weakness about HFT, it's that it is so complicated that virtually nobody can explain exactly how it works. That's precisely what was said about the sub-prime mortgage fiasco which led to the last global financial crisis.

To avoid another melt-down, would traders do well to spare a nanosecond or two to reflect on that?