Flash Boys (2014) by Michael Lewis is the latest book from a master of non-fiction whose strongest subject is financial markets. In Flash Boys Lewis looks at high frequency trading (HFT).
The book looks at the rise of high-speed trading and explains some of the games that (HFT) involves. Small firms using high-speed computers and short travel times exploited the electronic market. Even though overall trading costs were going down they were not going down as fast as they could because of HFT. Much of the trading that occurred switched to ‘dark pools’, that is markets run by various banks where they would first place their orders. HFT firms would exploit the spread of where orders were appearing and buy and sell and take some of the spread and make money. Large firms and older exchanges actually customised their exchanges to give HFT firms orders they wanted so they could continue to make money.
Lewis starts by talking about the case of Sergei Aleynikov, a Russian who emigrated to the US and became a computer programmer and worked for Goldman Sach’s who was about to leave but who was then prosecuted by the FBI for having taken some open source code, modified it at Goldman Sachs and then emailed it back to himself.
Flash Boys then looks at Brad Katsuyama who worked for the Royal Bank of Canada (RBC). Katsuyama looked at the jumps in a trading price and sought to understand them. When he could not he worked out that the difference was the timing difference between his orders hitting different exchanges due to the time taken to travel between them. This in turn led him to look at HFT before finally deciding that the only way to fix it was to start his own exchange which we then learn about as he assembles a crack team of Vietnam veterans convicted for a crime they didn’t commit including Face, BA and no, wait, that’s just the technique Lewis uses. It’s a fun read though. Katsuyama creates IEX, an exchange that has different rules to hinder HFT.
IEX is a risky proposition, lucky to have Lewis writing about them in a way that sometimes feels like advertising. The book follows them starting their exchange and then finally, the cavalry in the form of Goldman Sachs comes in to thwart the evil HFT firms.
Except there are a quite a few reviews out there that describe Lewis’s view of HFT as actually wrong. Far from taking some huge percentage the HFT firms actually take a tiny percentage which is far less than the old methods and is driven smaller by their competitive nature. These reviews also point out that the HFT firms collectively make smaller profits than a single one of the large Wall Street banks.
There is clearly more to the story than Lewis is letting on and a read around the internet shows that a lot of informed people disagree with him. Wall Street isn’t a place of virtue but when competition works it is a very useful tool for the US economy. Despite all this the book is a very quick enjoyable read where Lewis uses his skills as a non-fiction writer to describe an interesting new phenomenon.