Nonfiction – Business, High-Frequency Trading
Released March, 2014
Bottom Line: Read it…if you’re interested in the markets.
Affiliate Link: Buy from Amazon
Plot Summary of Flash Boys:
The story of a group of people, led by Brad Katsuyama (a Royal Bank of Canada trader), who uncovered the recent rigging* of the U.S. stock market by high-frequency traders.
*Lewis and the media have used the word “rigged” to describe the current situation in the equity markets. I have a bit of an issue with this because it makes a more sensational headline for the book than the actual situation warrants. “Rigged” conjures sinister images of some Great Power of Oz intentionally structuring the stock market so that certain parties can always win. Based on Flash Boys, the situation seemed to me to be more of an unintended consequence caused by a government regulation (Reg NMS) that created unfair, but legal loopholes.
My Thoughts on Flash Boys:
I should say up front that I absolutely love Michael Lewis’ writing and am a huge fan of his previous books, particularly The Big Short. He’s a master at simplifying complex financial topics and spinning these potentially boring concepts into entertaining stories. He stays true to form with Flash Boys. I was hooked by the first paragraph of the introduction, which reads more like a thriller than a book about telecommunications cables and time periods that are out of reach for humans (i.e. microseconds).
I am a casual follower of the stock market. I understand the basics, keep up with general news, and am moderately interested in what goes on in this space. I am by no means an aficionado and don’t follow all the nitty, gritty market details. I do think you need to be, at a minimum, a casual follower of the markets to enjoy Flash Boys, but you do not need to be an expert!
Let’s see if I can succinctly summarize Lewis’ central premise (a tall order!): high-frequency traders (HFT) have discovered that speed (and Lewis means microseconds, not seconds or minutes) is the key to the markets. By gaining a few microsecond advantage on regular investors (i.e. pension funds, mutual funds, etc), HFT can see the their intentions to buy or sell stock on one exchange, race them to the other exchanges (there are more than 10!), and beat them to completing the rest of their order at the “market” price. By the time the regular investors catch up, the price of the target stock has moved against them and they are shut out of the rest of their order. HFT can make a penny or two per share using this strategy, but it adds up to billions per year (Lewis quotes an estimate of $20 billion/year in collective profits available) when you consider how often this happens. This is called “front-running”.
As in his previous books, Lewis’s strategy to make this arcane stuff entertaining is to focus on the personalities involved. Brad Katsuyama sees the irregularities in the market and teams up with some other characters to figure out the problem, eventually piecing together the front-running bombshell. Some of the most entertaining moments in the book are the Canadian Katsuyama’s impressions of Wall Street and NYC:
“Everything was to excess. I met more offensive people in a year than I had met in my entire life. People lived way beyond their means, and the way they did it was by going into debt.”
In the few weeks since its release, Flash Boys has generated a firestorm of controversy in the financial and regulatory communities. Some of the criticism I’ve read is that Lewis:
A) didn’t present all sides to the story
B) is treating this “front-running” concept like breaking news when the story has been out there for a few years (there was a 2012 book called Dark Pools by Scott Patterson)
C) is spinning the story so that individual investors seem to be getting screwed when it’s really rich people screwing other rich people (see Charlie Gasparino’s NY Post opinion piece on this).
Regardless of the criticism, Flash Boys tells a compelling story in a mostly entertaining way (I did glaze over at some of the more arcane trading examples, but Lewis keeps this to a minimum). And, most of the information was new to me, but may not be to those closer to the world of trading.
Finally, I don’t know enough about the world of trading to say whether Lewis was accurate in his account of the situation…I’m merely coming at this from the perspective that it was an entertaining read that certainly opened my eyes to the underworld of the U.S. stock market.