Flash Boys
Flash Boys: A Wall Street Revolt – Michael Lewis
Lewis, the most entertaining and informative writer on things financial these days, covers the evolution of the stock market since the 2008 crash. This is not about the evolution of the visible market (the stuff you see on tickers, CNBC, financial pages etc) but of an underground world, where the tentacles of parasitic blood-sucking creatures known as High Frequency Traders (HFTs) infest the computer and communications systems that are now at the heart of the stock market. They do so with the full knowledge and collusion (and to the financial benefit) of the exchanges and many major brokerages, and at the expense of investors. Ironically, these parasites live off of opportunities created by regulations and standards (NMS, NBBO, SIP and a bewildering alphabet soup of other acronyms) implemented in 2007 to protect investors. The bottom line is that by taking advantage of infinitesimal differences in communications and computational speed, they are able to “front-run” the market and extract profit from any price differentials that they actually help create by increasing market volatility. This entire bizarre ecosystem, according to Lewis and his protagonists, has evolved to a point of complexity and instability that it puts us all at risk from unpredictable glitches and bizarre gyrations, such as the “flash crash” of 2010.
Brad Katsuyama and his team (originally at RBC) doggedly uncovered this subterranean world and ultimately developed tools to combat it, culminating in the launch of a new, much more transparent and HFT-proof (?) exchange, the IEX, in 2013. While Lewis documents this, he introduces the reader to “dark pools” (opaque, unregulated stock exchanges internal to major brokerages), enough financial arcana to keep me on the edge of total confusion, Russian programmers, clueless (or disingenuous and culpable?) regulators and the basic physics of communications technology.
Like the evolution of life, the evolution of the stock market is another example of the “Red Queen” (who, in Carroll’s Alice in Wonderland, says: “Now, here, you see, it takes all the running you can do, to keep in the same place.”) at work. In both cases, prey species have to continually adapt to try and stay one step ahead of their parasites, diseases and predators to survive, just as the parasites, diseases and predators must do the same with respect to their prey. Like it or not, this race is one of the major drivers of moral, legal and technological progress in human culture and will always be with us. Katsuyama and his crowd are great examples of the positive forces at work in this game, but if history is any guide, the parasites won’t take long to re-tool with new technology, algorithms and strategies to squeeze fresh blood from the markets and from us, the investors.
The only frustrating part of the book is that it casts little light on the personalities behind the HFT outfits themselves; probably a very difficult thing to do given the cloak of secrecy they perforce operate under in order to prosper, and the potential embarrassment that they could cause to the “legitimate” exchanges and brokerages that they have such an unholy symbiotic relationship with. Perhaps another Lewis book in the offing?
