Flash Boys

Flash Boys: A Wall Street Revolt is a book by the American writer Michael Lewis,[1] published by W. W. Norton & Company on March 31, 2014. The book is a non-fiction investigation into the phenomenon of high-frequency trading (HFT) in the US equity market, with the author interviewing and collecting the experiences of several individuals working on Wall Street.”[2] Lewis concludes that HFT is used as a method to front run orders placed by investors. He goes further to suggest that broad technological changes and unethical trading practices have transformed the U.S. stock market from "the world's most public, most democratic, financial market" into a "rigged" market.[3]

Flash Boys: A Wall Street Revolt
Hardcover edition
AuthorMichael Lewis
CountryUnited States
LanguageEnglish
SubjectHigh-frequency trading
Genrenon-fiction
PublisherW. W. Norton & Company
Publication date
March 31, 2014
Media typePrint, e-book
Pages288 pp.
ISBN9780393244663
Preceded byBoomerang 

The book has drawn criticism from some academics and industry experts, particularly on Lewis's grasp of HFT and other factual inaccuracies in its depiction of trading.[4][5][6] Other critics have praised Lewis's explanations of trading concepts and concurred with his criticism of HFT; however, it is suggested that he neglects to pay attention to the larger issue of financial regulation, and had excessively simplified the relationship between various institutions in the financial market.[4][7][8] A few executives in the industry have also responded by dismissing the book's content as "closer to fiction".[9]

Synopsis

The book centers on several people, including Sergey Aleynikov, a former programmer for Goldman Sachs, and Bradley Katsuyama, the founder of IEX, the Investors' Exchange.[2][3][10][11]

Flash Boys starts out describing a $300 million project from Spread Networks - the construction of an 827-mile (1,331 km) cable that cuts straight through mountains and rivers from Chicago to New Jersey - with the sole goal of reducing the transmission time for data from 17 to 13 milliseconds.[12]

The book takes a look at how electronic trading replaced the trading floor of screaming brokers, slamming telephones and hysteria-inducing ticker tape, and how that change impacted the market.[13] The speed of data is a major theme in the book; the faster the data travels, the better the price of the trade. Lewis claims access to this fiber optic cable, as well as other technologies, presents an opportunity for the market to be controlled even more by the big Wall Street institutions. To counter this disadvantage to investors, Katsuyama bands together a team that sets out to develop a new exchange, called IEX, to make the playing field for trading fairer.[14]

A chapter goes into detail about Sergey Aleynikov, the former Goldman Sachs programmer convicted of stealing the bank's high-frequency trading code and how Goldman actually called the FBI and then educated the FBI on that code.[15][16]

The book concludes by observing that there is now a conventional (microwave) link between Chicago and New Jersey, which follows an even straighter route than the Spread Networks' 827-mile cable (as microwaves always follow a direct path, whereas cables, by their very nature, must, at least occasionally, detour around physical barriers). The new route also takes advantage of the faster speed of signal travel that is possible through air (compared to signal travel speed through glass fibers, which slows light down). With these two advantages, this new link shaved 4.5 milliseconds off the Spread Networks speed, thereby rendering it obsolete.

Critical response

Manoj Narang, CEO of high-frequency trading firm Tradeworx, argued that Lewis' book is more "fiction than fact," claiming Lewis needs a primer in HFT.[9] A review by academic blogger Scott Locklin notes that Lewis had never spoken to, nor cited, a single high-frequency trader in the book.[17] Andrew Ross, writing in The Guardian, praised the book as an "effective exposé" but criticizes the author for arguing for the "heroism" of one group of financial insiders over another.[8] A month later, an article in The Economist noted that Lewis's book had generated "vigorous criticism", but that there may be some merits in its liquidity concerns.[6]

A Financial Post reviewer suggested that Lewis intentionally omitted details that point to market-stabilizing benefits of HFT: "Ironically, the Flash Crash itself was just glossed over. Could that be because the primary cause of that momentary blip lay in a confluence of regulatory mistakes and that it was many of the demonized HFTs who actually stood fast throughout and thereby ensured that the damage was a fraction of what it could have been had only the shell-shocked, traditional participants been left to respond?"[18]

An Oxford University Press handbook chapter authored by Andreas Fleckner calls Flash Boys a readable and mostly accurate introduction into such topics as dark pools, front-running, or kickbacks. The article however suggests that on-site trading practices are, nonetheless, too technical for laymen, market observers, or even regulators to fully understand. The author recommends providing incentives for self-regulation rather than SEC regulation.[5]

Felix Salmon, a financial columnist for Slate Magazine, asserted that the negative impact of high-frequency trading is restricted to "very rich" financial intermediaries, such as hedge funds. He notes that Lewis's story "needs victims" and that he portrays several billionaire characters as victims "by pulling out every rhetorical device he can muster." [7] In a crucial part of the book's narrative, a mutual fund manager named Rich Gates was "shocked" to find out he was paying 0.04% per trade due to his fund's dependence on a HFT front.[7] The reviewer noted that Gates' own mutual fund charged an average of 2.41% for "expenses" to retail investors.[7]

Impact and aftermath

The book reached No. 1 on The New York Times Best Seller list, overtaking Capital in the Twenty-First Century, and remained on the top for three weeks.[19]

Jonathan Weil at Bloomberg suggests that Federal Bureau of Investigation's investigation into high frequency trading, a day after the book's release, was directly motivated by the book's claims.[20][21]

Lewis's phrase "The market is rigged" was often referenced.[22] The chairwoman of the Securities and Exchange Commission (SEC), Mary Jo White, stated in Congressional testimony on April 29, 2014, that U.S. financial markets "are not rigged" in response to a direct question on claims in Lewis's book.[23]

Former New York City mayor Michael Bloomberg disputed claims made in Lewis' book on May 2, 2014, stating in a CNBC interview that "the system isn’t rigged."[24] Arthur Levitt, adviser to high-frequency firm KCG Holdings and former SEC chairman, commented that variation exists within the group of high-speed traders that Lewis’ book describes, saying "What is missed in the book and in the general discussion of HFT is there are some HFT traders who respect the sanctity of the investor, and some who don’t."[25]

On May 1, 2014, the New York Stock Exchange and two affiliated exchanges agreed to pay $4.5 million as a settlement for related investigations by the SEC.[26] The SEC noted a number of procedural violations, an improper use of an error account, and operating a block trading platform that did not comply to NYSE/SEC rules. The NYSE also agreed to find an independent consultant to review its procedures and policies. This was the second-ever SEC financial penalty to be levied at a stock exchange; the first penalty was handed out in 2012. Some writers suggest that the release of popular works such as Flash Boys contributed to these decisions. The charges are unrelated to high-frequency trading.[26]

References
  1. "Michael Lewis author page". Simon & Schuster. Retrieved February 22, 2015.
  2. Massoudi, Arash; Tracy Alloway (March 28, 2014). "'Flash Boys' starts Wall St soul searching". Financial Times. Retrieved March 31, 2014.
  3. "Michael Lewis 60 Minutes Interview on HFT [VIDEO]". Value Walk. March 30, 2014. Retrieved March 31, 2014.
  4. Smith, Noah (April 15, 2014). "Book Review: Flash Boys". Retrieved April 19, 2017.
  5. Fleckner, Andreas Martin (April 23, 2015). "Section 4 and Footnote 56, Regulating Trading Practices, The Oxford Handbook of Financial Regulation". Oxford University Press. ISBN 9780199687206. SSRN 2476950.
  6. Coggan, Philip (May 7, 2014). "HFT: the backlash continues". The Economist.
  7. Salmon, Felix (April 7, 2014). "The Lewis Effect". Slate Magazine.
  8. Ross, Andrew (May 16, 2014). "Flash Boys by Michael Lewis – review". The Guardian. Retrieved June 26, 2014.
  9. Narang, Manoj (April 4, 2014). "A Much-Needed HFT Primer for 'Flash Boys' Author Michael Lewis". Institutional Investor. Retrieved June 26, 2014.
  10. Ahmed, Azam (March 18, 2011). "Former Goldman Programmer Gets 8-year Jail Term for Code Theft". The New York Times.
  11. Michael Lewis (September 2013). "Michael Lewis: Did Goldman Sachs Overstep in Criminally Charging Its Ex-Programmer?". Vanity Fair. Retrieved June 18, 2018.
  12. Tovey, Alan (April 2, 2014). "High-frequency trading: when milliseconds mean millions". The Telegraph. In his new book Flash Boys, author Michael Lewis looks at the extraordinary lengths high-frequency traders go to to beat the competition
  13. Maslin, Janet (March 31, 2014). "Hobbling Wall Street Cowboys". The New York Times. Retrieved June 26, 2014.
  14. Gapper, John. "'Flash Boys' by Michael Lewis". 21 March 2014. Financial Times. Retrieved June 26, 2014.
  15. Brown, Tom (May 1, 2015). "Split verdict for Sergey Aleynikov ends a tumultuous trial but leaves open the chance the yearslong saga could continue". Reuters. Retrieved June 18, 2018.
  16. Matthews, Christopher M. (May 1, 2015). "Ex-Goldman Programmer Guilty of Stealing Code: Split verdict for Sergey Aleynikov ends a tumultuous trial but leaves open the chance the years long saga could continue". The Wall Street Journal. Retrieved June 18, 2018.
  17. Locklin, Scott (April 4, 2014). "Michael Lewis: shilling for the buyside". Scott Locklin. Retrieved June 26, 2014.
  18. Bandeen, Ian (May 29, 2014). "Flash ... or Fiction? Hit book on high-frequency trading lets the real villains off the hook". Financial Post. Retrieved June 26, 2014.
  19. "Best Sellers, Hardcover Non-fiction". The New York Times. April 20, 2014. Retrieved November 1, 2014.
  20. Weil, Jonathan (April 1, 2014). "Weil on Finance: FBI Hops on Michael Lewis Bandwagon". Bloomberg News. Retrieved April 1, 2014.
  21. Bradford, Harry (April 1, 2014). "FBI Investigating High-Frequency Traders: WSJ". Huffington Post. Retrieved April 1, 2014.
  22. Rubenstein, Ari (April 30, 2014). "Thank you, Michael Lewis". CNBC. Retrieved May 1, 2014.
  23. Bartash, Jeffry (April 29, 2014). "U.S. markets 'not rigged,' SEC boss says, White downplays 'flash boy' charges in new Michael Lewis book". MarketWatch. Dow Jones. Retrieved May 1, 2014.
  24. Fox, Michelle (May 2, 2014). "System isn't 'Rigged'-Bloomberg defends HFT". CNBC. Retrieved June 16, 2014.
  25. Mamudi, Sam (April 1, 2014). "Not Every High-Frequency Trader Is Predatory, Levitt Says". Bloomberg News. Retrieved October 30, 2014.
  26. McGrath, Maggie (May 1, 2014). "SEC Fines New York Stock Exchange $4.5 Million For Failure To Comply With Exchange Rules". Forbes. Retrieved April 19, 2017.
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