I’ve been a fan of Michael Lewis for a few years now, ever since I first read The Blind Side. I loved The Big Short, and just finished his most recent work, Flash Boys. As a former Wall Street trader, he seems to focus quite a bit on the financial markets as one of his most favorite topics. Even The Blind Side, which of course was the basis for the movie, focused more on a stastical analysis of the game of football, instead of Michael Oher himself.
In Flash Boys, he goes after high frequency traders – those Wall Street firms that trade in volume, speed, and predatory practices. I saw Lewis on 60 Minutes not too long ago promoting the book, in the interview he said “the stock market is fixed”. Meaning, the practice of HFT is something that no one really understood outside of Wall Street. What it boiled down to was a special connection to the stock market through super-fast fiber optic networks. If these firms, who paid a premium for this access, were able to get to the market faster, what would that mean? What is the value of a millisecond? He also dispels the old idea of Wall Street traders trading on the floor of the stock market. Instead, these traders now sit behind desks using the best and fastest technology.
Some HFTs were aware of the technology being used that gave some firms an unfair advantage over others. Is this insider trading? Before the topic was made more public through this book, much had been done to end this practice. When traders first realized what was happening, some were appalled, others wanted in. One trader who was so disturbed by the practice was Brad Katsuyama.
Brad is at the center of the book, a Japanese-Canadian who came to Wall Street in his early 20s. He was incredibly smart, accomplished, and well-educated. But so was everyone else on Wall Street, what set him apart was his honesty – and his mission to end this practice of unfair trading. He’s the hero of the book, and this little thing he did, was an attempt to even the playing/trading field, and it was revolutionary. Brad wondered why, with all this education and experience – he was arguably working with some of the smartest and most accomplished people in the world, why were they cheating investors instead of solving the world’s problems?
Brad decided to start his own exchange, which would still operate as an HFT, but would refuse to use the same techniques as some of their competitors. This proved to be an incredible challenge, he was essentially asking others to leave their higher-paying jobs, and take a risk with his new company. Not only that, but who would invest in his company, and with them? One of the most controversial practices of the HFT was the use of a dark pool (and even though I thoroughly enjoyed the book, I still don’t totally understand the practice), one thing that would set them apart – the operating rules would be made public to the investors.
Investing in the stock market is always risky, but knowing that the individuals who have been trusted with investor money are cheating those investors is scary. At the end Lewis concludes by saying “The System has let down the investor”. These are the new wolves of Wall Street. The scariest thing about this book is that none of these practices were actually illegal – there’s only one individual mentioned who ends up in prison. Let’s hope that there are more Brads out there.