Flash Boys

Flash Boys
A Wall Street Revolt

Hardcover edition
Author Michael Lewis
Country United States
Language English
Subject High-frequency trading
Genre non-fiction
Publisher W. W. Norton & Company
Publication date
 March 31, 2014
Media type Print, e-book
Pages 288 pp.
ISBN 9780393244663
Preceded by Boomerang

Flash Boys: A Wall Street Revolt is a non-fiction book by the American writer Michael Lewis,[1] published by W. W. Norton & Company on March 31, 2014. The book focuses on the rise of high-frequency trading (HFT) in the US equity market.[2] Lewis states that "The market is rigged" by HFT traders who front run orders placed by investors.[3] The book remained on the first place of The New York Times Best Seller list for four consecutive weeks.[4]

Synopsis

The book centers on several people, including Sergey Aleynikov, a one-time programmer for Goldman Sachs, and Bradley Katsuyama, the founder of IEX, the Investors' Exchange.[2][3][5][6]

Flash Boys starts out describing the construction of Spread Networks' secretive new 827-mile cable running as straight as possible, through mountains and under rivers, from Chicago to New Jersey that would reduce the journey time for data from 17 to 13 milliseconds.[7][8] This $300 million project was designed to connect the financial markets of Chicago and New York City where one could think front running might happen with a few millisecond advantage.[9]

The speed of data becomes 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 banks. 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.[10]

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.[11]

A full chapter goes into detail behind 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.[12][13] (Aleynikov's conviction was later overturned.)

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 slow light down). With these two advantages, this new link shaved 4.5 milliseconds off the Spread Networks speed. In a very real sense, Spread Networks' victory was Pyrrhic.

Reception

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.[14] A review by Scott Locklin asserted that the book purports to be about high frequency trading, but Lewis never speaks to a high-frequency trader.[15] However, in the acknowledgments section of the book, Lewis noted that "the people who work in these firms have grown more cynical about them, and more willing to reveal their inner workings, so long as their name is not attached to these revelations. As a result, I am unable to thank many of the people inside banks and high-frequency trading firms and stock exchanges who spoke openly about them".

Another reviewer asked: "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 insured that the damage was a fraction of what it could have been had only the shell-shocked, traditional participants been left to respond?"[16]

An Oxford University Press handbook chapter calls Lewis's book a very readable and mostly accurate introduction into such topics as dark pools, front-running, or kickbacks, but argues that the overall picture drawn by Lewis is too gloomy.[17]

On the other hand, Brian Tanguay called Flash Boys a startling exposé of the inner workings of the American stock market. He elaborated in his review: "As was the case with mortgage-backed securities and collateralized debt obligations and credit default swaps, the automated stock market is stunningly complex. On its face, high-frequency trading seems like it should be illegal. But no, the system is merely riddled with perverse incentives. The reality is that between investors and the market sits a layer of middlemen who earn fees, commissions, and rebates from order flow and volume. This labyrinth adds little actual value to the market or the larger economy; middlemen profit from the complexity they have nurtured and sustained—and defend with every resource at their disposal."[18]

John Lanchester's résumé in the London Review of Books: "After finishing Flash Boys, I found it hard not to think about those missing oceanographers, the computer geniuses and engineers and physicists and entrepreneurs, all those brilliant minds, all that passion and energy disappearing into the black hole of money, lost to all the more productive and interesting things that we humans can do."[19]

Harvard Political Review writer Austin Tymins expressed similar thoughts: "The greatest tragedy of high-frequency trading may simply be the wasted capital, both physical and human, in the quest for arbitrage profit. The $300 million cable from Chicago to New York added no tangible societal benefit despite its price tag. Wall Street firms have accelerated their recruiting of the best academic and technological talent in the country in order to run HFT groups, often siphoning these employees from universities and productive businesses."[20]

Impact

The day after the book's release the Federal Bureau of Investigation announced an investigation into high frequency trading, in particular about possible front running, market manipulation, and insider trading. Though the FBI did not connect Flash Boys to the investigation, others have.[21][22] New York Attorney General Eric Schneiderman also commented on his ongoing investigation into HFT, stating that practices associated with front running and improper information disclosure may be illegal.[23]

Lewis's phrase "The market is rigged" became the focus of debate.[24] 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 question on Lewis's book.[25]

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."[26] 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".[27]

In preparation to become a public company, the high-frequency trader Virtu Financial disclosed in March 2014 that during five years it made profit 1277 out of 1278 days, losing money just one day. Virtu repeatedly delayed its plan for an initial public offering due to the increased debate concerning HFT that has been sparked by the release of Flash Boys.[28]

On May 1, the SEC announced a $4.5 million fine for the New York Stock Exchange and two affiliated exchanges, on charges related to Lewis's book. The exchanges neither admitted, nor denied the charges.[29]

While Lewis can only estimate the cost to investors of the abuses, he believes it is over $5 billion per year, perhaps as much as $15 billion per year or even higher.[30][31]

References

  1. ↑ "Michael Lewis author page". Simon & Schuster. Retrieved February 22, 2015.
  2. 1 2 Massoudi, Arash; Tracy Alloway (March 28, 2014). "'Flash Boys' starts Wall St soul searching". Financial Times. Retrieved March 31, 2014.
  3. 1 2 "Michael Lewis 60 Minutes Interview on HFT [VIDEO]". Value Walk. Retrieved March 31, 2014.
  4. ↑ "Best Sellers, Hardcover Non-fiction". The New York Times. April 20, 2014. Retrieved November 1, 2014.
  5. ↑ "Former Goldman Programmer Gets 8-year Jail Term for Code Theft". New York Times. March 18, 2011.
  6. ↑ http://www.vanityfair.com/news/2013/09/michael-lewis-goldman-sachs-programmerMichael Lewis: Did Goldman Sachs Overstep in Criminally Charging Its Ex-Programmer?
  7. ↑ Ross, Andrew (May 16, 2014). "Flash Boys by Michael Lewis – review". The Guardian. Retrieved June 26, 2014.
  8. ↑ http://harvardpolitics.com/books-arts/rigged-market-review-flash-boys/ Harvard /harvardpolitics.com rigged-market-review-flash-boys/
  9. ↑ "High-frequency trading: when milliseconds mean millions". The Telegraph. April 2, 2014. In his new book Flash Boys, author Michael Lewis looks at the extraordinary lengths high-frequency traders go to to beat the competition
  10. ↑ Gapper, John. "'Flash Boys' by Michael Lewis". 21 March 2014. Financial Times. Retrieved June 26, 2014.
  11. ↑ Maslin, Janet (March 31, 2014). "Hobbling Wall Street Cowboys". New York Times. Retrieved June 26, 2014.
  12. ↑ http://www.reuters.com/article/2015/05/01/us-goldman-sachs-aleynikov-verdict-idUSKBN0NM43V20150501 Split verdict for Sergey Aleynikov ends a tumultuous trial but leaves open the chance the yearslong saga could continue
  13. ↑ http://www.wsj.com/articles/jury-gives-split-verdict-in-trial-of-former-goldman-programmer-sergey-aleynikov-1430496291Split verdict for Sergey Aleynikov ends a tumultuous trial but leaves open the chance the yearslong saga could continue
  14. ↑ Narang, Manoj (April 4, 2014). "A Much-Needed HFT Primer for 'Flash Boys' Author Michael Lewis". Institutional Investor. Retrieved June 26, 2014.
  15. ↑ Locklin, Scott (April 4, 2014). "Michael Lewis: shilling for the buyside". Scott Locklin. Retrieved June 26, 2014.
  16. ↑ 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.
  17. ↑ Fleckner, Andreas Martin (April 23, 2015). "Regulating Trading Practices, The Oxford Handbook of Financial Regulation". Oxford University Press. Retrieved May 26, 2015.
  18. ↑ Tanguay, Brian (October 15, 2014). "Book Review: Flash Boys". Santa Barbara Independent. Retrieved October 30, 2014.
  19. ↑ Lanchester, John (June 5, 2014). "Scalpers Inc.". London Review of Books. 36 (11). Retrieved October 30, 2014.
  20. ↑ Tymins, Austin (September 30, 2014). "The Rigged Market: A Review of Flash Boys". Harvard Political Review. Retrieved October 30, 2014.
  21. ↑ Weil, Jonathan (April 1, 2014). "Weil on Finance: FBI Hops on Michael Lewis Bandwagon". Bloomberg News. Retrieved April 1, 2014.
  22. ↑ Bradford, Harry (April 1, 2014). "FBI Investigating High-Frequency Traders: WSJ". Huffington Post. Retrieved April 1, 2014.
  23. ↑ "New York State AG Eric Schneiderman: Some high-frequency trading practices "may be illegal"". CBS This Morning. CBS News. March 31, 2014. Retrieved April 1, 2014.
  24. ↑ Rubenstein, Ari (April 30, 2014). "Thank you, Michael Lewis". CNBC. Retrieved May 1, 2014.
  25. ↑ 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.
  26. ↑ "System isn't 'Rigged'-Bloomberg defends HFT". CNBC. CNBC.com. May 2, 2014. Retrieved June 16, 2014.
  27. ↑ Mamudi, Sam (April 1, 2014). "Not Every High-Frequency Trader Is Predatory, Levitt Says". Bloomberg News. Retrieved October 30, 2014.
  28. ↑ Alden, William (April 17, 2014). "Virtu Financial Said to Shelve I.P.O. Plans". DealBook, published by The New York Times. Retrieved October 30, 2014.
  29. ↑ Krantz, Matt (May 1, 2014). "Rigged market? SEC busts the NYSE". USA Today. Retrieved May 1, 2014.
  30. ↑ "Michael Lewis on a Rigged Stock Market and the Heroes of Wall Street". Knowledge@Wharton (wharton.upenn.edu). Wharton School of Business. June 4, 2014.
  31. ↑ "The Wolf Hunters of Wall Street". Excerpt from The New York Times.

External links

Wikiquote has quotations related to: Flash Boys
This article is issued from Wikipedia - version of the 11/30/2016. The text is available under the Creative Commons Attribution/Share Alike but additional terms may apply for the media files.