Flash Boys: A Wall Street Revolt

If you have been watching economic news this week, you will have heard that the British pound collapsed in a “flash crash.” Most news stories leave it at that. (I suspect that’s because they don’t know what a flash crash really is.) Put simply (and in Flash Boys Michael Lewis explains this recurring phenomenon quite simply) a flash crash is how high frequency traders use computers, multiple exchanges and time to abuse the rules. Now that I’ve summarized that, let me back up a second and deconstruct the sentence. First, what are the rules? In 2007, after brokers were found to have been abusing customers’ trust once too often, the government came out with what’s called Reg NMS. This regulation (and here I am just going to quote Michael Lewis directly because I don’t think I can say it any better than he did). Reg NMS mandated that brokers buy shares at the best price. “To define best price, Reg NMS relied on the concept of the National Best Bid and Offer. If an investor wished to buy 10,000 shares of Microsoft, and 100 shares were offered on the BATS exchange at $30 a share, while the full 10,000 listed on the other twelve exchanges were offered at $30.01, his broker was required to purchase the 100 shares at Bats before moving on to other exchanges.” This meant that anyone with a computer can see where a purchase is going to be made and for how much. So if you have a faster connection (and several exchanges where you can sell a few shares of a stock, you can already see how you can make money.) Sure, you won’t make a lot of money from any one trade. Maybe less than half a cent here and half a cent there. But that adds up. I know this from first-hand experience. The other day at work, I was trying to calculate what would the cost be of a service was excluded from a package of services. And my calculation kept being almost a billion off. I did it and re-did and re-did it every which way I could think of. I even pulled down my stats book to see if my math was off. Nothing. I got up and went for a cup of coffee just to take a break from this ridiculous problem and when I sat down again, I saw it. It was a rounding error. To be exact it was a rounding error in the one/thousandth decimal place. But I was dealing with billions of dollars and that rounding error made quite a difference. So yes, parts of pennies add up. But wait, there’s more. The way the best price is computed is when an exchange computes all the bids and offers on a particular stock. This computation is done by a government computer and if you know one thing about government, you will know that it takes years to upgrade computers. That means that if you have your own, faster computer you can “front-run” the official best price and sell and buy 100s of shares at the “real” best price. Sure it will be a “rounding error” but as I said before, those rounding errors matter. So a rule that was intended to create equity and transparency in the market in fact institutionalized inequality between the traders who had access to the super-fast computers and those who did not. Only the former would make money from these rounding errors. But wait, there is yet more. To make full use of Reg NMS you also need many different exchanges or dark pools and dark cables. And guess what, both exist. Dark cables are cables that are optimized for speed of transaction. Sure it’s a millisecond difference or even less but in that time you can get a lot of rounding errors. Dark pools are, in essence, proprietary exchanges. They exist to make it easier for institutional investors (like the folks to whom you entrust your pension and mortgage, for example) to trade in large blocks. So, for example if you have one million shares of Microsoft you want to sell (or buy) but don’t want your identity known, you would rather sell/buy those shares away from the glaring eye of the public transaction. Here’s the problem, if your are a high frequency trader, you (by definition) have a super-fast computer and access to dark cables. That means you can “ping” the many, many dark pools that have been set up. By some estimates, 40% of all trading is now done inside dark pools. And that in turn means you can know, well before the government-issued slow computers have finished calculating the best price what the real selling price is. That’s one heck of a rounding error in your pocket. And finally, to make all this work, you need volatility. All volatility means is that the price of something moves up and down a lot. And obviously if it does that, there is a lot more room for a high-frequency trader to essentially insert him/herself in the middle of that trade. Basically here’s the way it works. You want to buy those 10,000 shares of Microsoft for $30. There’s a dark pool that will sell 100 of them to you for that price. I, as a high-frequency trader, ping that dark pool, know what the price you’re willing to buy for is and all the other prices out there and where you will buy from next. So I go and buy the next batch of Microsoft shares that are selling (as you will recall at $30.01). Now, your broker, by law, has to come and buy the shares from me. Except I sell the shares now at $30.1001. And right there, in less than the blink of an eye I have made almost $10. And that’s from a mere 9,900 shares—a small trade. So what high-frequency traders do in effect is charge a tax for trading. And that tax (like most taxes) makes economic activity, in this case people’s willingness to trade to decrease. It also means that flash crashes, caused when a front-running computer algorithm gets too clever by half, are inevitable. In Flash Boys, Lewis explains all of this a little at a time. In some ways, the book reads like a great detective story. And like a great detective story, it is eminently readable because at its heart is a kind of hero: Brad Katsuyama. Brad sets out to hire a lot of computer programmers to beat the system. First he introduced Thor. This was a platform that enabled you to trade more slowly and then a brand new exchange called IEX (an exchange—and yes, it got the license to be an actual exchange) that did the same thing. The idea behind Thor and IEX seems counter-intuitive but in a high-frequency world it works. If you trade many thousands of shares per trade, then it makes sense that your order should arrive at all the exchanges/dark pools at the same time. That way no-one can ping/front-run you. You will not, in other words, be paying a tax on your trade. So to get the high-frequency traders out of the loop, you need to trade just slowly enough that your orders arrive at all exchanges at the same time. This is the story of how Brad and the motley crew he gathered around him came up with that idea, the push-back they initially got from the industry and how they eventually sold the industry, including Goldman Sachs, on the concept. It is a story well worth reading. I highly recommend it.

Michal Lewis is a national treasure. He is able to take complex things and make them accessible to people like your mom - if you want to be condescending to your mother. In a way, he is one of the best nonfiction writers in English working today. I'd put him up there with Bill Bryson. But you know that already. This is a Michael Lewis book. You know: the guy who wrote Liar's Poker, Moneyball, The Big Short, and that other book you like. What Lewis does is take a look at an issue, but he does this thing where instead of boring you with a lot of details, he tells the story of a person (For real - this book has no index, no endnotes) and the problem they face and the cool things they do. The person isn't really usually that far removed from what we imagine ourselves to be, but perhaps a better version than the self we really are. In Flash Boys, that person is Brad Katsuyama. Katsuyama was a worker on the exchange for the Royal Bank of Canada. He noticed that there were issues with trading. Namely that the trades that his traders were trying to make basically disappeared in front of him when they tried to execute them. This lead the reader to go on a journey led by Lewis as the reader follows along with Katsuyama as everyone learns what the issue was and why those trades were disappearing. Mainly the story is computers, software, and companies using their smarts to insert themselves in the middle of a trade. Eventually Brad and the reader learn all about this and is disenchanted with the system as it exists so he sets out to change this. His mission is to create a new exchange that disarms the smart "High Frequency Trading" and levels the playing field for everyone. It's a good story, and Lewis tells it well. My issue with it is that with the structure of the story, where it focuses on Katsuyama and his team, is that it is one-sided. The implicit message is that they are the good guys and the HFT guys are the bad guys. If you don't know much about the world that Lewis describes then you take it for granted that he is right. The last third of the book becomes an advertisement for the exchange that was started. It has started a lot of conversations amongst finance and economic people about the value of HFT, but that is nowhere in the book. Does it help price discovery; does it provide liquidity; does it make trading more efficient ? Or is HFT just predatory; is it pure rent as Lewis quotes someone "The market is all about algos and routers. It's hard to figure this stuff out. There's no book you can read ." (209)? I don't know, but thankfully this book is bringing those issues. Ultimately, I have to hoist a footnote that Lewis writes that sums up the whole book for me: "'Glitch' belongs in the same category as `liquidity' or for that matter, `high frequency trading.' All terms used to obscure rather than to clarify, and to put minds to early rest."(203). Lewis lets in his editorial voice come in to show that even though he has written a whole book there is an inexactness to defining what HFT is - you have to get to the nitty-gritty to really know (He recommends a couple of books in the text but I didn't highlight them). Because in the end, this book is only tangentially about HFT. It is really about Brad Katsuyama. All I wonder is who is going to play him in the movie

This is a classic Michael Lewis book. It reads quickly. The topic is fascinating. The content is extremely insightful as the true technicalities of High Frequency Trading are either not covered or not understood even by the investment related media. Michael Lewis book follows three intertwined narratives. First, he opens the black box on what is high frequency trading (HFT). How it works, how it extracts rent profits from investors in the stock markets. There are currently over 50 stock market exchanges: 13 are public, and the rest are dark pools. The more market exchanges there are, the more arbitrage and front running opportunities there are for high frequency traders (HFTs) to exploit. Second, it narrates the history of the Investors Exchange (IEX) founded by a righteous quant type bunch who decided to start a stock market exchange that would eliminate all the HFT rent seeking strategies so to deliver a fairer market price to institutional investors trading on their platform. And, third it follows the strange life and career of the Russian computer programmer Sergey Aleynikov. He worked for two years for Goldman Sachs from 2007 to 2009 to render their computer trading systems faster and more competitive within the high speed world of HFT. He left Goldman Sachs with his computer codes that Goldman Sachs deemed proprietary. Goldman Sachs had him arrested by the FBI in 2009, and ever since he has been either engaged in trials prosecuted by Goldman Sachs or in jail. This third narrative also covers the ambiguous and evolving engagement of Goldman Sachs in HFT. At first, it attempts to become an engaged competitive high frequency trader itself. And, that is when it hired Aleynikov to improve its trading computers’ speed. Later, it will realize that chasing the HFTs in a speed competition is a losing proposition. And, it will become the only major Wall Street investment bank to fully support the Investors Exchange (IEX) to counter and neutralize the nefarious impact of HFTs. Going back to the first narrative, High Frequency Trading extracts rent profits from institutional investors (and their retail investors) in three ways. The first way is by beating the investor to the stock market gateway and quickly buying and reselling the stock to the investor at a small profit. They call it “electronic front-running.” To do that, you need to be fast. That is where the nano second trading speed comes in. The “co-location” of the HFTs servers next to the ones of the exchanges plays a major role by reducing the electronic distance travelled and maximizing trading speed. The second way is by exploiting a complex system of kickback and rebates on trades implemented by the various exchanges themselves. They call it “rebate arbitrage.” The third way appears similar to electronic front-running, except that the HFTs exploit minute price discrepancies between the various exchanges before the exchanges themselves have had a chance of correcting those. They call it “slow market arbitrage”. Apparently, of the three rent seeking strategies this is the most lucrative one for the HFTs. The above strategies are implemented within a market universe that is alien to individual investors and most institutional investors. This market universe has interesting characteristics. Its foundational one is an unfathomable stock trading speed measured in the 1/10000 of a second. Such speed relies on extra fast fiber optic networks and computer servers located extremely closely to the servers of the stock exchange themselves. Another characteristic is the HFTs purchasing customer order flows from the Wall Street brokerage houses. The latter now make more money from selling those customer order flows to HFTs than from trading itself. In essence, Wall Street sells proprietary customer order information to the HFTs, so the HFTs can front run these same customers (their stock orders). And, somehow SEC laws have still not caught up to this apparent infraction of the integrity of the stock markets. That’s even though the mentioned HFTs rent seeking strategies are at least a decade old. So, next time when you think your brokerage house is acting in your best interest, think again. It is acting in the best interest of the HFTs and itself by making money on selling your order information to the HFTs. And, we are talking millions if not billions of dollars in total annual revenues for the Wall Street brokerage houses. Going back to the second narrative, to correct for all those markets flaws exploited by the HFTs, Brad Katsuyama, a former trader at Royal Bank of Canada, will create a “fair” exchange: the Investors Exchange (IEX) in 2012. This exchange takes specific infrastructure measures to entirely eliminate all the exploitative advantages of HFTs including: 1) ensuring market pricing data arrives at external points of presence simultaneously; 2) slightly delaying market pricing data to all customers (no co-location, HFTs servers are not allowed proximate to the IEX servers); and 3) IEX refuses to pay for order flow and does not offer related trade rebates of any kind. The majority of Wall Street banks and HFTs will do everything possible to kill this emerging “clean” exchange in its infancy. This is because they collectively extract yearly rent-profit in the $billions on the back of retail and institutional investors. However, as mentioned one of the main player will break rank as Goldman Sachs ultimately decides to support IEX by routing a good portion of its trades to IEX. Goldman Sachs understands that what IEX is doing to restoring integrity in the equity markets is critical. And, as a result IEX survives. Nevertheless, it is not entirely encouraging when evaluating how much impact IEX has in restoring the integrity of the US equities markets since it captures less than 3% of its volume to this day. In other words, over 97% of such market trading volume still is done under the exploitative rent-seeking system abused by the HFTs (electronic front running, etc.) and the other Wall Street banks (making more money from selling their customer order flows than actual trading). The third narrative about Sergey Aleynikov and Goldman Sachs evolving position regarding HFT is very interesting because of its ambiguity. Aleynikov used mainly open source software to develop his codes to improve Goldman Sachs computer speed. When he accepts an offer to join Teza Technologies (who offered to triple his compensation from $400k to $1.2 million), he decides to copy and take his computer code on a USB drive. At such point, Goldman Sachs aggressively pursues him (gets him arrested by the FBI, tried, and jailed). At the time, Goldman Sachs considered the mentioned computer codes to be proprietary and critical to its competitive position within the HFT environment. Michael Lewis will engage with many industry insiders (HFTs, computer programmers, etc.) and solicit their opinion on whether Aleynikov was truly guilty of stealing proprietary company codes or not. Almost unanimously this crowd of insiders advance that Aleynikov was innocent. And, that his practice of copying his own open source based codes when he moved to another employer is absolutely standard within the computer programming community. Aleynikov also indicated that he had no use for Goldman’s proprietary codes as they were very cumbersome catered to Goldman’s antiquated legacy computer systems. When Michael Lewis talked to outsiders like institutional investors, they were far less lenient. And, they typically considered that Aleynikov was clearly guilty of stealing proprietary codes. As indicated, Goldman Sachs at first vigorously pursues Aleynikov in order to protect its position in terms of trading speed within the world of HFT. Much later, when it decides to give up on the speed competition and decides to do just the opposite by supporting IEX, Goldman Sachs does not pursue Aleynikov as adamantly anymore. But, by then the legal system takes a life of its own. As a result, some of the related lawsuits are still going on to this day. Aleynikov is nearly bankrupt and has an online legal defense fund to raise money to mount his defense and reclaim his innocence.

I retired from the hedge fund world and I can tell you that this book is mostly on target. For those who deny that HFT (high-frequency trading) is a rigged game, either they are un-informed or disingenuous. It wasn't always like this. There was a time, when a bid was a bid, and an ask was an ask. If you liked the ask, you could hit the buy button and have a buy order confirmed instantly. Likewise, if you liked the bid, you could hit it and have a sale order confirmed instantly. That instant used to be measured in seconds or less. Then came along the HFT algo. All of a sudden, a bid is no longer a firm bid, and an ask is no longer a firm ask. You can hit the bid, but instead of selling instantly, you now become the ask price, and the bid just got lowered by a penny or more, and the market is moving away from you. Most of the time, the price move is a head fake - an illusion, trying to get you to trade at a price with "scalping" built-in against you. If you are willing to stick around, the precise price you want will return and you can have your trade. But other times when execution really matters, it was all real, the price you were willing to trade at just got shifted permanently right before your eyes and somebody "front-run" you. I decided to retire, partly out of disgust, partly out of my lack of financial ambition. I learned a while ago, if the first million can't make you happy, that you have to accumulate more, you will never be content. If you have to play the rigged game to add more riches to your money pile that most human beings will never see in their lifetime, I feel sorry for you. Life is too short for me to play that game. Addendum: This book was written for the lay person, so was my review. Sorry for not bandying about the jargons as some would expect, my bad. As much as I tried, I seem to have failed to write in plain English and draw the analogy to a functioning market. That's where Michael Lewis' book excelled, hence my recommendation. Granted, true free market doesn't exist in the financial world (no matter where you look, New York/London/Chicago/Tokyo). Only the naive will expect any market to give all participants the same level of positioning to engage in any transaction. My favorite analogy is my local farmers' market. When I show up to buy strawberries, some farmers/dealers have way more information on the supply and demand, and have inventory to reflect their view. They will rightfully make a profit when I buy the basket of strawberries from any of them. What I don't want to see is some jerk get in the way and buy up all the strawberries just before I hand my money to the seller, then turn around and sell the strawberries to me as if he had been the seller all along. The price quoted at my farmer's stand should be the price I can buy strawberries at, not a new price some jerk just jacked up to after seeing my intention to transact. I hope the description above clears any doubt about what this book is really about. It's not about someone having some legitimate edge after doing extensive research, or illegitimate edge resulting from inside information. It is about the financial market must be well functioning and free of unnecessary intermediation. That said, still two thumbs up on the book! For those who deny the unfairness of HFT front-running, either you haven't seen it (which should disqualify you from commenting on this topic) or you are so jaded that you can't see its harm (which begs questions about your integrity). As for myself, still happily retired after a short stint in the world of finance, thank you very much! I never learned much and never enjoyed rattling off the jargons.

This is a one sitting book. I started it at about 8:00pm one evening and found the sun coming up as I finished it. Most read a lot faster than I do, so you may not take as long. Obviously, it is well written and compelling. On reflection, however, I wonder why it seems like a big deal to have financial intermediaries slice milliseconds and then microseconds off stock market buy and sell transactions. To me the issue of artificial intelligence applications seems like a bigger deal than time slicing. Let me give perspective. I worked once with a man whose college roommate was given six million dollars by his (the roommate's) father to master the commodity market in cashew nuts. This was more than fifty years ago. His father did not believe that his son's education would teach him how to prosper in this market. So he underwrote a real world trial and error education. I don't know anything about cashew markets but I can appreciate that you must know who is producing and who is consuming this product. You must know all the factors connected with the producers and consumers. This would include but not be limited to: the countries where the fields are located, their microclimatology, their owner's ages and prospects, their labor relations, politics and economies, etc. There would seem to be several dozen factors associated with each producer and consumer and the mechanisms in the market that process and transport the product. And you would have to be alert to trends and any sudden impact of plant diseases, drought, floods, revolutions, etc. Well, to make it short, the roommate spent the six million and had nothing to show for it. But, now consider the artificial intelligence applications to such problems. In particular, consider adaptive artificial intelligence algorithms. Let the application scan the WEB for `cashew' or whatever its translation is in the dozen or more languages of the countries where it is grown and even more countries where it is consumed. This includes information from the respective departments of agriculture with alerts and forecasts along with reports from selected growers that you pay to make such reports, etc. It would also include reports from the producer of my favorite cashew candy bar, Rocky Road! With the computer power now available and the decreasing costs of Internet connection and bandwidth, would you not be able to find the important factors among the patterns of these data? Would the big banks not be able to fund such a development and even provide it with information from their transactions base? Can you see where this could go with access to NSA style surveillance of financial and personal transactions? It was one of the worries of many producer countries about the implications of EROS - earth resources observation satellites with their multispectral 24/7 monitoring of their lands. The country controlling the satellite data might know more about your cashews than you do? This was a big issue forty years ago and now you never hear of it. So, why did Michael Lewis concentrate on time slicing rather than the issue of Goldman Sachs being able to count the cashews on your ranch?

I found Flash Boys to be riveting. I read it in two sittings in two days. Of course we know that Lewis is an excellent writer and has the gift of simplifying a complex story, but what made this book so inspiring for me was the heart and soul of Brad Kutsayama and his team to "do the right thing" in spite of the uphill climb they face and still face. How anyone can read this book -understanding what it articulates- and then turn around and say this story is "over-blown" seems unconscionable. I was actually moved to tears after finishing it because it's so obvious to me that the IEX Group has an intention and desire to take what has been severely less than a transparent platform and recreate a new one against the odds - and yes they will make a profit but an appropriate one - a platform that is built on transparency & integrity. No one is denying that there has always been and always will be a middle man - I have no problem with that or anyone making their cut. But to hold our sell or buy orders until it benefits them (hiding them in their own dark pools) so they can jack up their profit on our trade's back - is way above and beyond what is fair and it's certainly not in their client's best interest. This from IEX Group's website: "While IEX has no broker owners, we will have only broker subscribers of our trading platform. This unique separation of ownership and subscribers allows IEX to design a trading venue with the traditional investor's best interest in mind, while continuing to recognize the role of brokers in the investment process." I don't think you need to be a trader or investor or even for that matter a rocket scientist to see how clear the raping & pillaging has been. No one is dissing electronic trading - least of all Lewis or Katsuyama - it's the behavior of those electronic trading exchanges that have been skimming off our trades as well as the bank's behavior in their dark pools as well, which denies everyone the fairness of the market place. As investors we all have a right to transparency. That's what IEX Group is about - giving that back to all of Wall Street and beyond. I even found the small vignette re Goldman's Sergey Aleynikove and their over reaction to him - proof that on so many levels of high finance the tail is wagging the dog. Today I actually had the privileged of interviewing Brad Katsuyama for the book I'm writing called Transforming Wall Street. His story is truly extraordinary and one that I think has the power to move and inspire all of us on, in and beyond Wall Street to transform and speak out. Flash Boys reads like a David & Goliath story with David and all of us investors winning. It gave me great hope and affirmed me in my mission to uncover the good guys on Wall Street so that they can start to wrestle the reins back from the anti-capitalists. Reading about the two guys at Goldman and their courageous act - proves how powerful one man never mind two can be. That story still takes my breath away! The time has come for each of us to rally. It's time for each of us to demand better treatment from every division that represents us on Wall Street. Together we can take a stand for what Wall Street is here for. All of us. Katsuyama and his team are taking that stand - with no guarantee still (!) that they will succeed. I like books that give me hope and call me forth to play an even bigger and courageous game and Flash Boy's did just this! I highly recommend it!

Michael Lewis’ new book “Flash Boys: A Wall Street Revolt,” hit the top of The New York Times bestseller list a week after its release. As you would expect, the book is skilfully assembled and quite sensational. When I first started to read it, I too was convinced that Lewis was on to a big story, an important narrative about the seamy underside of Wall Street. But the more I read and, more important, the more I checked his story with my colleagues on the operations side of the financial markets, the more it becomes apparent that Lewis has missed the real story – and perhaps deliberately. The headline of “Flash Boys” is about Wall Street traders using fast technology and unfair tactics to trade ahead of retail investors – and they do – but Lewis misses the real issues, namely: 1) a lack of transparency and 2) deliberate complexity. It is important to distinguish between issues related to the “flash crash” of May 2010, when the deliberately fragmented ghetto that is the US equity markets almost melted down and the daily business of HFT. The former is discussed in an important 2011 paper by Ananth Madhavan of BlackRock, Inc. Unfortunately, as the title of his book confirms, Lewis combines the two issues together into an often confusing narrative that is almost impossible for laymen to understand. The abusive aspect of HFT which Lewis rightly identifies is not so much about the speed of the trading but rather always being first in line. If you think of the current market price of a stock, a couple of years ago, the trader using HFT used to sit just above and below the current market price, and sought to execute quickly when the market price either went up or down. The fact of computers and fast network connections enables this HFT activity, but it is not really the key part of the strategy. Instead the key is to always be first in line. The important part of the story that Lewis misstates is that there is no conspiracy, no illegal activities. All of the strategies used in HFT are not only legal, but they are the result of extensive rule making and public hearings by Congress, the Securities and Exchange Commission, FINRA and the major exchanges. So while Lewis is right to say that these strategies “screw” retail customers in a practical sense, the fact is that the activity has been entirely blessed by Congress, regulators and the major exchanges. In the first aptly named chapter, “Hidden in Plain Sight,” Lewis describes groups of traders attempting to conceal their activities, great stuff if your chief objective is to sell books. But the reality is that the top three HFT firms – Goldman Sachs, Morgan Stanley and Credit Suisse – have been very visibly investing in trading technology for decades. These investments in computers and fast network connections not only give them an advantage over other firms, but afford these firms bragging rights on the Street. If you are an equity trader, you don’t want to work at a “flow shop” like Merrill Lynch. Part of the reason that the Big Media is making such a fuss over “Flash Traders” is that they have no idea how the equity markets actually work in the brave new world of Reg NMS – 600 pages of unintelligible rules and definitions. Lewis notes that as the size of equity trades after 2000 “had plummeted, the markets had fragmented and the gap in time between the public view of the markets and the view of high frequency traders had widened.” This passage and others give readers the false impression that the speed of the HFT is the key point, but this is incorrect. Going back to the point about being first in line, let’s take an example. The BATS order type known as “display-price sliding” allows an investor to essentially position themselves in the center of the equity market for a given stock. This means that when the market price changes, instead of the HFT “market order” being canceled as per the National Best Bid and Offer (NBBO) rule, it simply “slides” to follow the market. Most investors and advisors don’t even know that such an order type exists. For example, when Lewis talks about the fact that Virtu Financial had made money almost every day for five years, the reader is given the impression that the speed of the trading gave Virtu and other HFT shops the advantage. But the reality is that the high frequency trader not only executes before the retail customer, as Lewis describes, but is always first in line. This structural duplicity is programed into the system, but is perfectly kosher under Reg NMS. Indeed, the real scandal is that all of this has been entirely blessed by the SEC, FINRA and the major exchanges and is described in the voluminous public documentation for permitted order types. But suffice to say, virtually nobody in the Big Media or at most Wall Street firms understand any of this or knows, for example, that there are over 100 different order types allowed by the SEC and FINRA under current law and regulations. The crime of HFT is that Congress, the SEC and other regulators have allowed a handful of Wall Street firms to assemble a set of opaque market rules that few people understand. You could probably put all of the Wall Street operations people who really understand HFT in a large conference room. Outside of the small community of traders and operations people who make HFT work, almost nobody else on Wall Street really understand the nuances of the business. And virtually nobody at the SEC has a clue how this works in practice. We should thank Michael Lewis for using his celebrity and considerable writing skills to draw attention to this issue of HFT, but “Flash Boys” incorrectly demonizes individual traders and firms. Lewis “Puts a Face on HFT,” but in doing so misses the real point of the problem. Instead of drawing an accurate picture of HFT, namely corruption and stupidity in Washington, admittedly a banal and boring tale, Lewis chose instead to create a sensational and interesting fictional narrative that will obviously sell more books. “Flash Boys” is a book written for Hollywood instead of the history books or policy makers. Just as the hyper-popular “Wolf of Wall Street” was not an accurate portrayal of fraudster Tom Prousalis, as his daughter Christina testifies, the story line in “Flash Boys” is more fictional dramatization than fact. The true perpetrators in Michael Lewis’ tale of Wall Street greed and corruption are, in order of complicity, the US Congress, the SEC, FINRA and major exchanges, and last but not least the community of Buy and Sell Side Advisors, who genuinely do not understand how HFT really works. That covers just about everybody. As illustrator Walt Kelly’s Pogo said famously: “We have met the enemy and he is us.” This review was published in Zero Hedge in April 2014: [...]

Much positive has already been said. Shortly after the book was published and I'd read it, when there were less than 50 reviews, I responded to the review of an Amazon reader using the name Mercenary Trader who, after first professing the impartiality of his review despite his vocation, bashed the book with 1 star supported by weak, wordy arguments (a veritable novella). Instead of adding repetitive positive feedback, I simply re-post my fairly self-contained response, still posted as a comment to MT's review to which he did NOT reply. __________________________________________________________________________________________ "Why would we think a TRADER would be biased against this book? That you are not an HFT TRADER renders you unbiased about a book that attacks the status quo in stock TRADING and a practice from which, if you so chose, you could profit? Even vultures serve a purpose in our ecosystem...; if you will, please honor us with your loquacity (in layman's terms), by explaining the VALUE added to the U.S. economy by scum-skimming HFT TRADERS and the HFTrading practices outlined in this book, but this time do so in relation to the costs to INVESTORS in the stock market both from higher prices paid or lower prices received and from the lack of disclosure in a secondary market built on disclosure and regulation since the Securities Exchange Act of 1934? Your drop-in-the-bucket argument appears disingenuous or it trivializes an apple (HFT "tax") in relation to a bucket of oranges (total trading volume). Under your logic, the financial world is devoid of any ethical lapse, moral or criminal wrong, or infliction of harm to society or the economy worth reporting or that should even be considered Wrong (morally or legally) so long as the acts in question affect less than 1/10th of 1% of otherwise, similar moral and legal conduct. So, according to this mercenary logic, an HFT "tax" of $160 million a day is a pittance because it's on $225 Billion in Trade VOLUME a day. In other words, "Joe Plummer, the trader in Vegas claims that a $58,400,000,000/year (that's 58.4 BILLION) tax on investors is really nothing. Dude, you have to look at how much was traded in the year." [This is not to mention that you don't even consider that the $58.4 BILLION is a real effect on investors (assuming the correctness of the study) while all that astronomical trade VOLUME you cite could hypothetically net to a near-zero effect to investors as a whole]. Why attempt to downplay $58.4 BILLION? Particularly, why do so by using a false denominator??? Other questions: Certainly a new exchange cannot be built upon a molehill or lay among polished turds (your terms). So, is IEX destined for failure? Why has it had moderate success despite the criticism from traders like yourself? And, what's up with the recent announcements (formal and informal) of changes in trading practices by Wall Street investment banks? Why am I commenting on your post? Because I get fired up by severely negative critiques, such as yours, that begin with a profession of impartiality. Perhaps you feel it necessary to offer this because your profile prominently features your website address which offers us some clues about your occupation and zeal. Also I discount opinions which minimize the effects of a practice that anyone using their common sense can see is the trader's equivalent of ambulance-chasing. A couple of things I've learned in 20 years practicing law: 1) don't defend bad lawyers and bad lawyer practices in the court of public opinion, else people will assume you too have fleas; and, 2) where there's smoke, there's almost always a fire. Peace and Love, Peace and Love"

Muy buen libro.

Micheal Lewis non si smentisce mai, ottimo scrittore, ennesimo suo libro "must read". La storia é agghiacciante in quanto stiamo parlando di alta finanza istituzionale negli stati uniti condotta dai migliori laureati di università Ivy League, ma potrebbe essere tranquillamente ambientata in qualche paesiello della nostra penisola dove si studia e si lavora solo ai fini di manomettere e aggirare regole e istituzioni per monetizzare. Racconto pazzesco che mi ha fatto pensare che la finanza abbia davvero toccato il fondo, più in basso di cosi non si può scendere (ma sarò smentito). Scritto benissimo, intrigante con molti aneddoti interessanti e personaggi che coinvolgono il lettore, un "page turner" che si legge velocemente. Descrive una realtà che lascia l'amaro in bocca e che per certi versi conferma che tutto il mondo é paese; le cose da sistemare nella nostra società sono ancora molte e in tante parti del globo.

The thrust: Over the past 20 years, and particularly in the past decade, the stock market has undergone some significant changes. The most visible change is that much of the action has now become computerized. For example, whereas stock markets used to consist of trading floors (pits), where floor traders swapped stocks back and forth, we now have computer servers where sellers and buyers are connected automatically. Now, on the one hand, this automation has led to some substantial efficiencies, as once necessary financial intermediaries have now largely become obsolete (this has led to savings not only because the old intermediaries earned an honest commission for their dealings, but because their privileged position sometimes led to corruption). It is not that the new stock market has done away with intermediaries entirely. Take brokers, for example. Brokers are still used by large investors to help them move large chunks of stock where the market may not be able to fill the order immediately. The brokers take some risk in this action, and provide liquidity in doing so, since they help move capital to its most useful location, and thus brokers still provide a very useful service. While brokers have always existed, the new stock market has also added a new breed of intermediary. This new breed of intermediary is known as the high frequency trader (HFT). The high frequency trader operates on speed, relying on location and advanced communications technology to learn about the movement of the market before others, and uses this knowledge to make winning trades. To give you an indication of how important high frequency trading has become, consider that at least half of the trades now being made in the United States are coming from high frequency traders. Those who defend high frequency trading argue that these quick trades actually help move money through the stock market, and thus add liquidity to the system (the way brokers do); and that, therefore, high frequency traders provide a valuable service. However, just how high frequency trading works has largely remained a mystery to anyone outside of the industry itself; and many have become concerned that high frequency trading is not so much a liquidity-contributor as a way of scalping money off of trades that would have happened anyway. In 'Flash Boys: A Wall Street Revolt', Michael Lewis follows one man who made it his mission to find out what was going on at the heart of HFT. That man is one Brad Katsuyama, a broker from the sleepy Canadian bank RBC. Katsuyama’s interest in the mystery began back in 2007, when he found that the trades he was trying to make from his desk at RBC were not being executed in the way they once had. In short, Katsuyama was being ripped off. And that’s not all. Katsuyama soon found that other brokers were also being ripped off—and even the investment firms were being ripped off. And since the investment firms manage your money and mine, we were being ripped off too!! This was big. Katsuyama’s dogged persistence eventually led him (and a growing band of fellow mystery-solvers) to find that it was indeed the high frequency traders who were ripping him (and everyone else) off (though the HFTs were not the only culprits involved). What’s more, Katsuyama’s team also discovered just how the HFTs were doing it. The long and the short of it is that the HFTs are just gaming the technology. And in a way that is not only ripping others off, but making the system more volatile, and prone to errors and disasters as well (witness the flash crash of May 6, 2010). Rather than deciding to join the HFTs at the trough (which would have been easy enough to do), Katsuyama and his team decided to fix things. Specifically, the team decided to start their own stock exchange: a stock exchange (called the IEX) that was designed to be immune to advantages in technology, and hence fundamentally fair to all (it was either that or wait around for the SEC to do something—which may take forever). Now, you would think that a stock exchange that is fundamentally fair to all would be a big hit. But then again, a whole heck of a lot of people have no interest in making things fair to all. Which side will win? The fate of the IEX (which opened in October of 2013) has yet to be determined... This book is fantastic. The story will confirm your suspicious that truth is stranger than fiction. Lewis writes beautifully, unpretentiously, and makes the characters jump right off the page (that wouldn’t have been that difficult here—these are some brilliant characters). My only objection is that Lewis’ explanations of the technical side of things, while very good, could have occasionally been slightly more clear. Still, an enlightening and wonderful read.

Awesome book on HFT trading. A must read for any trader of any experience

Michael Lewis diskutiert das Thema sehr differenziert und gibt tiefe Einblicke in die heutigen Aktienmärkte. Interessant ist vor allem, dass nicht die Hochfrequenzhändler verteufelt werden, denn sie nutzen lediglich das Machbare in legalem Rahmen. Vielmehr sind die Aufsicht und die Börsenbertreiber, sowie die Broker gefragt eine fairere Handelsumgebung zu schaffen. Denn es ist eben nicht so, dass Geschwindigkeit schädlich für den Aktienmarkt ist, es resultieren daraus auch keine allzu grossen Risiken für Crashs. Geschwindigkeit nutzen, um Informationsvorsprünge zu realisieren ist ok und etwas ganz normales am Aktienmarkt. Nur wenn durch die Geschwindigkeit Informationsvorsprünge entstehen, dann ist es möglicherweise nicht fair und die Marktregeln sollten angepasst werden. Aber um das genauer zu verstehen, lesen Sie am besten das Buch. Sehr anschaulich in dem Buch auch die Erklärung, dass die Hochleistungsinfrastruktur der Händler nicht dazu genutzt wird unendlich viele Käufe und Verkäufe zu tätigen, sondern "nur" um auf Ereignisse sehr schnell reagieren zu können. Eine Tatsache, die gerade in den deutschen Medien sehr oft verdreht wird. Für mich ist das Buch ein klares "Buy".