I’ve been procrastinating writing this review because, while Michael Lewis is one of my favorite nonfiction writers, this book proved to be a bit of a struggle for me. Maybe that’s because I’m too jaded to be surprised that banks and stock traders had found yet another way to screw over the little guy. Maybe it’s because everything I know about the stock market I learned from Trading Places, so if it’s not about pork bellies or frozen concentrated orange juice, it doesn’t arouse my interest. Possibly it’s because once I got the gist of the problem I wasn’t deeply curious about the details, so even a modest 271 pages seemed like more than the topic required. Regardless, Lewis is an accomplished writer and does an admirable job explaining high frequency trading to a lay person like myself.
For those of you who learned about the stock market from 1980s movies like I did, you might be surprised to learn that trading floors, where men in business suits make funny hand gestures and shout at each other, have been replaced by electronic trading (although, somewhat impressively in my opinion, the New York Stock Exchange didn’t embrace electronic trading until 2007). With the advent of electronic trading came the race for speed. The premise of the book is that access to high-speed data gives a major advantage to Wall Street firms and high-frequency traders.
I’ll sum up the problem, to the best of my understanding. Say you want to buy stock in frozen concentrated orange juice (or something less silly). You place an order, which high frequency traders can see come in. With their faster access to the markets, they rush in to buy up all the available OJ stock and then sell to you at a higher price than was originally anticipated. By faster access, we’re talking about microseconds, which is one millionth of a second. Basically, they swoop in on your desired stock like a seagull on a bag of Doritos and sell it back to you at a higher price.
Finance lesson, bitches
Most of us would have no way of knowing that any of this was happening, except that Brad Katsuyama, financial wizard and all-around Canadian nice guy (or just nice guy, to be less redundant), discovered the problem and made it his mission to level the playing field for investors. Katsuyama probably wasn’t the first person to figure out what was happening, but people who were profiting from the system had no incentive to take on the thankless task of exposing it. Lewis writes, “Once very smart people are paid huge sums of money to exploit the flaws in the financial system, they have the spectacularly destructive incentive to screw the system up further, or to remain silent as they watch it being screwed up by others.”
Katsuyama’s answer was to create his own exchange, IEX, where access would be equal, which he did by slowing down the time it took traders to access his exchange. By the way, Katsuyama gave up a lucrative career to tackle this problem and create the exchange. So the heroes of this story are Canadians and slowness.
O. . . Can. . . a. . . .da. . . .our. . . home. . . and . . . na. . . tive. . . land
Lewis has always struck me as one of the good guys, always researching and writing about underdogs, and Flash Boys is consistent with that opinion. For most of us, dabbling in the stock market consists of investing in our retirement funds or relying on investing firms to do the heavy lifting for us. Meanwhile, we’re blissfully ignorant of how rigged the system is against investors. Lewis writes, “The U.S. Stock Market was now a class system, rooted in speed, of haves and have-nots. The haves paid for nanoseconds. The have-nots had no idea that a nanosecond had value. The haves enjoyed a perfect view of the market; the have-nots never saw the market at all.”
A good Michael Lewis book also includes the human element, this time in the form of Goldman Sachs programmer Sergey Aleynikov, who was convicted of stealing code that was mostly useless, largely open-source, and that nobody really wanted. He lost everything and went to jail for a year but was so Zen about it that he chalked the situation up to a learning experience, saying “If the incarceration experience doesn’t break your spirit, it changes you in a way that you lose many fears.”
Sergey after being released from prison
To sum up, there’s lots of great stuff and food for thought in this book. It was a bit long for me given my limited interest in the stock market, but that’s probably the reason that Wall Street and traders are able to get away with such shenanigans. The less interested the general public is in complex topics like this, the easier it is for them to be fooled. Given that, I suggest everyone begin a primer in educating themselves on the stock market.