Flash Boys: A Wall Street Revolt
by Michael Lewis; narrated by Dylan Baker
Flash Boys is two books at once. First, it’s a fascinating tale about a few different innovators working in the financial markets. These men spotted an opportunity to create a better wall street, to fix a problem that the market would, hopefully, reward them for. Second, it’s another reminder that the primary motivator on Wall Street is for the people who work on Wall Street to make money, and that the money invested there by the rest of us is just a prop they use to do so. In case you didn’t learn that lesson from The Big Short.
A brief precis: Lewis tells the story of High Frequency Trading (HFT) through a few stories about people fighting to undermine it. Essentially, HFT is a market trading style that uses the inherent latency in the space between the different stock exchanges to make money. Here’s an example of the most basic way this happens: Say you want to buy 100,000 shares of Apple. Your broker goes to the first exchange and finds 10,000 shares on offer, including 100 shares being sold by a HFT. After you buy up the 10,000 shares there, your broker’s pokey computer sends a request to the rest of the stock exchanges looking for the other 90,000 shares. In the 1/3 – 1/2 of a second it takes for your order to move through the market, HFT computers have rushed ahead and bought up all the shares, and are now selling them for a tiny fraction more (say, 1 penny per share). You buy the shares from them, and they’ve just made money off their speed advantage in the market, without adding any value to the exchange. Now multiply that by every trade made on every stock market in the US, and you can see how they’re making billions of dollars, basically by cutting in line where most people don’t know there’s a line to cut in.
A few thoughts:
- The first lesson Lewis teaches us in the story of this burgeoning force fighting against High-Frequency Traders is that regulation usually only solved the problem it’s meant to. But it almost always creates new loopholes through which different ways to cheat can be exploited. And since the incentives on Wall Street are so massive, someone will always exploit said loopholes.
- The second lesson is a reminder that banks are there to make money, not to serve the good of the market or even of their own clients. The level to which the banks and the exchanges have altered how they do things to make it easier for the HFTs is appalling.
- The book has some hope, though, unlike The Big Short, which just feels depressing. The new exchange being created throughout the book (which opened this year) seems like it has the potential to change things as the clients, the investors who’re paying a speed tax to HFTs, notice what’s going on.
Once again, Lewis does a fantastic job telling a complex tale in a gripping way. Dylan Baker’s performance is quite strong, and adds great nuance to the tale. Highly recommended read.