My review of Michael Lewis’ Flashboys: A Wall Street Revolt
‘Socialism’, Albert Einstein said, is humanity’s attempt ‘to overcome and advance beyond the predatory phase of human development’, and for G.A. Cohen ‘every market … is a system of predation.’
It reminds me of the FX HFT market. Imagine a large men’s club, the larger men in one area, and the smaller, younger ones, uglier ones in another. All of them are trying to get the attention of one girl, of two, or three.
Finally, one of the big men tells someone half his size: “you’re predatory, get up and leave and never come back” as if he’s the one who’s threatened.
Although all parts of HFT are different, between FX, Equities, and Futures, Lewis’ book operates more as a novella than a true champion and essay that can add luster and varnish on boring texts on HFT from Fabozzi or Wiley Books.
Lewis’ book is scintillating drama, first and foremost, with creatively drawn historical characters rather than something that you would use in an interview to say you now know a lot about HFT.
Still, in an era where the normal retail investor trades 200 shares at a time, HFT trades up to 1,000,000 (BATs under David Cummings is one of them and mentioned several times) in just a few seconds and up to a 1 billion a day; one invariably wonders if the markets are rigged for the favored few rather than the everyday plebe with his 401k and Fidelity account.
That’s where Lewis begins. Lewis, as always, is characteristically lucid, engaging, even gently humorous with his typical southern gait, and builds up an argument where markets are rigged for HFT in succession of stories of financiers facing "Darwinian" extinction out there at the hands of something that, at times, could have the name Skynet in its place without a shuttering of the eye.
From HFT spoofing, HFT front running, HFT this and that, in Flashboys, Lewis argues HFT is used as a particular instrument to re-create some of the worst excesses of the trading floor before the advent of mass telecommunication, the fiber optic cable, and the computer. HFT exploits all of these weaknesses in markets at once, to the hilt as never before. Above all, its reform seems out the question now too.
Lewis points to the HFT arms race to build faster connections, to go from fiber optic and pay for a faster connection, to using microwaves and actually putting the optic fiber cable and stringing it on top to just get that extra 2 micmics (microseconds) of input, makes the everyday Joe seem like he’s going the way of the Dodo bird (thus making this technological disruption neither normal or temporal, oft-considered qualities of real entrepreneurship).
Moreover, it turned trading market incentives on its head. Suddenly, the rules of the game shifted in favour of HFT in every direction as they became not only the breadwinners (or proprietors) of an "ecosystem" whereby the rules were bounded in sofar they should have won (in execution terms) at the end of each game before the game has started.
For example, Lewis points to the exchanges that want HFT to win because it increases volumes. Regulators, for a while, thought it was fine because it made markets more efficient. Retail investors thought highly of HFT because it reduced transaction costs. The only people who were pissed were other traders.
HFT even got priority data and extra-speed than even big banks like Goldman Sachs at times couldn't find. For example, a retail investor might have made a bid before an HFT order. However, for various reasons, the exchange executes the HFT order first. Odd.
Finally, people have caught on, Lewis conjectures. Finally, he questions whether pecuniary pensioners or the everyday baby boomer with their up-coming social security retirement nearing do understand HFT firms are just another set of middle men extracting, economic rent-seekers catching people completely unaware they that can now paying higher fees while they're trying to reign in as much profit from their retirement accounts as they can.
Lewis comforts us in the last chapters: HFT firms provide the economy no real value — no real value at all. Can we can't we just go back to the old ways and strip down the steeplechasers of HFT and re-start our whole system again, reboot it fresh and new, and feel good about ourselves once again? Can we? It ends on that note.
The unwanted Writer's note:
My only hesitation with saying this is a good book is to say that I am somewhat involved in HFT. I have not gone native yet. However, be cautious to get on the anti-HFT bandwagon.
If you read my posts, you'll have noticed I grew up trading on the Chicago Board of Trade. I should hate HFT.
However, HFT has done good things. For one, it's spread out the profits that normally accrued to banks. It democratized the financial industry by sending trading units of big banks crashing down. It's advanced Wall Street technologically which have led to huge leaps in how we do business. I never imagined a small hedge fund could get a pretty easily built out, cheap, HFT platform in my wildest dreams -- but it can, now, thanks to how disruptive HFT was.
P.S. For other books I recommend sociologists like Donald MacKenzie and Alex Preda. They write more on the "ecology of HFT".
Solid write up, +1
Did you get the chance to watch the CNBC interview with Lewis and brad katsuyama? Worth a watch if you haven't.
CNBC was good push back to 60 Minutes commercial (not journalism) for Lewis book and Brad's exchange. Non-sequitors galore, conclusory allegations, no support for theories.
great write-up
+1, solid write up. also check out Howard Marks' comments at 8:15 of this interview
http://www.bloomberg.com/video/marks-public-money-supporting-risky-inve…
care to comment on the actual impact to retail investors?
I loved the book. Literally could not put it down.
Great review. I just started reading it. I just finished "Dark Pools" by Scott Patterson. I felt it did a good job of giving this history of HFT and it's evolution, kind of died off near the end of the book though.
Also read that recently and agree with you. Dark Pools is a great read to see how its changed the markets in mostly a good way (read: efficiency, volume, technology), but i like what Flash Boys does for the more negative side. They seem to balance each other out and create a better overall picture of HFT. Whether youre for or against both great casual reading.
Does he mention mifid 2 at all?
I have been waiting to get my hands on the book. Finally, got it. I am a huge fan of Michael Lewis' Liar's Poker. So expectations are high. HFT has always been interesting to me, being a CS major with interests in finance and banking.
I saw Lewis talk about this book on The Daily Show. My take was that he was trying to say he felt that HFT was essentially high speed insider trading or just a way to skim off the top of every trade made. Thank you for the review as I can see this is more than just bashing on HFT.
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