Friday, February 13, 2015
In his book Flash Boys, Michael Lewis penetrates the shroud of mystery cloaking "high frequency trading" firms, and how they are manipulating the stock exchanges. While the topic may sound dry, Lewis brings it alive by telling the story through the personal perspectives of several key Wall Street players. The main hero is an unusually decent Canadian broker who set out to find out just exactly what high-frequency traders (HFT) were really doing (since practically no one actually knew), and ultimately moved to correct the predatory behavior by creating a new transparent exchange that neutralized advantages of speed. Other characters include an Irish immigrant who became very successful selling technology to the HFTs so they could gain timing advantages measured in microseconds, and a Russian programmer who became the only Goldman Sachs employee arrested in the wake of the financial crisis. Lewis does a good job of breaking down some rather technical details, keeping the story human-focused, and nicely framing it with an artful ending that signals both that the new exchange succeeded and that foiling one game will not end market gaming, it will only change the strategy. I found the tale fascinating, and by the end I was outraged at just how much economic resources and human capital are lost due to the perverse incentives in the current market structure. Fortunately, it seems the FBI has read the book too, and some action has begun to be taken. Now if only the SEC would wake up and read this book.