Score: ***** (5 out of 5)
Bestselling Berkeley author Michael Lewis has been spending a lot of time back East lately. After researching and writing his blockbuster fifteenth nonfiction book, Flash Boys, currently the country’s #1 bestseller, he’s now juggling interviews and appearances triggered by the fallout. I can’t recall any book that has ever before struck such fear into the denizens of Wall Street.
Flash Boys tells the tale of the arcane and long-secret phenomenon known as high-frequency trading (HFT). The book reads like a thriller, showcasing the author’s legendary writing talent. Like the best fiction, it’s centered on people, not abstract processes or institutions, and the prose sings.
As Lewis discovered, HFT is one of the ways that Wall Street cheats investors — and not just small-time investors like you and me, but also the elite folk who manage multi-billion-dollar pension funds and mutual funds (and thus, indirectly, us as well). Initially, the practice was limited to a handful of traders working in small, independent shops, many of them Russian immigrants with advanced degrees in math or science. However, in the course of Lewis’ exploration of this complex and clever technique to game the system, he learned that many of the big Wall Street banks bought into the process as well and gained enormous profits as a result. Altogether, Lewis attests, HFT has robbed the investing public of billions of dollars.
HFT is no more than a computer-age version of the way Paul Julius Reuter made his name a century and a half ago by using telegrams and carrier pigeons to get the news to the London Stock Exchange faster than anyone else. (The result, of course, was the Reuters agency, now Thomson-Reuters Corporation.) By using obscure techniques to learn the intentions of unsuspecting investors milliseconds ahead of everyone else, HFT traders move the market up or down almost instantaneously, buying the investors’ stock at lower prices or selling to them at higher ones. Lewis refers to one HFT company that operated for five years without losing money on any day. (An HFT firm doesn’t invest; it only trades, ending each day with no stock in its name.)
Lewis’ hero is a brilliant young Canadian named Brad Katsuyama, who for many years was head of electronic trading at the little-known Royal Bank of Canada office on Wall Street, earning $2 million a year. In 2008, Katsuyama discovered that the quotes on his ticker tape didn’t reflect the reality of the market, and he set out to learn why. Over the course of two years, by hiring disgruntled veterans of HFT and grilling them endlessly, he came to see better than anyone else how the contemporary stock market really works — and he didn’t like what he saw. Not at all. HFT wasn’t “nice.” He was a Canadian, after all.
Ultimately, the result of Katsuyama’s investigation was a new stock exchange he and his colleagues designed expressly to frustrate HFT traders and assure investors of fair treatment. It’s called IEX (“A market that works for investors”).