Review by Choice Review
A report on a high-tech predator stalking the equity markets, this book by financial journalist Lewis illustrates the rise of the modern high-frequency trading system based solely upon speed, with participants making riskless trades for a few pennies per share that add up to billions of dollars annually. The book begins with the building of a direct line between the futures market in Chicago and the computer terminals of financial institutions and high-speed traders in "New Pricing" that line at a cost of $300 million. The book ends with the development of an exchange (IEX) designed to offer investors direct access to a trade that is executed at the midpoint of the bid/ask spread. Those teaching principles of economics and intermediate microeconomic theory can use some of the examples employed to develop a cost-benefit analysis of the current system of trading in what are now fragmented markets, with much of the trading not on public markets but in "dark pools." The researcher will find this volume a useful starting point while searching for the data necessary to quantify the benefits and costs of the current system for trading. Finally, the general reader will find this volume of great interest. --Ward S. Curran, Trinity College (CT)
Copyright American Library Association, used with permission.
Review by New York Times Review
FOR BRAD KATSUYAMA, then a young equities trader at Royal Bank of Canada, a life-changing revelation about the stock market began in June 2007 with a mystery: Why, when he tried to buy stocks at the offered prices on his computer screen, did the offers instantly vanish and the prices pop higher? Katsuyama's struggle to first understand why he couldn't execute the trades showing up on his screen, and then to combat the problem by starting his own stock exchange, is the spine of "Flash Boys: A Wall Street Revolt," Michael Lewis's latest excursion onto the trading floors of Wall Street, a venue he portrayed so memorably in his now-classic "Liar's Poker." When it comes to narrative skill, a reporter's curiosity and an uncanny instinct for the pulse of the Zeitgeist, Lewis is a triple threat, as he's demonstrated in bestselling books like "The Big Short" and "Moneyball." But those formidable talents are only intermittently on display in this ultimately unsatisfying probe of high-frequency traders, who may (or may not) be ripping off investors and destabilizing the global financial system. In Katsuyama, Lewis has found a good guide into the esoteric and highly technical world of high-frequency trading. A mild-mannered Canadian Everyman with a capacity for moral judgment all too rare on Wall Street, Katsuyama seemed as befuddled as the rest of us by the explosion of the superfast, computer-driven trading that now accounts for an estimated 50 percent of all transactions in the stock market. He teams up with Ronan Ryan, an awkward young Irish immigrant with a knack for high-speed telecommunications technology, who joins RBC as head of high-frequency trading strategies, even though he has no idea what he's supposed to do. Thanks to their combined expertise, the answer to the mystery of the vanishing sell offers soon becomes clear: High-frequency traders are merely "pinging" the market with bids to tease out genuine buy orders. Then, at blazing speed, they cancel the offers, buy the shares, drive up the price by a few cents and resell them to a real buyer. This seems an amalgam of insider trading and front-running, both illegal in other contexts but, evidently, perfectly lawful here. High-frequency traders have plenty of accomplices, as Katsuyama and Ryan discovered. Foremost among them seem to be the exchanges - the New York Stock Exchange, Nasdaq and BATS, to name some - which are happy to sell their order flow to high-frequency traders and thus have a financial stake in perpetuating their practices. So, too, do the big banks that run so-called dark pools, matching buyer and seller, and that sell their trading information. Armed with knowledge of large buy and sell orders, high-frequency traders dart in ahead of the trades, capturing a tiny spread between bid and ask prices that may last for a millisecond or two. Lewis singles out Goldman Sachs as among the most egregious offenders. Rich Gates, who ran a mutual fund called TFS Capital, was "a bit surprised that Goldman, and only Goldman, seemed to be running a pool that allowed someone else to front-run his orders to the public stock exchanges." He was "shocked" that "no one seemed much to care that 35,000 small investors could be so exposed to predation inside Wall Street's most prominent bank." Among those who seemed unconcerned were reporters at The Wall Street Journal, to whom Gates took his claims, and officials at the Securities and Exchange Commission who turned a deaf ear. Why would this be? One of the frustrating aspects of Lewis's reporting is that readers never hear anyone else's side to a story. No one from Goldman, The Journal, the New York or other stock exchanges, or the S.E.C. offers any explanation, and it isn't clear whether Lewis gave them the opportunity. Taking the book's assertions at face value, how big a threat is high-frequency trading? Something certainly seems rotten here. Lewis relegates to a footnote the startling fact that Virtu Financial, one of the largest high-frequency trading firms, boasts that in five and a half years, it had only one day when it failed to make money, and that was the result of "human error." So there can't be any risk. But the average investor probably wouldn't even notice. Most don't care about a penny or two here and there, although in the aggregate those pennies can add up to big numbers. Defenders of high-frequency trading point out that since its advent soon after the market was computerized in 2000, the spread between bid and ask prices has narrowed, the cost of trading has dropped and investors have saved billions. The case for high-frequency trading is that it provides the liquidity that makes a more efficient, lower-cost, computer-driven market possible. Lewis clearly doesn't buy this argument, calling high-frequency trading "less a market enabler than a weird sort of market burden." Technology should have reduced the cost of intermediation. "Instead this new beast rose up in the middle of the market and the tax increased - by billions of dollars," Lewis writes. "Or had it?" He says he can't answer that, because "the new intermediaries were too good at keeping their profits secret." (IBISWorld, a market research firm that produces reports on high-frequency trading, estimates that it's a $29 billion industry.) But perhaps there's something far more dangerous here than mere intermediation. On May 6, 2010, the Dow Jones industrial average plunged 600 points, and then recovered, in mere minutes, in what is now known as "the flash crash." Despite an S.E.C. investigation and ensuing report, the causes of that confidence-shaking incident remain obscure. Were high-frequency traders and their Wall Street allies to blame? That's a mystery worthy of a book, but Lewis mentions it only in passing. Katsuyama and his band concluded that high-frequency traders, working hand in glove with the exchanges and big banks, were ripping off investors to the tune of billions of dollars. When, like Mickey Rooney and Judy Garland setting out to stage a backyard musical, they decided to quit their jobs at RBC and create their own exchange, their idea was to create a market free from conflicts of interest and openly at odds with the high-frequency traders. In Lewis's telling, their motives were largely idealistic and altruistic. "They loved the idea of a stock exchange that protected investors from Wall Street's predators." But presumably there was also a profit to be made once the high-volume traders - Vanguard, Fidelity and other big fund companies - gravitated to their new exchange and away from their corrupt rivals. That proved harder than expected. Katsuyama shocked a group of investors when he told them how the banks were colluding against them. "Which bank is the worst?" one asked. "I can't tell you," Katsuyama replied. "Do you know how frustrating it is to sit here and hear this and not know who that broker is?" another asked. "What we want to do is highlight the good brokers," Katsuyama replied, in classic P.R.-speak. Evidently idealism has its limits. But surely Goldman Sachs must be among the villains? Lewis repeatedly castigates Goldman for its alleged complicity in the financial crisis, and the firm played the role of the heavy in the saga of Sergey Aleynikov, about whom Lewis wrote at length in Vanity Fair and whom he rather awkwardly inserts into his narrative here. After Aleynikov left Goldman, where he was well paid but little more than a cog in the bank's own high-frequency trading operation, he was arrested and charged with stealing Goldman's computer code and covering his tracks. "The only Goldman Sachs employee arrested by the F.B.I. in the aftermath of a financial crisis Goldman had done so much to fuel was the employee Goldman asked the F.B.I. to arrest," Lewis dryly observes. so it comes as an unexpected twist that Goldman, the bank nearly everyone, including Lewis, seems to love beating up on, emerges as the new exchange's most prominent supporter - a savior of sorts - and that two Goldman executives, Ron Morgan and Brian Levine, are actually good guys. Lewis explains this seeming paradox with the observation, "It was a mistake to think of a bank as a coherent entity." Morgan and Levine "were not high-frequency trading types." Thanks to Goldman's support, Katsuyama's new exchange, called IEX, now seems well on its way to financial success, even though there's scant evidence it has made the slightest dent in the high-frequency trading that prompted its creation. It's a happy ending, of sorts. But Lewis might have pondered how frustrating it is for readers, and not just investors at Katsuyama's conference, to be told a story in which the villains aren't named. When Katsuyama declines to identify the bad bank, Lewis comes to his hero's defense, observing that "Brad was not by nature a radical." But a purported contest between good and evil in which all the characters are good quickly becomes dull, especially when the setting is as technical as high-frequency trading. The traders themselves remain faceless adversaries of Katsuyama and his buddies. Lewis never penetrates their high-tech lairs, or even seems to have tried. Who are these people? What are they like? How do they do what they do? How much money do they make and what do they do with it? And are they really so bad? (For answers to these questions, there's Scott Patterson's far more comprehensive and persuasive 2012 book, "Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market.") By the end of "Flash Boys," even Katsuyama seems to be having second thoughts about his high-frequency trader adversaries. "I hate them a lot less than before we started," he says. "This is not their fault. ... It's brilliant what they have done within the bounds of the regulation. They are much less of a villain than I thought. The system has let down the investor." That may be true, and to the extent "Flash Boys" focuses public attention on this system, it is a welcome addition to a growing chorus calling for further investigation and reforms, which may yet yield some results. In February the S.E.C. chairwoman, Mary Jo White, said the agency would intensify its scrutiny of high-frequency trading. And the New York attorney general, Eric T. Schneiderman, has started an investigation into the sale of trading data by exchanges. Given that the fourth anniversary of the flash crash is approaching, it seems not a moment too soon. How big a threat is high-frequency trading? Something certainly seems rotten here. JAMES B. STEWART writes the Common Sense column for the business section of The Times and is a professor at the Columbia School of Journalism. He is the author of nine books, including "Den of Thieves" and, most recently, "Tangled Webs."
Copyright (c) The New York Times Company [April 20, 2014]
Review by Publisher's Weekly Review
In his latest captivating expedition into the marketplace jungle, Lewis (Moneyball) explores how the rise of computerized stock exchanges and their attendant scams started a battle for the soul of Wall Street. He probes the subterfuges of high frequency traders who, assisted by banks and brokerages happy to sell out customers, use blindingly fast data links to gain inside information on investors' trades and then exploit them on today's entirely digital stock markets. At the center of his novelistic narrative is a New York mosaic: Brad Katsuyama, a Canadian-born trader with a conscience; Ronan, a hot-headed Irish telecom expert; and a Dostoevskian cast of Slavic programmers veering between existential angst and saintly resignation. This cast bands together to expose the market manipulations and then start their own honest stock exchange. Lewis does his usual superb job of explicating the inexplicable in his lucid, absorbing account of the crossroads of high-tech data transfer and byzantine market strategies, where milliseconds of signaling speed yield billions in profits. He also presents a rich sociology of Wall Street's assholes-vs.-geeks culture clash between greedy, blustering financial honchos and the flickers of rationalism and humanity in the tech people they need to run their markets. The result is an engrossing true-life morality play that unmasks the devil in the details of high finance. Agent: Al Zuckerman, Writer's House. (Apr.) © Copyright PWxyz, LLC. All rights reserved.
Review by Kirkus Book Review
In trademark Lewis (Boomerang: Travels in the New Third World, 2011, etc.) fashion, a data-rich but all-too-human tale of "heuristic data bullshit and other mumbo jumbo" in the service of gaming the financial system, courtesy ofyes, Goldman Sachs and company.That stuff you see on TV about dinging bells and ulcer-stricken traders pacing the floor of the New York Stock Exchange? It's theater. The real speculative economy lives invisibly in little wires that go to nodes in out-of-the-way places, monitored by computer, shares bought and sold by algorithm. If you send a sell order, it might get intercepted for a fraction of a second by an intermediary that can manipulate the order to squeeze off one one-hundredth of a penny in profitsmall on the individual level but big when you consider the millions of trades made every day. Both the system and that process are considerably more complex than that, but this fact remains: It dawned on someone that a person could grow rich laying ever faster optic cables to selected clients, cutting deals with the governments of towns and counties "in order to be able to tunnel through them," all perfectly legal if not exactly in the spirit of the market. Lewis follows his tried-and-true methods of taking a big story of this sort and deconstructing it to key players, some on the inside, some on the outside, at least one an unlikely hero. In this case, that unlikely hero is an exceedingly mild-mannered Japanese-Canadian banker who assembled a team of techies and numbers nerds to track the nefarious ways of the HFT worldthat is, the high-frequency traders and the firms that engaged in "dark pool arbitrage" as just another asset in their portfolios of corruption.If you've ever had the feeling that the system is out for itself at your expense, well, look no further. A riveting, maddening yarn that is causing quite a stir already, including calls for regulatory reform. Copyright Kirkus Reviews, used with permission.
Copyright (c) Kirkus Reviews, used with permission.
