Book review

'Flash Boys': Michael Lewis shines a light on the netherworld of high-frequency trading


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With the release of his latest book, “Flash Boys: A Wall Street Revolt,” Michael Lewis has dropped an incendiary device into the stock market’s dark pools.

It was a perfectly timed book made even more timely by the raft of publicity that accompanied its release, including a segment on “60 Minutes” that hit the book’s best demographic: older investors who have seen their holdings shrink.


“FLASH BOYS: A WALL STREET REVOLT”
By Michael Lewis
W.W. Norton & Company ($27.95).

America is slowly recovering from the Great Recession, a period in which everyone but Wall Street traders suffered, and it has lost its confidence in the stock market. This book is the confirmation that the rest of us were right.

Mr. Lewis has the ability to write about highly technical issues for a general audience and to toggle between sports and finance in a way that makes the complex understandable — even entertaining — for audiences that might not have a natural affinity for the topics.

In his sports books “The Blind Side” and “Moneyball,” he explained the details of football and baseball.

“The Blind Side: Evolution of a Game” describes the rise of the importance of the left tackle in football and the overall change in the game to more of a passing offense. He made the topic work by focusing on Michael Ohr, the left tackle for the Baltimore Ravens who had been taken in by a family of Alabama football boosters when his own family failed him.

“Moneyball: The Art of Winning an Unfair Game” explained the use of obscure baseball statistics that allowed Billy Beane to excel as a baseball general manager who could take the Oakland Athletics, with one of the lowest payrolls in baseball, into the playoffs year after year. Both of those books had such strong narratives that they were made into movies that were nominated for Best Picture.

Those books were followed by “The Big Short,” a story of short selling and sub-prime mortgages.

Mr. Lewis’ first book, “Liar’s Poker,” was about his own experience working in the bond market.

“Flash Boys” is not a how-to on becoming a high-frequency trader, nor is a manual to create a stock exchange. But the book does convey the essence of the market as it currently works.

The story starts with a secret 827-mile fiber optic information line that was run from Chicago to New Jersey, boring through the Allegheny Mountains at a cost of $2.8 billion. The purpose of the line was to take less than 2 microseconds off the time it took to get information from the Chicago Mercantile Exchange to the computerized stock markets in New Jersey.

From there, Mr. Lewis takes the reader to Brad Katsuyama, who ran the trading desk of Royal Bank of Canada and noticed that when he would trade lightly traded stocks, suddenly the price would jump. It was just a little, but enough that his customers were being charged more than they should have.

His investigation led him to high-frequency trading, an activity that is only possible when someone has advanced knowledge of trades. By advanced knowledge, we are talking milliseconds.

Mr. Lewis never says that Mr. Katsuyama was the only smart guy to figure out what the high-frequency traders were doing, but he does explain what Mr. Katsuyama did to try to stop them.

The reaction to “Flash Boys” has been, predictably, Wall Street protesting just a bit too much that the game is not really rigged.

Watching some of the commentary that has ensued has been like listening to the 7-year-old who swears she had nothing to do with the missing brownies and doesn’t know how they got to be hidden in the ice bucket.

This is not the first book about the netherworld of trading in stocks that happen in brokerage’s secret exchanges. Scott Patterson, a Wall Street Journal writer, wrote about high-frequency trading two years ago in his book “Dark Pools: The Rise of Machine Traders and the Rigging of the U.S. Stock Market.”

But what Michael Lewis does that Mr. Patterson didn’t is write best-sellers. Mr. Lewis has shined a very bright and public light into the shadows of Wall Street. It will be interesting to watch if anyone is able to clean up the mess he illuminated without creating a bigger mess elsewhere.


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