Flash Boys: A Wall Street Revolt

Even for the ones who don’t know much about the stock market, the book is really easy to read, with a simple pick of words for everyone understand what’s going on. Really recommend if you like stock market stories and a good story at all

This is a classic Michael Lewis book. It reads quickly. The topic is fascinating. The content is extremely insightful as the true technicalities of High Frequency Trading are either not covered or not understood even by the investment related media.Michael Lewis book follows three intertwined narratives.First, he opens the black box on what is high frequency trading (HFT). How it works, how it extracts rent profits from investors in the stock markets. There are currently over 50 stock market exchanges: 13 are public, and the rest are dark pools. The more market exchanges there are, the more arbitrage and front running opportunities there are for high frequency traders (HFTs) to exploit.Second, it narrates the history of the Investors Exchange (IEX) founded by a righteous quant type bunch who decided to start a stock market exchange that would eliminate all the HFT rent seeking strategies so to deliver a fairer market price to institutional investors trading on their platform.And, third it follows the strange life and career of the Russian computer programmer Sergey Aleynikov. He worked for two years for Goldman Sachs from 2007 to 2009 to render their computer trading systems faster and more competitive within the high speed world of HFT. He left Goldman Sachs with his computer codes that Goldman Sachs deemed proprietary. Goldman Sachs had him arrested by the FBI in 2009, and ever since he has been either engaged in trials prosecuted by Goldman Sachs or in jail.This third narrative also covers the ambiguous and evolving engagement of Goldman Sachs in HFT. At first, it attempts to become an engaged competitive high frequency trader itself. And, that is when it hired Aleynikov to improve its trading computers’ speed. Later, it will realize that chasing the HFTs in a speed competition is a losing proposition. And, it will become the only major Wall Street investment bank to fully support the Investors Exchange (IEX) to counter and neutralize the nefarious impact of HFTs.Going back to the first narrative, High Frequency Trading extracts rent profits from institutional investors (and their retail investors) in three ways.The first way is by beating the investor to the stock market gateway and quickly buying and reselling the stock to the investor at a small profit. They call it “electronic front-running.” To do that, you need to be fast. That is where the nano second trading speed comes in. The “co-location” of the HFTs servers next to the ones of the exchanges plays a major role by reducing the electronic distance travelled and maximizing trading speed.The second way is by exploiting a complex system of kickback and rebates on trades implemented by the various exchanges themselves. They call it “rebate arbitrage.”The third way appears similar to electronic front-running, except that the HFTs exploit minute price discrepancies between the various exchanges before the exchanges themselves have had a chance of correcting those. They call it “slow market arbitrage”. Apparently, of the three rent seeking strategies this is the most lucrative one for the HFTs.The above strategies are implemented within a market universe that is alien to individual investors and most institutional investors. This market universe has interesting characteristics. Its foundational one is an unfathomable stock trading speed measured in the 1/10000 of a second. Such speed relies on extra fast fiber optic networks and computer servers located extremely closely to the servers of the stock exchange themselves. Another characteristic is the HFTs purchasing customer order flows from the Wall Street brokerage houses. The latter now make more money from selling those customer order flows to HFTs than from trading itself. In essence, Wall Street sells proprietary customer order information to the HFTs, so the HFTs can front run these same customers (their stock orders). And, somehow SEC laws have still not caught up to this apparent infraction of the integrity of the stock markets. That’s even though the mentioned HFTs rent seeking strategies are at least a decade old.So, next time when you think your brokerage house is acting in your best interest, think again. It is acting in the best interest of the HFTs and itself by making money on selling your order information to the HFTs. And, we are talking millions if not billions of dollars in total annual revenues for the Wall Street brokerage houses.Going back to the second narrative, to correct for all those markets flaws exploited by the HFTs, Brad Katsuyama, a former trader at Royal Bank of Canada, will create a “fair” exchange: the Investors Exchange (IEX) in 2012. This exchange takes specific infrastructure measures to entirely eliminate all the exploitative advantages of HFTs including: 1) ensuring market pricing data arrives at external points of presence simultaneously; 2) slightly delaying market pricing data to all customers (no co-location, HFTs servers are not allowed proximate to the IEX servers); and 3) IEX refuses to pay for order flow and does not offer related trade rebates of any kind. The majority of Wall Street banks and HFTs will do everything possible to kill this emerging “clean” exchange in its infancy. This is because they collectively extract yearly rent-profit in the $billions on the back of retail and institutional investors. However, as mentioned one of the main player will break rank as Goldman Sachs ultimately decides to support IEX by routing a good portion of its trades to IEX. Goldman Sachs understands that what IEX is doing to restoring integrity in the equity markets is critical. And, as a result IEX survives. Nevertheless, it is not entirely encouraging when evaluating how much impact IEX has in restoring the integrity of the US equities markets since it captures less than 3% of its volume to this day. In other words, over 97% of such market trading volume still is done under the exploitative rent-seeking system abused by the HFTs (electronic front running, etc.) and the other Wall Street banks (making more money from selling their customer order flows than actual trading).The third narrative about Sergey Aleynikov and Goldman Sachs evolving position regarding HFT is very interesting because of its ambiguity. Aleynikov used mainly open source software to develop his codes to improve Goldman Sachs computer speed. When he accepts an offer to join Teza Technologies (who offered to triple his compensation from $400k to $1.2 million), he decides to copy and take his computer code on a USB drive. At such point, Goldman Sachs aggressively pursues him (gets him arrested by the FBI, tried, and jailed). At the time, Goldman Sachs considered the mentioned computer codes to be proprietary and critical to its competitive position within the HFT environment.Michael Lewis will engage with many industry insiders (HFTs, computer programmers, etc.) and solicit their opinion on whether Aleynikov was truly guilty of stealing proprietary company codes or not. Almost unanimously this crowd of insiders advance that Aleynikov was innocent. And, that his practice of copying his own open source based codes when he moved to another employer is absolutely standard within the computer programming community. Aleynikov also indicated that he had no use for Goldman’s proprietary codes as they were very cumbersome catered to Goldman’s antiquated legacy computer systems. When Michael Lewis talked to outsiders like institutional investors, they were far less lenient. And, they typically considered that Aleynikov was clearly guilty of stealing proprietary codes.As indicated, Goldman Sachs at first vigorously pursues Aleynikov in order to protect its position in terms of trading speed within the world of HFT. Much later, when it decides to give up on the speed competition and decides to do just the opposite by supporting IEX, Goldman Sachs does not pursue Aleynikov as adamantly anymore. But, by then the legal system takes a life of its own. As a result, some of the related lawsuits are still going on to this day. Aleynikov is nearly bankrupt and has an online legal defense fund to raise money to mount his defense and reclaim his innocence.

Micheal Lewis non si smentisce mai, ottimo scrittore, ennesimo suo libro "must read". La storia é agghiacciante in quanto stiamo parlando di alta finanza istituzionale negli stati uniti condotta dai migliori laureati di università Ivy League, ma potrebbe essere tranquillamente ambientata in qualche paesiello della nostra penisola dove si studia e si lavora solo ai fini di manomettere e aggirare regole e istituzioni per monetizzare. Racconto pazzesco che mi ha fatto pensare che la finanza abbia davvero toccato il fondo, più in basso di cosi non si può scendere (ma sarò smentito). Scritto benissimo, intrigante con molti aneddoti interessanti e personaggi che coinvolgono il lettore, un "page turner" che si legge velocemente. Descrive una realtà che lascia l'amaro in bocca e che per certi versi conferma che tutto il mondo é paese; le cose da sistemare nella nostra società sono ancora molte e in tante parti del globo.

C'est le premier ouvrage de M.L. que je lis, et je n'ai pas été déçu.Ce livre est très bien écritIl permet de se plonger au coeur de Wall Street, et de se sentir dans la peau d'un "Kind Wolf of Wall Street".Les personnages, bien réels, débordent d'imagination et de talent, qualités requises pour élucider le mystère du HFT....Je recommande aux passionnés de la finance, mais pas seulement.

Over the past 24 years, Michael Lewis has enjoyed five-star success writing four-star, three-star and occasionally two-star books of the fly-on-the wall variety.Flash Boys breaks this mould. It is a genuine contribution.I can pass judgement because my life has run parallel to his books. I read "Liars' Poker" as a college junior in 1990 and used it as a manual to get a job at Salomon Brothers. Six years there was parlayed into a career mostly in finance, but by the time he was writing the "New New Thing" I was already a co-founder and CEO of a disruptive business called book2eat.com. When "Boomerang" came out I was trading Greek government bonds. And now "Flash Boys" is coming out I've just accepted a job to do electronic trading.In all his efforts that I can judge (so I'll have to leave Moneyball out) he's so far been unfailingly entertaining, but very consistent in getting the wrong end of the stick. Let's take it one by one:The subject of "Liars' Poker," Salomon Brothers, not only pioneered the use of financial mathematics in the pricing of plain securities like bonds, not only invented all vanilla derivatives such as swaps, it also invented live pricing and for example seeded Teknekron, the pioneer of sending exchange prices into spreadsheets. Its head of IT was a certain Michael Bloomberg whose ground-breaking software had its baptism of fire as Salomon's B-Page.In his short tenure at the firm, Michael Lewis completely failed to notice any of the above. He also failed to notice that customers in the main seek yield and nothing else. Always have done and always will do. They lack the inclination to understand value and they are not incentivized to seek it. Many feel zero fiduciary duty toward the institution they work for and maximize their own career prospects, while many actually seek out willing accomplices within the banks, often via "introductory agents" etc. and do what they can to monetize the position they hold. Michael Lewis was completely wrong to accuse Salomon as an institution of greed, basically. All they ever did was invent markets and exploit their first-mover advantage.I've worked at Salomon, Goldman, Lehman, CSFB, ABN, Nomura (the cynical reader will notice the progression is rather monotonic) and my current employer who will remain nameless. Of the above, Salomon was very comfortably the most stand-up toward its customers. It was head and shoulders above the rest. My first week at Goldman I was so deflated by what I saw relative to what I'd known at Salomon, I resolved to leave as soon as my (very juicy) guarantee was cashed in and I still have zero regrets about it. But I did not write a book, because Goldman merely did very well what everybody else except Salomon was doing poorly, let's put it that way. It operated well within the parameters of its industry.With a total of one observation, Michael Lewis got the wrong end of the stick. He's never seen true rogue behaviour. Even if he'd been at Bear Sterns, of course, he would not exactly have been handed those funky accounts in his first year, would he? Regardless, "Liars' Poker" was a fun book that changed my life.The subject of the "New New Thing" was the founder of Netscape, who (like Salomon, admittedly) no longer exists. But my main gripe with that book was that it failed to mention that success in entrepreneurial business is 90% about hard work and 9% about getting backed by the right people and at most 1% for everything else. It isn't at all about the idea. Not even half a percent. My favorite example is Amazon. Jeff Bezos got his start in the least sexy, most replicable, zero-network-effect, clicks-and-mortar corner of the market. He now runs the most important business on earth and is getting into all the sexy stuff through brute force. In celebrating genius, Michael Lewis showed he did not understand what it was all about. But, again, it was a very entertaining book. I loved it.The author truly hit rock bottom with Boomerang. For one, while it undeniably has its moments, it has to resort to grotesque exaggeration to elicit any laughs. I've lived in the same Germany he describes and never noticed anybody having any obsession with fecal matter. And as a Greek I'm totally appalled that he visited one of the most beautiful spots on the planet, and probably the only way anyone can time-travel to year 1400 (Prince Charles regularly does, recently with his sons, in the past with Prince Philip) and take away tawdriness rather than grandeur from Haghion Oros.The guy had a budget to go visit the most amazing places on earth and rather than celebrate what was great about them or get to the bottom of what was wrong about them (and God knows plenty is) he came back with a bunch of trite observations. So I vowed never to read Michael Lewis again.And then comes this."Flash Boys" is AWESOME. It has a plot, it has fully-developed heros and villains, it has a subplot that you suspect got lost but comes back with a vengeance (and a twist!! I won't spoil it for you) at the end of the book. It has a second subplot that is also a morality story, which I found totally gripping. It's as tightly packed as "Pulp Fiction" and I say that with no exaggeration.Most importantly, it seems like Michael Lewis finally "gets it." His description of "Scalpers Inc." on pages 107 to 112 (which incidentally gets left out of the New York Times short version of the book) should be required reading for all politicians, let alone Business School students. It's really QED in terms of why HFT is a scourge. His description of the three ways HFT works ("electronic front running," "rebate arbitrage" and "slow market arbitrage") on pages 172-3 is concise and irrefutable. His description of "dark pools" is damning. For all of that I'll pardon him that he fails to explain how the IEX 350 microsecond delay really works... Check it out on page 176 and see if you get it, I didn't.The other way this book is different is Michael Lewis consciously wrote this as an epitaph. Salomon had its scandal that spelled the beginning of the end exactly one year after "Liars' Poker" appeared on the bookshelves. Netscape barely outlasted "The New New Thing." And Greece defaulted roughly as "Boomerang" appeared. And all of the above would have been a surprise to the author. Not this time. In "Flash Boys" he shows you step-by-step how HFT as an industry is coming to a close and provides the intellectual argument to back his case. It's a new new Michael Lewis.I thought I'd read PIketty first and this later, but I was wrong. "Flash Boys" is my candidate for book of the year and I doubt anything will appear to change my mind. Yes, I know, it's like comparing "Lives of Others" with "Wedding Crashers" but I can't help it, the truth is I enjoyed "Flash Boys" more than "Capital"