Flash Boys: A Wall Street Revolt

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.

Michal Lewis is a national treasure. He is able to take complex things and make them accessible to people like your mom - if you want to be condescending to your mother. In a way, he is one of the best nonfiction writers in English working today. I'd put him up there with Bill Bryson. But you know that already. This is a Michael Lewis book. You know: the guy who wrote Liar's Poker, Moneyball, The Big Short, and that other book you like.What Lewis does is take a look at an issue, but he does this thing where instead of boring you with a lot of details, he tells the story of a person (For real - this book has no index, no endnotes) and the problem they face and the cool things they do. The person isn't really usually that far removed from what we imagine ourselves to be, but perhaps a better version than the self we really are. In Flash Boys, that person is Brad Katsuyama. Katsuyama was a worker on the exchange for the Royal Bank of Canada. He noticed that there were issues with trading. Namely that the trades that his traders were trying to make basically disappeared in front of him when they tried to execute them.This lead the reader to go on a journey led by Lewis as the reader follows along with Katsuyama as everyone learns what the issue was and why those trades were disappearing. Mainly the story is computers, software, and companies using their smarts to insert themselves in the middle of a trade.Eventually Brad and the reader learn all about this and is disenchanted with the system as it exists so he sets out to change this. His mission is to create a new exchange that disarms the smart "High Frequency Trading" and levels the playing field for everyone. It's a good story, and Lewis tells it well.My issue with it is that with the structure of the story, where it focuses on Katsuyama and his team, is that it is one-sided. The implicit message is that they are the good guys and the HFT guys are the bad guys. If you don't know much about the world that Lewis describes then you take it for granted that he is right. The last third of the book becomes an advertisement for the exchange that was started. It has started a lot of conversations amongst finance and economic people about the value of HFT, but that is nowhere in the book. Does it help price discovery; does it provide liquidity; does it make trading more efficient ? Or is HFT just predatory; is it pure rent as Lewis quotes someone "The market is all about algos and routers. It's hard to figure this stuff out. There's no book you can read ." (209)? I don't know, but thankfully this book is bringing those issues.Ultimately, I have to hoist a footnote that Lewis writes that sums up the whole book for me: "'Glitch' belongs in the same category as `liquidity' or for that matter, `high frequency trading.' All terms used to obscure rather than to clarify, and to put minds to early rest."(203). Lewis lets in his editorial voice come in to show that even though he has written a whole book there is an inexactness to defining what HFT is - you have to get to the nitty-gritty to really know (He recommends a couple of books in the text but I didn't highlight them). Because in the end, this book is only tangentially about HFT. It is really about Brad Katsuyama. All I wonder is who is going to play him in the movie

Muy buen libro.

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

Such an incredible read it was. The gripping and enthralling story. And the biggest bow goes to the people who wanted transparency in the stock market orders as well as Michael Lewis - For literally just digging up the facts and the events as they happened in such an incredible manner. The research Michael has done for this book is simply breathtaking. This book is not just a casual read, it is a learning. I, personally, did not know anything about the HFTs (primarily because of the new regulations by the market regulators now-a-days) and the dark pools that the companies and the stock exchanges had/have created. Just a mind blowing book. The only tinie tiny minor downside is the penguin publications. The book quality and the page quality could've been better (if some other publishing house would've done it). But who cares because you literally have to think of some excuse to put this book down. Done with this, next two Michael Lewis targets - The big short and liar's poker. Reviews coming soon for them.Conclusion - Well as "Inventors" of the IEX stock exchange would say : Pick up the f*****g book.

As Michael tells stories the way onlyhe does it, the narrative takes you from the backdoors of rooms full of servers managed by IT geeks to the trading floors of hedge funds and HFT managed by this new breed of traders, geeky, smart, playing with flash crashes and a lot of money.Nice insights a lessons for life for wall Streeter and non wall Streeters alike. Enjoy.It's always about the people and Michael knows how to bring each character at the forefront of the action and the STORY.

In his first book, Liar's Poker, Michael Lewis sketched colourful and entertaining characters to show us the excesses of a Wall Street titan - Salomon Brothers - at the peak of its game. Later, in The Big Short, he used his considerable storytelling abilities and yet more colourful and entertaining characters to help explain the financial collapse of 2007. With his latest book, Flash Boys: A Wall Street Revolt, Lewis again weaves a compelling story with still more wonderful characters, but rather than chronicling a market excess or explaining post hoc a financial crisis, this time Lewis investigates, uncovers and reports on systematic Wall Street shenanigans by a small group of High Frequency Traders (HFT), their complicit and enabling stock exchanges, and the perverse regulations that permit or encourage the activity.While the book is enjoyable and entertaining to read, what Lewis reports will anger and sadden most readers, for it becomes very clear as the book progresses how enormously the odds are stacked against most investors. In the beginning even "the most sophisticated investors didn't know what was going on in their own market. Not the big mutual funds, Fidelity and Vanguard. Not the big money management firms like T. Rowe Price and Janus Capital. Not even the most sophisticated hedge funds."Flash Boys engages readers immediately with a story; the laying of a new and secret fibre optic cable between New Jersey and Chicago. The cable's sole purpose is to be straighter, and therefore shorter and faster, than the existing phone company links used by futures traders. Time is money, and the prohibitively high cost for the new fibre line is more than offset by the financial advantage (via an edge in trade execution) to the few firms who lease the line.From this Lewis shifts to the integrity of programmed and algorithmic trading, then on to dark pools and several other trading strategies. Readers should not be put off by the industry jargon or the esoteric corner of finance that Mr. Lewis exposes. Each concept is introduced in turn and in the most concise and entertaining way possible. As both a liberal arts major and a former Wall Street insider, Lewis bests all other financial authors in taking complex issues and distilling them into memorable and understandable passages.It seems no exposé of Wall Street's shortcomings is complete without an appearance by Goldman Sachs, and Lewis doesn't disappoint. Goldman's role, however, is modest. First, like all of the major investment banks, they employ `dark pools' where clients can trade anonymously and ostensibly for better execution, but where either the investment bank or, for a fee, an HFT firm will game the system to deliver poorer execution. The difference between good and poor execution is a small profit to the bank or HFT firm, repeated millions of times per day.Second, Goldman saw there was even more profit in speedier execution and HFT, and to this end hired a Russian born computer programmer. Unfortunately, Goldman's systems were built atop years of antiquated and bloated code, and they never did realize the profits of smaller, sleeker HFT firms with all new coding. In any case, the Russian left Goldman and was subsequently convicted of stealing trade secrets. Just as Bob Dylan sang about Hurricane Carter, Lewis waxes poetic about the injustice, the ineptitude of investigators, and perverseness of Goldman's position in the matter.The heroes of the book are Canadians: the Royal Bank of Canada in general, and Brad Katsuyama in particular. Of RBC, their `nice guy' image, and their desire to enter Wall Street, Lewis says "It was as if the Canadians had summoned the nerve to audition for a role in the school play, then turned up wearing a carrot costume." An inauspicious start to RBC's Wall Street push, but a perfect setup to Katsuyama's role in exposing the HFT inequities and eventually setting up his own rival stock exchange where investors cannot be fleeced.Forty years after Bernstein and Woodward's investigative journalism changed the American political landscape, perhaps Lewis' sleuthing will foment change in capital market structure. An excellent book by a master at the top of his game.