Wednesday, January 28, 2015

Flash Boys: A Wall Street RevoltFlash Boys: A Wall Street Revolt by Michael Lewis
My rating: 4 of 5 stars

Michael Lewis’s latest book, Flash Boys, talks about high frequency trading and the creation of a new stock exchange to create fairness in stock sales. I started hearing him on Terri Gross and 60 Minutes when the book came out, but now I understand more about the issues.

Lewis has established himself as one of our leading authors in explaining economico-cultural phenomena, like baseball or the 2008 housing collapse, and Flash Boys continues in this familiar vein.

Lewis describes a number of characteristics of the current stock market system that have the potential to work to the detriment of investors. They include:

1.       While we tend to think of the stock market as a unitary system, trades take place not on one or two exchanges, like the New York Stock Exchange, NASDAQ, and the AMEX, but on a dozen or fifty public and private exchanges.

2.       High frequency traders (firms running computer algorithms) invest millions of dollars in getting closer to the exchanges--actually placing thir computers physically closer to the computers where the stock trades take place--so that they have access to market information microseconds before ordinary traders, which enables them to make trades ahead of trades that were ordered first, and use that information to buy lower or sell higher than the investor first seeking to make the trade. (How this happens is complicated, but the way it works is that they see an investor looking to make a big purchase or sale on one exchange and then, using their faster electronic connections, they can run ahead of that investor to the other exchanges, cut to the head of the line, and get a better price.)

3.       The advantage that high frequency traders and big banks have is not limited to speed: these multiple exchanges also make financial arrangements—kickbacks or payments--that pay investment banks and brokers to make transactions in a way that makes them money even though their investors, whom they are supposed to be serving, worse off.

The book talks about the establishment of a new exchange called IEX (from their original name, Investors Exchange, which had unfortunate connotations when reduced to a URL) designed to eliminate these distortions in the market (i.e. stop traders from screwing investors).

As with Lewis's other books, Flash Boys brings the subject matter to life through the stories of well-drawn protagonists who must move beyond what they--and we--think they know in order to understand and respond to changing circumstances. Also, as with The Big Short, once you understand how the market and money manipulators are making things very profitable for themselves at your expense you may have a hard time keeping your temper in check.

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March 15, 2016 2:03 PM  

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