Here’s the funny thing about Flash Boys, Michael Lewis’ latest book (yeah I know I’m a year late on this). I started reading it to learn about the dark, secretive inner workings of High Frequency Trading (HFT). By the time I was finishing it, I realized I didn’t even understand what HFT actually was in the first place. This is a fairly embarrassing admission considering I was attempting to day trade a few years ago (2008/2009) and the legend of HFT was already circulating in online day trading forums. Now, having completed this book, I’m not sure all the people on those forums even understood what HFT was either. I’d wager many still don’t.
What Is High Frequency Trading?
Based solely on the name, you’d be forgiven for thinking that HFT is nothing more than rapid stock trading. Even the most inexperienced of us would have the foresight to infer this uses computer algorithms to go beyond mere real-time human computation and reaction, allowing for extremely quick trading of stocks for mere pennies a trade. A Walmart version of stock trading where margins are slim but volume is king. Rather than struggling to time a perfect trade pair and make 10 cents per share per trade, one can just let a computer rip off a bunch of half cent trades that accumulate to that same 10 cents worth per share. Simple.
The reality, however, is so much more complex and nefarious and thanks to this wonderful book I have a far better understanding of HFT though, admittedly, the functioning of it are still beyond my frustratingly average mind. This stuff is the world of computer programmers and mathematicians, geek meets greed, University of Waterloo invades Wall Street. Oh, and a generous sprinkling of Type A sociopaths to orchestrate it all. It’s this recipe that makes this book so compelling and ultimately disgusting.
Lewis is a well-known, successful author and for good reason. Most of you likely know him from Moneyball but those with even a passing interest in the world of finance will also know him from his many books delving into the moral morass that is Wall Street. Flash Boys joins an admirable repertoire of fine, enthralling financial writing that includes Liar’s Poker and The Big Short, two other books I highly recommend.
Flash Boys tells the tale of a Canadian trader at RBC who notices something peculiar is happening with his trades. In what we’re supposed to believe is an atypical response for pretty much anyone in the financial industry, he sets out to determine what is going on. What he eventually uncovers is fascinating, obscure, and ultimately unethical if not illegal.
If you have even just a passing interest in trying to understand how the global financial system has been corrupted and is exploiting you with the government’s support, then read this book. Not because the world needs yet another tinfoil hat wearing conspiracy theorist ranting away on Twitter but because your hard-earned dollars are purposefully being siphoned away from you with the complacency and often the help of the very people enlisted to protect you.
The Stock Market Is Risk Free
We live in a world where every penny of our savings are incentivized, dare I say forced, into the stock market. In Canada our RRSPs, RESPs, TFSAs, LIRAs, non-Registered accounts, company pension plans, union pension plans, even portions of the CPP are all almost exclusively invested into the world’s stock markets. This is done under the ruse that this is the only sure, safe path to retirement freedom and wealth.
Meanwhile, the very same banks, mutual fund companies, and insurance companies that have successfully lobbied for this lucrative situation have invested tens of millions of dollars into the very latest high end technology and hired the very brightest our education system has produced in order to covertly profit for themselves from your money that has conveniently been funneled into their coffers.
It takes a book like Flash Boys and a skilled, accessible write like Lewis to expose just how ludicrous this entire system is. And in this book he’s only focusing on one small piece of a large, rotting apple. The money industry is purposefully confusing and rife with difficult concepts sure to make most of our eyes roll up into our heads. This is no accident. There is no better way to exploit a population’s hard earned dollars than by ensuring their ignorance through complication and lack of clarity.
What’s truly fascinating is how the industry, a very powerful industry, circles the wagons to defend the status quo. Even if you fail to understand the intricate details of HFT you will still be left with the sickly sense that what is happening is immoral. They are taking advantage of a situation that is neither advantageous nor available to most of us. Oh they will be very vocal in trying to convince us that all this is to our benefit and they will do so with hellfire, but this is where a writer of Lewis’ stature comes in handy.
Michael Lewis, himself, is a high profile writer with financial industry credentials and is difficult to swat away from the national stage or even undermine with spin. This provides a small glimmer of hope that the shady dealings behind HFT will enter the consciousness of the greater populace which is by and large disengaged from what is happening out there. Having already bailed out Wall Street in 2008 for similarly unethical ploys I can only pray that one day the public’s apathy will wash away and someone will hold these sociopaths responsible for something, anything.
Flash Boys is fast paced and interesting. For the most part, Lewis excels at making difficult, esoteric concepts engaging though admittedly some of the material is just beyond many of us. He has found likeable people in what can be an overwhelmingly unlikeable industry. Sometimes Lewis over-hypes these characters as heroic but never so much as to make the reader turn on them or question their motivation.
Those Noble Canadians
If I have one significant complaint, it’s that Lewis tries far too hard to perpetuate the myth of the friendly, polite Canadian. The hero of the book, a whipsmart Canadian working at RBC in New York, is presented as the perfect Canadian stereotype, the good Mountie meme, who goes about doing the honest, noble thing where nobody else would because, hey, he’s Canadian. This theme is repeated ad nauseam in the book and, frankly, it’s a bit much. I’m Canadian and worked for twelve years in the oil patch and I can assure you there are Canadians just as self-absorbed and ruthless as Wall Street Americans and there are Americans just as polite and honest as our Canadian hero here. I suppose it makes an effective pitch for an American audience but it wore thin on me quite quickly. We should be applauding the hero for doing what is right, not because he’s Canadian, but because we purport to believe in justice and ethical behavior.
As Flash Boys unfolds one can’t help but be fascinated at the lengths people will go to and the dollars they will spend in order to essentially game the stock market. The most striking example is of a company building a fiber optic transmission line along the shortest route possible from Chicago to New Jersey for a mere $300 million. This is being done for no other reason than to save a few microseconds of data transmission time allowing High Frequency Traders to essentially scalp pennies from futures trading in Chicago.
This book leaves little doubt in the reader’s mind that not only HFT, but all of finance, is now a strictly digital pursuit. Money is all about speed and is becoming the dominion of MIT grads rather than Harvard grads. There’s a part of me that couldn’t stop thinking “if only I’d stuck to computers in school I could be a millionaire now” while reading this book.
Trading Places is a terrific movie but the world depicted in it no longer exists. It’s all computer code and blinking lights. Cubical farms of people aren’t such a big part of trading anymore, except for the programmers and salesmen. It’s another frightening example of Sci Fi coming to fruition, I suppose.
I give this book 3 ½ baby dill pickles out of 5. It’s a good, worthwhile read as is typical of Lewis’ books but the heroic Canadian bent and esoteric subject matter were downers for me. This isn’t a book that’ll leave you feeling happy. Then again, I don’t think it was supposed to.