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Flash Boys Hardcover – March 31, 2014
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- Kevin Roose, New York Magazine
“If you read one business book this year, make it Flash Boys.”
- David Sirota, Salon
“Dazzling… guaranteed to make blood boil… riveting.”
- Janet Maslin, The New York Times
“A beautiful narrative, so well-written. You’ve got to get this.”
- Jon Stewart, The Daily Show
“Important to public debate about Wall Street… in exposing what one of his central characters calls the ‘Pandora’s box of ridiculousness’ that financial exchanges have become.”
- Philip Delves Broughton, The Wall Street Journal
“Michael Lewis knows how to tell a story.”
- Vanity Fair
“Remarkable… Michael Lewis has a spellbinding talent for finding emotional dramas in complex, highly technical subjects.”
- Financial Times
“Who knew high-frequency trading was such a sexy subject?”
- Bloomberg Business Week
“Michael Lewis is one of the premier chroniclers of our age.”
- Huffington Post
“Score one for the humans! Critics of high speed, computer-driven trading have a new champion.”
- CNN Money
About the Author
- Item Weight : 1.3 pounds
- Hardcover : 288 pages
- ISBN-10 : 0393244660
- ISBN-13 : 978-0393244663
- Dimensions : 6.6 x 1 x 9.6 inches
- Publisher : W. W. Norton & Company; First Edition (March 31, 2014)
- Language: : English
- Best Sellers Rank: #50,285 in Books (See Top 100 in Books)
- Customer Reviews:
Top reviews from the United States
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This meant that anyone with a computer can see where a purchase is going to be made and for how much. So if you have a faster connection (and several exchanges where you can sell a few shares of a stock, you can already see how you can make money.) Sure, you won’t make a lot of money from any one trade. Maybe less than half a cent here and half a cent there. But that adds up. I know this from first-hand experience. The other day at work, I was trying to calculate what would the cost be of a service was excluded from a package of services. And my calculation kept being almost a billion off. I did it and re-did and re-did it every which way I could think of. I even pulled down my stats book to see if my math was off. Nothing. I got up and went for a cup of coffee just to take a break from this ridiculous problem and when I sat down again, I saw it. It was a rounding error. To be exact it was a rounding error in the one/thousandth decimal place. But I was dealing with billions of dollars and that rounding error made quite a difference. So yes, parts of pennies add up. But wait, there’s more.
The way the best price is computed is when an exchange computes all the bids and offers on a particular stock. This computation is done by a government computer and if you know one thing about government, you will know that it takes years to upgrade computers. That means that if you have your own, faster computer you can “front-run” the official best price and sell and buy 100s of shares at the “real” best price. Sure it will be a “rounding error” but as I said before, those rounding errors matter. So a rule that was intended to create equity and transparency in the market in fact institutionalized inequality between the traders who had access to the super-fast computers and those who did not. Only the former would make money from these rounding errors.
But wait, there is yet more. To make full use of Reg NMS you also need many different exchanges or dark pools and dark cables. And guess what, both exist. Dark cables are cables that are optimized for speed of transaction. Sure it’s a millisecond difference or even less but in that time you can get a lot of rounding errors. Dark pools are, in essence, proprietary exchanges. They exist to make it easier for institutional investors (like the folks to whom you entrust your pension and mortgage, for example) to trade in large blocks. So, for example if you have one million shares of Microsoft you want to sell (or buy) but don’t want your identity known, you would rather sell/buy those shares away from the glaring eye of the public transaction. Here’s the problem, if your are a high frequency trader, you (by definition) have a super-fast computer and access to dark cables. That means you can “ping” the many, many dark pools that have been set up. By some estimates, 40% of all trading is now done inside dark pools. And that in turn means you can know, well before the government-issued slow computers have finished calculating the best price what the real selling price is. That’s one heck of a rounding error in your pocket.
And finally, to make all this work, you need volatility. All volatility means is that the price of something moves up and down a lot. And obviously if it does that, there is a lot more room for a high-frequency trader to essentially insert him/herself in the middle of that trade. Basically here’s the way it works. You want to buy those 10,000 shares of Microsoft for $30. There’s a dark pool that will sell 100 of them to you for that price. I, as a high-frequency trader, ping that dark pool, know what the price you’re willing to buy for is and all the other prices out there and where you will buy from next. So I go and buy the next batch of Microsoft shares that are selling (as you will recall at $30.01). Now, your broker, by law, has to come and buy the shares from me. Except I sell the shares now at $30.1001. And right there, in less than the blink of an eye I have made almost $10. And that’s from a mere 9,900 shares—a small trade. So what high-frequency traders do in effect is charge a tax for trading. And that tax (like most taxes) makes economic activity, in this case people’s willingness to trade to decrease. It also means that flash crashes, caused when a front-running computer algorithm gets too clever by half, are inevitable.
In Flash Boys, Lewis explains all of this a little at a time. In some ways, the book reads like a great detective story. And like a great detective story, it is eminently readable because at its heart is a kind of hero: Brad Katsuyama. Brad sets out to hire a lot of computer programmers to beat the system. First he introduced Thor. This was a platform that enabled you to trade more slowly and then a brand new exchange called IEX (an exchange—and yes, it got the license to be an actual exchange) that did the same thing. The idea behind Thor and IEX seems counter-intuitive but in a high-frequency world it works. If you trade many thousands of shares per trade, then it makes sense that your order should arrive at all the exchanges/dark pools at the same time. That way no-one can ping/front-run you. You will not, in other words, be paying a tax on your trade. So to get the high-frequency traders out of the loop, you need to trade just slowly enough that your orders arrive at all exchanges at the same time.
This is the story of how Brad and the motley crew he gathered around him came up with that idea, the push-back they initially got from the industry and how they eventually sold the industry, including Goldman Sachs, on the concept. It is a story well worth reading. I highly recommend it.
Top reviews from other countries
So says Lewis at the very end of this book. This is the story of a small group of people working on, or connected with Wall Street, who identify a problem whereby the markets were colluding to work against the interests of their clients and customers. I have heard & read of the negative impact of high frequency trading on the stock market but never really had a grasp on how it worked. This book has answered that question. The explanation is in one sense simple, although complex at the same time. I suspect that some will find it a bit too technical but this isn't a book aimed at those in the markets who would no doubt find it all a bit basic. Once again, you think you have heard it all about the murky world of investment banking, and yet again you find more to demonstrate that many banking employees lack any moral compass and act in their own best interests (in this case those best interests may have conflicted with their employer's best interests).
The main narrative follows a Canadian banker as he tries to get to grips with what was going on and his eventual solution - the creation of a trading exchange (a recognised public exchange since the middle of 2016). It is a gripping tale, told almost in a novelistic way as it concentrates on a small number of characters with their parts to play. I was also more than a little staggered to find that Goldman Sachs, more usually the villain of the piece, comes out on the 'good' side - fear of market volatility and reputational damage seemingly contributing to their decision to trade via the new exchange (IEX) in a more transparent manner.
The book has had plenty of critics and there are those who will defend high frequency trading, which inserts an unnecessary intermediary that is willing to pay to play on the public and private (Bank/broker) exchanges. One argument attempted was that HFT only affected rich hedge funders - conveniently ignoring the fund managers who run pension schemes, unit trust funds, etc that are the bedrock of investing for middle America (and middle Europe too). When the new exchange opened one rather dim-witted manager at a money manager advised people to avoid the new exchange as she believed it had inherent conflicts of interest (oh, the irony!). It just so happened that said money manager managed the pension fund of IEX - although not for long after the stupid press release.
Lewis wrote the book because he admired the disruptors. We should admire them too for revealing what they discovered to change the game more in investors's favour.
The book focuses on a group of people, with Brad Katsuyama perhaps the protagonist, who have through their work uncovered a lot about high frequency trading for the general public, as well as created a new exchange - the IEX - helping to protect investors from the predatory behaviour of HFTs. While the latter were a fully legal development, exploiting loopholes in well meaning legislation, one does at times wonder to what extent legislation is simply written with such and similar loopholes built in. Hence a case of unintended consequences if one is generous.
The author manages a well judged balance of uncovering and presenting facts, without being judgmental of the players - he does allow his protagonists to voice their opinion but does not villify or crucify anyone as such.
I guess the book may be of a slightly lesser interest than The Big Short: Inside the Doomsday Machine to the general public, as fewer people will have suffered badly from the dynamics of HFT (big investors would but then they get less compassion on Main Street) but it will be equally easy to understand and quite useful to piece together a more comprehensive understanding of trading activities for the uninitiated.
This book tells us what happens in the shady world of the U.S. stock market, yet this also what happens in every other market. Investors are being robbed by the financial institutions they trust and the High Frequency Traders who are waiting to screw you over.
Why don't the big banks protect you? That's because they earn from the HFT's. Everyone is out to nibble away at your trades and those of the large pension, hedge and mutual funds that invest our money in the markets.
Yet this is also the story of some guys who saw what was wrong and did something about it. A group of people who put the concerns of the investor above their own interest and even took large cuts in income to do something to help those being ripped off.
Don't believe all the day trading hype either, they get to earn even more money off you. They charge you to trade and then take money from HFT's who make money off you as well.