Michael Lewis “Flash Boys: A Wall Street Revolt” W.W.Norton Co, 2014, 274 pp.
Most of us believe stocks are traded on either the
NASDAQ or the NYSE by screaming brokers and lots of ticker tapes. Well…forget it…that method of trading no
longer exists. This book describes the
technology that led to its demise and replacement resulting in the breakup of
central stock exchanges into many small ones providing new opportunities for
skimming, kickbacks, and secret fees. However,
this book is mostly about the good guys setting out to try and correct this
unfair and dangerous system that has been created.
Mr. Lewis’s first illustration of high-frequency
trading depicts the kind that can transmit stock market information from New
York to Chicago and back in one-tenth of the blink of an eye and has divided
the world of stock traders into the haves and have-nots, depending on what
speeds they can afford. It involves the stealthy building of an absolutely
straight tunnel to run fiber-optic cable through the mountains of Pennsylvania.
Like this book’s other heroes, Mr. Katsuyama has an
inquisitive, scientific mind; the more clearly he saw that the markets were
rigged, the better he wanted to understand what was wrong with them. He began
experimenting on his own and developed a better understanding of how the
hoodwinking worked. Federal investigators and New York State’s attorney general
have begun looking into whether such trading practices ought to be monitored
and regulated.
To fix the problems discovered, the books’ heroes decided
to “create our own stock exchange.” That was in 2011, and it occurs less than
halfway through the book, because Mr. Lewis needs room to talk about why
changing the world wasn’t as easy as expected.
Many a dirty trick awaits anyone trying to push back against common Wall
Street practice with a firm dedicated to fairness and transparency. But the
firm, which was called IEX, opened in October 2013. It has had support from
Goldman Sachs, because, according to Mr. Lewis, events like the “Flash Crash”
of May 6, 2010, are ever more apt to occur in a fast, computerized system and
scare American investors out of the market. One of the book’s most controversial
points is that affiliation with a fair and square IEX will be good for larger
firms’ reputations.
My Notes:
The IEX stock market exchange opened on October 25,
2013.
Pg. 44: In
May 2009 New York senator Charles Schumer wrote a letter to the SEC and then
issued a press release telling the world that he was condemning the stock
exchanges for allowing ‘sophisticated high-frequency traders to gain access to
trading information before it is sent out widely to other traders. For a fee, the exchange will ‘flash’
information about buy and sell orders for just a few fractions of a second
before the information is made publicly available.
Pg. 52: It
appears that the front running High Frequency Traders are netting about $160
million a day and it is mostly invisible—like a tax.
Pg. 80: At
2:45 on May 6, 2010 came the co-called flash crash. For no obvious reason, the
market fell six hundred points in a few minutes. A few minutes later it bounced right back up
to where it was before. You could have
missed the whole thing but shares of Procter & Gamble, for instance, traded
as low as a penny and as high as $100,000.
Twenty thousand different trades happened at stock prices more than 60
percent removed from the prices of those stocks just moments before. The clueless SEC charged the whole thing to a
single large sell order of stock market futures contracts by an obscure Kansas
City mutual fund. The SEC cannot have a
clue as the unit of trading is now the microsecond, but the records to examine
to find the cause that are kept by the exchanges are by the second. There are one million microseconds in a
second. It was as if, back in the 1920s,
the only stock market data available was a crude aggregation of all trades made
during the decade. You could see that at
some point in that era there had been a stock market crash. You could see nothing about the events on and
around October 29, 1929.
Pg. 96:
Regulation National Market System (Reg NMS) was passed by the SEC in
2005 and implemented in 2007. It
required brokers to find the best market prices for the investors they
represented. The regulation had been
inspired by charges of front-running made in 2004 against two dozen specialists
on the floor of the old New York Stock Exchange—a charge the specialists
settled by paying a $241 million fine.
Pg. 99: Reg
NMS was intended to create equality of opportunity in the U.S. stock
market. Instead it institutionalized a
more pernicious inequality. A small
class of insiders with the resources to create speed were now allowed to
preview the market and trade on what they had seen.
Pg. 112: The
U.S. stock market price volatility within each trading day between 2010 and
2013 was nearly 40 percent higher than the volatility between 2004 and 2006 for
instance. This is due to the HFT
front-running activity.
Pg. 135: The
initial promise of computer technology was to remove the intermediary from the
financial market, or at least reduce the amount he could scalp from that
market. The reality turned out to be a
windfall for financial intermediaries—of somewhere between $10 billion and $22
billion a year.
Pg. 265:
Goldman Sachs installed two new managers on top of their stock market
operations: Ron Morgan and Brian Levine.
They wanted to change the way the market worked and became early
supporters of IEX.
Pg. 267: It
now appears that fiber optics for the HFT’s may be replaced by microwave
signals. It takes roughly 8 milliseconds
to send a signal from Chicago to New York and back by microwave signal, or
about 4.5 milliseconds less than to send it inside an optical fiber. The technology is being worked on.
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