Michael Lewis’ Flash Boys, a book with the difficult task of turning a mass audience on to the dry topic of high frequency trading, is having a bigger impact on a critical Wall Street discussion more than any book in memory.  The reason for this is not due to the book’s intellectual heft – Scott Patterson who wrote Quants and Dark Pools and Sal Arnuk and Joseph Saluzzi who wrote Broken Markets do a better job detailing the nuts and bolts of this complex topic.  The magic of Lewis, like that of a classic Disney movie, is to bring a story to life.  And that he does in spades.

Michael Lewis

Revealing the sausage factory

Sometimes reading the page-turning Flash Boys reminds one of looking at the inside of a sausage factory. If you’ve ever watched sausage made it is something that is difficult to eat afterwards.  After reading this book you won’t look at your stock orders the same.  The book reveals how fragmented stock exchange trading platforms, with over 50 trading venues, the majority being dark pools, front run orders through the use of speed and technical advantage not available to most investors.  The result being the advertised price one sees on their computer screen not being what is truly available.  The book peels back the onion on a pay-for-play system where brokerage firms not only generate revenue from customer trading commissions, but also receive payments from exchange venues for their order flow.

Book is different in its clear and unmitigated focus on generally sacred Wall Street establishment targets

Lewis takes on the Wall Street establishment with a bravado that is rare among financial journalists – which could largely explain his popularity.  Calling the US stock market “rigged,” Lewis sells his product while making a statement with more than a dash of hyperbole based only on the book’s content.  The reality is the argument is better made when considering a number of issues, not just HFT.  When wondering why so many Russian nationals are employed by the large banks as HFT programmers, Lewis humorously attributes it to their ability to figure out the loopholes in communist government regulations to make ends meet.  In jest there is truth.  Lewis also outs a major Wall Street newspaper for initially spiking a story detailing a component of HFT market rigging because it mentioned Goldman Sachs, illustrating the author’s lack of fear and devotion to raw truth that separates this book from the crowd.

Rabbit holes need investigation

Perhaps most disappointing about the book were the rabbit holes not investigated.  In the introduction, Lewis details the story of Sergey Aleynikov, a former Goldman Sachs programmer criminally charged for taking what was at one point open source code, noting the FBI considered that HFT code to be used to manipulate markets “in the wrong hands.”   This is a critical topic that has been discussed in detail behind the scenes yet received no more than a couple of lines of copy in the book.

The book fails to give proper weight to the value of honest market making, seeming to think an exchange can magically connect buyers and sellers at the same time, price and desired quantity all the time.  The book could have explored how the HFT speed race has reduced the ability of many firms to compete, slimming down the pool of potential honest market makers. Another issue is the book’s focus only on strategies that utilize the speed advantage.  Other secretive HFT strategies are actually more dangerous.  But perhaps most egregious was the lack of focus on the flash crash and brief couple paragraph mention of subsequent flash crashes.  This is the real danger that needs to be addressed for the sake of economic and national security.  While the general debate following publication of the book focused on the cost HFT skims from the market, the most important contribution Flash Boys made was questioning the fragility of market structure, albeit a disappointingly brief critique.  While there are places where more meat on the bone would have been desired, such topics could have been taken from areas of the book.

At times Flash Boys gets ponderous.  While the IEX story, about the exchange built by insiders that defies Wall Street conventions, is fascinating, it begins to drone on and on like an infomercial to the point where some of the later chapters could have explored new information.  For instance, a profile of the one man army against HFT, an activist named Eric Hunsader, might have made the book more interesting. Further, while the story of Aleynikov’s absurd FBI entanglements were interesting, it was essentially a cut and paste from a previous Vanity Fair article and didn’t add to the conversation nor was it tied into the overall narrative. Despite HFT and exchange professionals commented at the time the DoJ’s focus on Aleynikov was more than unwarranted, the debate wasn’t advanced.  Why not use this issue as a platform to discuss the US Department of Justice’s blind and one-sided love affair with the Wall Street banks to a new level? But then again, how much can be discussed in the confines of 274 pages?

Lewis produces worthwhile read and achieves significant goal

Was Flash Boys a fascinating and worthwhile read?  Absolutely.  While it’s easy to nit-pick, one must not lose sight of Lewis’ genius.  A man who can write a book so compelling as to bring the complex and droning topic of HFT into the mainstream is no ordinary author.  Lewis is someone who is altering the conversation with his words in historic fashion, shining a flickering torch on an important topic.  This accomplishment in itself cannot be diminished.