FLASH BOYS is the story of our stock markets, how they have evolved and how they are—as Lewis says—‘rigged’. Lewis is a great story teller and this book does not disappoint—although at times he can over emphasize the point he is trying to make.
For me, parts of the book were really personal because I started in the financial services industry as a NASDAQ stock trader. I was in the business less than a year when the crash of 1987 occurred. Back then most trading was done over the phone and to avoid buying stock during the crash, many trading desks simply did not answer the phone. I remember that day…trying to call traders in New York, but no one ever picked up. Lewis brilliantly tracks the electronic revolution in our markets as a response to this event. Stock market regulations were a reaction to past infractions, but new regulations would somehow lead to loopholes that could be exploited.
Fast forward to today and almost all trading is done electronically. The thinking was that if all orders were ‘matched’, then human traders could not stand in the way of a fair price. High Frequency Traders (HFT’s) found a way to exploit the system—legally. Basically, HFT’s—according to Lewis—are profiting by legalized front running. Front running occurs when a trader saw a large order coming (usually from his own firm) and jumped in front of it with his own order before the stock moved. Front running is riskless—and illegal.
Publicity from the book has sparked some high profile investigations and most likely trading rules will have to be re-defined. Major brokerage firms and the exchanges themselves are partly to blame too, according to Lewis, because they knowingly allow it and reap huge profits from the order flow.
In their defense, the HFT’s say that investors benefit by smaller spreads—the difference between the bid and ask (which is true) and better transparency (also true). But the fact remains that HFT’s have found a way to trade faster and capture big bucks.
FLASH BOYS by Michael Lewis can be ordered directly from this blog. Click on the Search Box in the Sidebar or on the book in the graphic.