The publication of Michael Lewis’ book “Flash Boys” renewed the general interest in high frequency trading and fuelled the debate about its potential use or harm. After finishing my first compilation of comments and reviews of the book I came upon further interesting and challenging contributions which I would like to share with you.
Zerohedge presented a summary of High Frequency Trading: All You Need To Know writing
“In the aftermath of Michael Lewis’ book “Flash Boys” there has been a renewed surge in interest in High Frequency Trading. Alas, much of it is conflicted, biased, overly technical or simply wrong. And since we can’t assume that all those interested have been followed our 5 year of coverage of a topic that finally has earned its day in the public spotlight, below is a simple summary for everyone. …”
There was a very interesting debate on April 4 on Reuters Insider about Wealth Strategies: Are the markets better off with HFT? Reuters’ Rhonda Shaffler confronted Manoj Narang, founder and CEO of Tradeworx, and Haim Bodek, author of The Problem of HFT and founder of Decimus Capital Markets, with statements Michael Lewis had made in an earlier interview and asked for their comments:
The same day, Scott Lockling posted a highly critical review of Michael Lewis’ book: Michael Lewis: shilling for the buyside:
“Journalism, in the ideal world, is supposed to inform the citizenry of facts important to their well being. Modern journalism seems to involve issuing press releases from the oligarchical reptiles who are destroying Western Civilization. Maybe I am a naive fool, and it was always thus. Either way, Michael Lewis’s latest book lends credence to the view that he is a very modern journalist.
Lewis’s book purports to be about high frequency trading. He manages to write several hundred pages of gobbledeygook without actually speaking to a High Frequency Trader (unless you count his incongruous encounter with poor Sergey Aleynikov ). The story Lewis actually tells is one of incompetent sell side traders who started an exchange which serves the interests of wealthy buy siders and shady brokers. …”
The Streetwise Professor asked on April 5: Pinging: Who is the Predator, and Who Is the Prey? starting:
“The debate over Lewis’s Flash Boys is generating more informed commentary than the book itself. One thing that is emerging in the debate is the identity of the main contending parties: HFT vs. the Buy Side, mainly big institutional traders.
One of the criticisms of HFT is that it engages in various strategies to attempt to ferret out institutional order flows, which upsets the buy side. But the issue is not nearly so clearcut as the buy side would have you believe. …”
Many would consider the following two contributions as two extremes in this debate:
In a Wonkblog interview on April 4, Eric Scott Hunsader, a well-known critic of high frequency trading, welcomed Michael Lewis’ book. In his introduction to A veteran programmer explains how the stock market became “rigged”, Max Ehrenfreund who conducted the interview wrote:
“Lewis is not the first to cry foul on these strategies. Eric Scott Hunsader, the founder of Nanex, has made himself immensely unpopular in some circles for his outspoken and persistent criticism of HFT, which he first encountered during the “flash crash” of 2010. Bloomberg called him the “nemesis” and “scourge” of the HFT world.
I asked Hunsader to talk about the book, the new stock exchange, and his long career in financial technology. The conversation focused on the Securities and Exchange Commission ruling in 2007 that allowed what we now know as high-frequency trading. …”
The second example is the blog post by Matt Hurd (Meanderful) on Flash Boys – Misleading information, who wrote
“Flash Boys? I read the book last night. Appalling. I found it a well wide of the mark. It vilifies and accuses inaccurately. The pulsating vehemence of its message makes it a singly dangerous book.
I love Michael Lewis’ story telling. He really knows how to write a page turner for a geek like me.
Working in an investment bank in 90s, Liars Poker had a cult status with the currency note based serial number poker he made infamous being pervasive with many traders in Sydney too. Without Moneyball there wouldn’t have been a Soccernomics book to read. Soccernomics made watching football richer and, as a Liverpool fan, I’m especially liking soccer just now. So thank you Mr Lewis.
The Big Short. Terrific read. Hmm, but what happened to Paulson? A good story but not quite the full picture. No doubt about it though, Lewis writes books that many people find fun to read.
Nonetheless, Flash Boys is a stunningly dangerous piece of misinformation. The truth is quite a bit different to the words you’ll read beyond its red cover. … “
The question of data came up. As Ben Walsh (Reuters) asked in US stock ownership: Fact-checking Michael Lewis:
“Before the flash crash, 67 percent of U.S. households owned stocks; by the end of 2013, only 52 percent did: the fantastic post-crisis bull market was noteworthy for how many Americans elected not to participate in it.
–Michael Lewis, Flash Boys, pp 200-201
Is this true?”
On Politico, on April 5 Zachary Warmbrodt and Dave Clarke drew attention to The Michael Lewis factor:
“Talking heads on CNBC for days scoff that worries over high-speed trading are old news and overblown.
Reporters on the beat are defensive on Twitter.
And Attorney General Eric Holder is telling Congress not to worry — the Justice Department is already looking into high-speed traders.
Add it up: Michael Lewis has another hit on his hands. …”
One merit of the book is that, as the Streetwise Professor indicated, the debates around it offer so much information. John McCrank (Reuters) explained on April 6 why Dark Markets May Be A Bigger Threat To Investors Than High-Frequency Trading:
“Fears that high-speed traders have been rigging the U.S. stock market went mainstream last week thanks to allegations in a book by financial author Michael Lewis, but there may be a more serious threat to investors: the increasing amount of trading that happens outside of exchanges.
Some former regulators and academics say so much trading is now happening away from exchanges that publicly quoted prices for stocks on exchanges may no longer properly reflect where the market is. And this problem could cost investors far more money than any shenanigans related to high frequency trading. …”
In The mystery ending of Michael Lewis’ Flash Boys: FCC License No. 1215095 Ann Brocklehurst drew the attention to a special aspect:
“You’re here because you googled FCC license 1215095, right? Perhaps you’ve already discovered the registrant, Converge Towers LLC, and its corporate ties to Cantor Fitzgerald, a New York financial firm best known for the devastation it suffered in the 9/11 attacks.
Or maybe that information is incorrect. (See the comments.) In my work, I discover quite a lot of errors and outdated information in internet databases. I haven’t actually called the FCC to check so for now, I can’t actually confirm anything about 1215095.
I think I might, however, know the story — or at least part of the story — Michael Lewis hints at at the end of his fascinating new book, Flash Boys: A Wall Street Revolt.
That’s because a couple of months ago I wrote a post about how Vigilant Global — a Montreal-based HFT prop shop was building its own microwave networks.
I later learned this was something of a trend so I wasn’t surprised, but rather perplexed, by the final paragraph of Michael Lewis’ fascinating new book, Flash Boys, where he writes about a microwave tower he discovers in the wilds of Pennsylvania: …”
Finally, on April 7 Jérémie Cohen-Setton presented on Bruegel’s blog a Blogs review: High frequency trading – too linked to fail, too fast to save? which contains some of the texts you find in my two articles and many more.
And here is Michael Lewis himself once again in two Bloomberg videos. On April 2 Bloomberg’s Stephanie Ruhle looked back at a 30-year journey explaining how Michael Lewis became the most-read author on Wall Street:
and on April 7 Michael Lewis was talking about his wish to have Brad Pitt as ‘Flash Boys’ Star in the film:
Since many years, there is a controversy about high-frequency trading which just reached the wider public with the publication of Michael Lewis’ latest book Flash Boys. His conclusion that US stock markets are rigged by high-frequency traders rose strong emotions on both sides. With the following links and excerpts I would like to give an impression of some of the first days’ contributions and comments.
As one observer mentioned, not many people may have read the book when the storm broke loose. But some may have seen The Wolf Hunters of Wall Street – An Adaptation From ‘Flash Boys: A Wall Street Revolt, by Michael Lewis in The New York Times of March 31, 2014.
Reactions on Twitter differed:
I just finished Michael Lewis' – Flash Boys. Loads of fun.Disagree with quite a few statements—
Daniel Lacalle (@dlacalle) April 04, 2014
All it took for the SEC, FBI and now DOJ to probe HFT is one Michael Lewis book. Pathetic—
(@zerohedge) April 04, 2014
I'm trying to remember if I've ever seen a more vicious, sustained attack than over Flash Boys issue? Beats Icahn / Ackman or eBay / Icahn?—
Mark Melin (@MarkMelin) April 04, 2014
Can the HFT firm that scalped 1¢ per share off Michael Lewis's recent order for 50 shares of $AAPL please just apologize so we can move on?—
Epicurean Dealmaker (@EpicureanDeal) March 31, 2014
A flash crash here would make Michael Lewis a legend…—
Jesse Livermore (@Jesse_Livermore) April 04, 2014
Beside his “Adaption” in the NYT there have been interviews and public statements by Michael Lewis himself. Here are two examples.
On April 1, there was The great debate: Combating HFTs image
In a CNBC interview. Brad Katsuyama (IEX), William O’Brien (BATS Global Markets president), Michael Lewis (“Flash Boys” author) and Bob Pisani (CNBC) discussed about high frequency trading and the perceived unfairness in the public exchanges:
Manuela Hoelterhoff (Bloomberg News) spoke to Michael Lewis at Bloomberg world headquarters in New York the day after the Great Debate finding that Michael Lewis feels no shame as ‘Flash Boys’ curdles tempers.
Felix Salmon was among the first. The headline of his article on March 31 on Michael Lewis’s flawed new book leaves no doubt about his feelings. He started:
“I’m halfway through the new Michael Lewis book – the one that has been turned into not only a breathless 60 Minutes segment but also a long excerpt in the New York Times Magazine. Like all Michael Lewis books, it’s written with great clarity and fluency: you’re not going to have any trouble turning the pages. And, like all Michael Lewis books, it’s at heart a narrative about a person — in this case, Brad Katsuyama, the founder of a small new stock exchange called IEX.
The narrative is interesting enough — but so far I haven’t seen anything that would qualify as the “lighting in a bottle” …”
In ‘Flash Boys’, by Michael Lewis John Gapper gave a great overview of the various arguments in a review published in the Financial Times on April 3, 2014, which began:
“Michael Lewis has a spellbinding talent for finding emotional dramas in complex, highly technical subjects. He did it for the role of left tackle in American football in The Blind Side (2006), and for the science of picking baseball players in Moneyball (2003). In Flash Boys, he turns his gaze on high-frequency computerised trading in US stock markets. …”
Highly readable also Justin Fox’ High Frequency Trading: Threat or Menace? of April 3, 2014, which begins:
“There’s a wonderful scene (one of many) in Michael Lewis’s new book, Flash Boys: A Wall Street Revolt, in which John Schwall, then the head of product management at RBC Capital Markets in New York, decides one day in 2011 to figure out how stock trading had evolved into a high-speed, unfair race he thought it had become.
Schwall goes into his backyard with a cigar, a chair, and an iPad, and Googles “front-running,” “Wall Street,” and “scandal.” Before long he learns that …”
Other reviewers are less enthusiastic or even disappointed. In Dumb Tourist: Michael Lewis “Flash Boys” Review Jack Sparrow (Mercenary Trader) wrote a great piece on April 2, 2014 beginning:
“I am (or sad to say, was) a huge Michael Lewis fan. Liar’s Poker, The Blind Side and The Big Short are all classics. I love most of what Lewis writes for Vanity Fair — his long-form pieces on Iceland, Ireland, Greece and Germany for example. I ordered Flash Boys as soon as it came available on Amazon.
With that said, Flash Boys is terrible. It is not just a major whiff, but a travesty. And it really ticked me off. …”
Some reactions did not come unexpected. In M Stanley hits back over Flash Boys row Tom Braithwaite, Tracy Alloway and Arash Massoudi in New York wrote on April 3:
“Morgan Stanley has disputed the suggestion that improvements in its equities business have been driven by controversial high-frequency trading, after questions were raised by a rival about why it has been so successful. …”
That this is no new debate is demonstrated by this video of 24 July 2009 which emerged on Twitter showing Joe Saluzzi of Themis Trading and Irene Aldrige, author of High-Frequency Trading, in a heated discussion of the problems of high-frequency trading:
And here is Themis Trading’s Take On “Flash Boys” including the following links to a comment by Joe Saluzzi on CNBC:
and a Bloomberg interview with Sal Arnuk:
There is also a new video of an interview on Bloomberg TV with Irene Aldrich on April 3 expalining how HFT Helps Make Market More Efficient.
Jo Nocera’s comment in The New York Times of April 4 on Michael Lewis’ Crusade points to a dilemma readers face with books like this one. He appears to have mixed feelings about “Flash Boys” when he starts observing that
“There is always something just a little frustrating about reading a Michael Lewis book. On the one hand, Lewis’s core point — whether it is that left tackle has become the second most important position in football (“The Blind Side”), or that the stock market has become rigged by high-frequency traders, as his new book, “Flash Boys,” claims — is almost always dead-on. His ability to find compelling characters and tell a great story through their eyes is unparalleled. He can untangle complex subjects like few others. His prose sparkles.
On the other hand, there usually comes a point in a Michael Lewis narrative when it all starts to feel just a little too perfect. …”
But then he ends:
“From where I’m sitting, it is a blessing that Lewis chose to write about high-frequency traders. Others may have come before, but nobody else could have created the firestorm that Lewis did by going on “60 Minutes” on Sunday and announcing that high-frequency traders had rigged the market. The F.B.I., the Justice Department and New York’s attorney general, Eric Schneiderman, are now investigating high-frequency trading. The Securities and Exchange Commission, whose regulations unwittingly helped create the problem, is also said to be investigating.
Always before, discussions around high-frequency traders took place after events like the “Flash Crash” of 2010. Then the question was whether the computer technology used by high-frequency traders was destabilizing the market.
The arrival of “Flash Boys” has put a more important question on the table: whether high-frequency traders have been given an unfair advantage that needs to be dealt with. Lewis’s answer is clearly yes, and “Flash Boys” is both clear enough and persuasive enough that Lewis’s millions of readers are likely to agree with him.
A little literary license is a small price to pay.”
Which, of course, is perfectly right if “unfair” is the criterion which matters. Retail customers, for instance, have never experienced “fairness” in this sense. Furthermore, history knows many examples of speed advantage in financial trading. I would like to end with an excerpt from an article about Information Technologies in International Finance and the Role of Cities which I wrote long ago:
“The most common method to communicate over long distances was to hire a person to deliver a message as fast as possible, either a human runner or a rider on horseback. Safety considerations made early rulers place guards at regular distances along the roads. They became the forerunners of the relay systems. References to messenger systems were found dating back almost 4000 years to ancient Egypt and Babylon. The Romans had relay stations which kept a reserve of 40 horses and riders. And for Asia, Marco Polo reported of a system of post-horses used by the Mongol ruler Kublai Khan (1215-1294) with about 200 horses per post which reached considerable speed – in this it was compared to the Pony Express which operated much later (from April 1860 to October 1861) in the United States covering the 3,200 km distance from Missouri to California in about ten days (Holzmann and Pehrson, 1994). Other means of transmission in history were homing pigeons, mirrors, flags, fire beacons and semaphores. For example, it was a pigeon that brought Nathan Rothschild the news of Napoleon’s defeat. Mail was delivered by stage coach, caravans and merchant vessels. Travellers were routinely ask to take messages with them. When young Pierpont Morgan left England to go to school in Vevey, Switzerland, travelling over Calais and Paris in 1854, he was asked by the American minister in London, James Buchanan, to deliver a packet of government papers to Paris which was not unusual. (Strouse, 1999, p. 54) …
The arrival of the telegraph made all the difference allowing messages to be sent with great speed over very large distances. The first optical telegraph line started operating in France between Paris and Lille in May 1794. Soon other European countries followed and in 1830 “lines of telegraph towers stretched across much of western Europe, forming a sort of mechanical Internet of whirling arms and blinking shutters” (Standage, 2000, p. 18). But the system had also its drawbacks. It was expensive to run requiring shifts of skilled operators at each station and involving to build towers all over the place. Beside, optical telegraphs would not work in the dark or in fog and mist.
Eventually, it were electric inventions that changed the world. The discovery of the electric telegraph in the 1830s, and the telephone in the 1870s, marked a distinct new era. Discovered simultaneously in Great Britain and the United States, the telegraph made possible the first efficient direct control of operations in one distant place from another. It became the first agent of instant communication between countries and continents coordinating international financial and commodities markets (Mokyr, 1990, p. 124). For example, prior to its introduction between New York and Philadelphia, the transmission of price data from the distant market to the local one had taken one day. The telegraph enabled investors to obtain the price information before their own market closed. Before telegraph lines were established between New York and New Orleans, dealers in foreign exchange in one city received quotes from the other with a delay from four days to a week. This was reduced by the telegraph to a day or less (Garbade and Silber, 1994). The telegraph fundamentally changed America’s financial landscape. In 1850, there were 250 stock exchanges. 50 years later, New York had become the dominant exchange standing out as the only financial centre of national importance (Edwards 1998).”
Unfair to 249 others. Think about it.
The other day, I came upon an interesting article on Vox about The Returns to Currency Speculation: Evidence from Keynes the Trader where Olivier Accominotti and David Chambers described the results of their research on currency speculation in London in the 1920s and 1930s. Looking for more, I found a preliminary unpublished paper by the same authors on the topic in the internet (which unfortunately must not be quoted). In that paper, describing the London foreign exchange market in the period under consideration the authors drew heavily on Paul Einzig’s The Theory of Forward Exchange of 1937. This is one of several rich and fascinating books Paul Einzig wrote (actually, the author himself considered it his best effort, as he mentioned in his autobiography), which, although from another century (in 1919 the telegraph had just begun to change the nature of foreign exchange dealing in London), bear many lessons, not only for historians.
Paul Einzig was born in 1897 in Braşov in Transylvania, in a “quiet little backwater, a small town at the foothills of the South Eastern Carpathians” (Einzig 1960), at a time when this Romanian region was still a part of Hungary. In 1919, after studies at the Oriental Academy of Budapest and first steps as a financial journalist in his home country, he came to London.The world Paul Einzig was set to conquer: 2nd October 1919: London Dandies attired in menswear by Beau Brummell promenade in London’s Fleet Street.
The other day, the New York Times provided us with an example of how fads and fashions can be used to draw attention to, and win acceptance for, an economic argument. In his article In Search of a Stable Electronic Currency Nobel laureate Robert Shiller proposed the introduction of an inflation-indexed unit of account similar to the Chilean unit of development or unidad de foment (UF) which is existing since the 1960s. The article is in large parts a summary of the ideas of an academic paper the author published in 1998. In short, its main argument says that recent progress in computer technology has considerably widened the possibilities of inflation indexing which would allow for a better pricing, contracting and risk management in an economy.
Are US regulators corraling their financial system with the latest financial-safety rules for foreign banks as Patrick Welter (Frankfurter Allgemeine Zeitung) and others argued or will their move eventually even pave the way for closer cooperation and a revitalization of the worldwide regime of bank supervision?
Let us hope that this will not become a habit. As David Enrich (The Wall Street Journal) wrote the other day on Twitter
RBS becomes second big EU bank to pre-announce lousy 4Q results, following Deutsche Bank eight days ago. pic.twitter.com/X6jCWcrCq1
— David Enrich (@davidenrich) January 27, 2014
The tactics to choose a favorable moment (in case of Deutsche Bank a Sunday) ahead of the regular presentation of results to confront the markets with bad news illustrates how much, five years after the peak of the financial crisis, both institutions are still struggling to explain their activities and performance to the public in a damage-limiting way. What happened to the two banks which were once the biggest in the world? The following is a short compilation of information from banks’ press releases, media comments and other readily available sources to find out what the main problems are. Of course, this is no substitute for a thorough analysis. If not mentioned otherwise, data are from the banks’ official websites.
Stoppen oder weitermachen? Das ist die Frage, vor der Zentralbanken in den USA, Europa und anderswo zurzeit in Bezug auf ihre extrem lockere Geldpolitik stehen. Dabei wird an ein Zurückfahren der Programme und ein Abschöpfen der überreichen Liquidität, die sichtbar kaum produktive Verwendungen findet, noch gar nicht gedacht. Und das obwohl Beobachter seit langem vor dem Inflationspotential dieser Politik warnen. Auf Twitter & Co. werden sie dafür mit Spott überhäuft und, sofern sie aus Deutschland kommen, als typisch deutsche Inflationshysteriker abgetan.
Ein Blick auf die offiziellen Preisstatistiken scheint den Spöttern recht zu geben. Gerade meldet Eurostat, dass die jährliche Inflation im Euroraum im Dezember 2013 auf 0,8 Prozent vorausgeschätzt wird. Damit wird selbst eine Inflationsrate von zwei Prozent, wie sie die Europäische Zentralbank (EZB) auf längere Sicht anpeilt, zu einem höchst ehrgeizigen Ziel. Welche Seite recht hat, ist dennoch schwer zu beurteilen. Mit der Geldpolitik wird der Rahmen für Preissteigerungen in einer Volkswirtschaft abgesteckt. Inwieweit dieser ausgefüllt wird, hängt von der Wirtschaftsdynamik und den Aktionen und Reaktionen vieler Einzelner ab. Die entscheidende Frage, die sich hier stellt, ist: Würde ein dauerhafter Anstieg der Preise auf breiter Front, wenn er im Anzug wäre, so rechtzeitig erkannt, dass die Geldpolitik darauf angemessen reagieren könnte? Ein Blick auf die Art der Preisbildungsprozesse in der Wirtschaft und die Konstruktion von Preisindizes lässt daran Zweifel aufkommen.
Mehr dazu auf CARTA.
SUMMARY Regarding the ongoing extremely loose monetary policy in the United States, Japan and Europe, some observers worry about inherent inflationary dangers. Those worries are ridiculed by others who point to the lasting tendency of declining prices everywhere as reflected in major price indices. Which side is right is difficult to decide:
- Even in a deflationary environment there are constantly some prices rising, while others fall.
- The current state of the economy and our economic knowledge does not allow deciding at an early stage, which would enable monetary policy to act adequately, whether the general level of prices has begun to rise persistently.
- Official price indices are poor early-warning signs. In simply adding up weighted price changes of goods and services for special groups of economic actors they fail to capture the underlying price dynamics in an economy. Hidden price changes and people’s reactions to rising prices further complicate the diagnosis.
- The calculation of the German consumer price index may serve to illustrate the way in which official statistics account for a changing environment as well as its shortcomings.
Shortly after the US default had been averted on October 16, the S&P 500 closed at an all-time peak of 1,744.50. Alan Wheatley (Reuters) commented enthusiastically:
“If Wall Street’s record high is a signpost, the U.S. economy has every chance of pulling further ahead of a stuttering Europe despite new battles to come in Washington over the government’s budget and debt ceiling.”
Does this mean that all the worries of the past weeks about a “Lehman moment” were nothing but hot air? Is the debacle that we observed nothing more than an episode in an endless soap opera that long ceased to impress markets?
Die Welt ist noch einmal davongekommen, so scheint es, nachdem sich in dem US-Haushaltsstreit die Beteiligten auf einen Kompromiss geeinigt haben. Wobei das Ultimatum vom 17. Oktober insofern nie eine unmittelbare Gefahr dargestellt hat, als sich das US-Schatzamt, wie von Goldman Sachs angemerkt, zwar von diesem Tag an nicht hätte neu verschulden können, aber immer noch zusätzlich zu den täglich hereinkommenden Steuereinnahmen über eine Barreserve von etwa 30 Milliarden Dollar verfügt hätte, die ihm eine weitere Atempause gewährt hätte. Wie lange jene gereicht hätte, ist angesichts der folgenden Zahlen allerdings fraglich: Bereits am 31. Oktober muss die US-Regierung 60 Milliarden Dollar für Zinsen und Tilgungen aufbringen, am 29. und 30. November sind es zusammen weitere 87 Milliarden (NZZ).
Krise beendet also – wieder einmal. Oder auch nicht: In einem vielbeachteten Beitrag wies Felix Salmon (Reuters) vor wenigen Tagen darauf hin, dass, unabhängig davon, ob es im US-Senat zu einer Einigung kommt, der Schaden für die Weltwirtschaft und die internationalen Finanzmärkte längst angerichtet ist. Nur werden die Auswirkungen des scheinbar abgewendeten Worst Case erst allmählich spürbar werden und sehr viel unauffälliger und weniger spektakulär daherkommen als in den zahlreichen Krisenszenarios, die jetzt beschworen wurden. Sie werden allerdings möglicherweise auch verhängnisvoller sein.
Mehr dazu auf CARTA …