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A perfect storm – first reactions to Michael Lewis’ Flash Boys

2014/04/05

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:

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:

http://video.cnbc.com/gallery/?video=3000262609

and a Bloomberg interview with Sal Arnuk:

http://www.bloomberg.com/video/high-frequency-trading-neither-good-or-bad-arnuk-mXNCD8AqRhqocXGmBi5LHw.html.

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.

http://www.bloomberg.com/video/hft-helps-make-market-more-efficient-aldridge-says-4Xv9tew3TFCu_Ghkf6L6Og.html

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.

 

 

From → Markets

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