Flash Boys: A Wall Street Revolt - The Story of the Outsiders Who Fought for a Fair Market
Flash Boys: A Wall Street Revolt - A Book Review
Have you ever wondered how the stock market works? How do you buy or sell shares of a company? How do you know if you are getting a fair price? And who are the people behind the scenes who make it all happen?
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If you are interested in these questions, you might want to read Flash Boys: A Wall Street Revolt by Michael Lewis. This is a book that reveals the hidden world of high-frequency trading (HFT) and how it affects the stock market. It tells the story of a group of outsiders who discover that the market is rigged by insiders who use sophisticated technology to exploit small differences in prices. It also shows how they try to fight back by creating a new exchange that aims to level the playing field for all investors.
In this article, I will give you a summary and analysis of this book. I will also share my personal opinion and evaluation of it. By the end of this article, you will have a better understanding of what HFT is, how it works, and why it matters. You will also learn some tips on how to protect yourself from being cheated by HFT firms.
Introduction
Flash Boys is a non-fiction book written by Michael Lewis, a best-selling author and journalist who specializes in finance and economics. He is also known for his other books such as The Big Short, Moneyball, and The Blind Side, which have been adapted into successful movies.
Lewis wrote Flash Boys after he learned about the existence of HFT and its impact on the stock market. He was intrigued by the story of Brad Katsuyama, a former trader at the Royal Bank of Canada (RBC), who uncovered the truth about HFT and decided to do something about it. Lewis spent several months interviewing Katsuyama and his colleagues, as well as other insiders and experts in the industry. He also did extensive research on the history and evolution of HFT, the role of intermediaries and exchanges, and the regulatory and legal aspects of the issue.
The book is important and relevant because it exposes a major flaw in the financial system that affects millions of investors and traders around the world. It also raises questions about the ethics and morality of the people who run and profit from HFT. It challenges the conventional wisdom that the market is efficient, transparent, and fair. And it offers a possible solution to fix the problem and restore trust and confidence in the market.
Summary of the book
Part One: How It All Started
The book begins with a prologue that introduces Katsuyama, the main protagonist of the story. He is a Canadian-born son of Japanese immigrants who grew up in a modest family. He studied business at Wilfrid Laurier University and joined RBC as a junior trader in 2001. He quickly rose through the ranks and became the head of global electronic sales and trading in 2008. He moved to New York with his wife and two children to take on this role.
Katsuyama was a successful and respected trader who enjoyed his job and his life. He had no interest or knowledge of HFT until one day in 2009, when he noticed something strange in his trading screen. He tried to buy 10,000 shares of Intel at $22 per share, but he only got 9,000 shares at that price. The remaining 1,000 shares were offered at a higher price of $22.01. He thought it was a glitch, but he soon realized that it was happening with other stocks as well.
He was puzzled and frustrated by this phenomenon, which he called "ghost liquidity". He felt that someone or something was interfering with his orders and preventing him from getting the best prices. He decided to investigate the matter and find out what was going on. He enlisted the help of his colleagues at RBC, such as Ronan Ryan, an Irish-born telecom expert who knew a lot about the infrastructure and technology of the market.
They discovered that HFT was behind the ghost liquidity. HFT is a form of trading that uses high-speed computers and algorithms to execute millions of orders in fractions of a second. HFT firms exploit small differences in prices across different markets and venues by using sophisticated strategies such as market making, arbitrage, momentum trading, and spoofing. They also pay for special privileges from intermediaries and exchanges, such as co-location, direct market access, rebates, and proprietary data feeds.
One of the main strategies that HFT firms use is called latency arbitrage. This is when they take advantage of the time delays or latencies between different markets and venues. For example, if a stock is traded on both the New York Stock Exchange (NYSE) and BATS Exchange, there might be a slight difference in the prices due to the different locations and speeds of these exchanges. HFT firms can detect these differences faster than anyone else because they have faster connections and data feeds. They can then buy or sell the stock on one exchange before anyone else can react on the other exchange, making a small profit on each trade.
This is what happened to Katsuyama's orders. When he tried to buy 10,000 shares of Intel at $22 per share on NYSE, an HFT firm saw his order before it reached NYSE. The HFT firm then bought all the available shares of Intel at $22 per share on NYSE and other exchanges, driving up the price to $22.01. The HFT firm then sold those shares to Katsuyama at $22.01 per share, making a profit of $10 on his order.
Katsuyama realized that he was being ripped off by HFT firms every time he traded. He also realized that this was happening to millions of other investors and traders who had no idea what was going on. He felt that this was unfair and unethical, and that it undermined the integrity and efficiency of the market. He decided to do something about it.
Part Two: The Network
The second part of the book follows Katsuyama's journey to understand how HFT works and how to counter it. He meets various people who help him along the way, such as: - Sergey Aleynikov, a former Goldman Sachs programmer who was arrested for stealing HFT code - Dan Spivey, the founder of Spread Networks, a company that built a fiber-optic cable from Chicago to New Jersey to reduce latency - Zoran Perkov, a former Nasdaq executive who witnessed the 2010 flash crash caused by HFT - Eric Scott Hunsader, the founder of Nanex, a market data company that analyzed HFT activity - John Schwall, a former Bank of America executive who joined Katsuyama's team and helped him understand the history and regulation of the market - Rob Park, a former RBC programmer who joined Katsuyama's team and helped him design a solution to counter HFT They also encountered various obstacles and enemies along the way, such as: - The Securities and Exchange Commission (SEC), the regulator that failed to oversee and control HFT - The Financial Industry Regulatory Authority (FINRA), the self-regulatory organization that was captured by HFT interests - The National Market System (NMS), the set of rules that enabled and encouraged HFT - The major Wall Street banks and brokers, such as Goldman Sachs, Morgan Stanley, and Credit Suisse, that profited from HFT and opposed any reforms - The major stock exchanges, such as NYSE, Nasdaq, and BATS, that catered to HFT firms and sold them unfair advantages - The HFT firms themselves, such as Citadel, Virtu, and Tradebot, that used their speed and power to manipulate the market The solution that Katsuyama and his team came up with was to create a new exchange that would eliminate the advantage of HFT. They called it IEX, which stands for Investors Exchange. IEX was designed to be a fair and transparent market that would protect investors from predatory HFT. The key feature of IEX was a speed bump, a 350-microsecond delay that would apply to all orders equally. The speed bump would prevent HFT firms from front-running or reacting faster than other investors. It would also make latency arbitrage impossible. To launch IEX, Katsuyama and his team had to overcome many challenges and risks. They had to raise enough money from investors who believed in their vision. They had to recruit enough staff who shared their passion and skills. They had to build enough technology and infrastructure that could handle the complexity and volume of trading. They had to attract enough customers who were willing to trade on their platform. And they had to withstand enough criticism and opposition from the incumbents who wanted to stop them. Part Three: What Happens Next?
The third part of the book follows the aftermath of IEX's launch and its impact on the market. It also explores the implications and recommendations for investors and traders who want to navigate the market in the era of HFT.
IEX launched in October 2013 as an alternative trading system (ATS), also known as a dark pool. A dark pool is a private trading venue that does not display its orders publicly. Dark pools are supposed to offer better prices and lower costs than public exchanges. However, many dark pools are owned or influenced by Wall Street banks or HFT firms that use them to exploit their customers.
IEX was different from other dark pools because it was independent and transparent. It did not sell any advantages or data to HFT firms. It did not charge any fees or rebates to its customers. It did not hide any information or conflicts of interest from its customers. It also published its trading rules and statistics on its website for everyone to see.
IEX's mission was to become a public exchange that would compete with the existing exchanges. To do so, it had to apply for an exchange license from the SEC. This was a long and difficult process that involved many legal and technical hurdles. It also faced fierce resistance from the incumbents who lobbied against IEX's approval.
Despite these challenges, IEX managed to gain support and traction from various stakeholders in the industry. It attracted more investors and traders who wanted to trade on a fair platform. It gained more media attention and public awareness thanks to Lewis's book Flash Boys, which came out in March 2014. It also received more endorsements and recognition from influential figures such as Warren Buffett, Charles Schwab, David Einhorn, Mark Cuban, and others.
After more than three years of waiting and fighting, IEX finally got its exchange license from the SEC in June 2016. It became the 13th national securities exchange in the US. It also became the first exchange to implement a speed bump to counter HFT. It marked a historic moment and a major victory for Katsuyama and his team.
However, IEX's story is not over yet. It still faces many challenges and uncertainties in the market. It still has to compete with the other exchanges and HFT firms that have not given up their advantages and practices. It still has to deal with the regulatory and legal issues that have not been resolved or updated. And it still has to educate and persuade more investors and traders to join its platform and support its cause.
Analysis of the book
Strengths
The book has many strengths that make it an engaging and informative read. Some of them are:
The use of storytelling and characters to explain complex concepts. Lewis is a master storyteller who knows how to make complicated and technical topics accessible and interesting to a general audience. He uses narrative techniques such as dialogue, suspense, humor, and drama to keep the reader hooked. He also introduces memorable and relatable characters who represent different perspectives and roles in the story. He makes the reader care about them and their struggles.
The exposure of unethical practices and conflicts of interest in the financial industry. Lewis does a great job of exposing the dark side of Wall Street and HFT. He reveals how HFT firms use their speed and power to manipulate the market and exploit other investors. He also shows how intermediaries and exchanges collude with HFT firms and sell them unfair advantages. He also criticizes the regulators who fail to oversee and control HFT. He exposes the corruption and greed that pervade the industry.
The advocacy for transparency and fairness in the market. Lewis also does a great job of advocating for a better and fairer market that serves the interests of all investors. He praises Katsuyama and his team for their courage and integrity in challenging the status quo and creating IEX. He also supports their vision and mission of making the market more transparent and fair. He also encourages the reader to learn more and take action to protect themselves from HFT.
Weaknesses
The book also has some weaknesses that limit its scope and credibility. Some of them are:
The lack of counterarguments and alternative perspectives. Lewis is clearly biased in favor of Katsuyama and his team, and against HFT firms and their allies. He does not present any counterarguments or alternative perspectives that might challenge or balance his views. He does not interview or quote any representatives or defenders of HFT or Wall Street. He does not acknowledge any benefits or merits of HFT or Wall Street. He does not address any criticisms or objections that might be raised against his arguments or claims.
The oversimplification of some issues and solutions. Lewis is also guilty of oversimplifying some issues and solutions that are more complex and nuanced than he portrays. He paints a black-and-white picture of the market, where there are good guys (Katsuyama, IEX, investors) and bad guys (HFT firms, Wall Street, regulators). He does not consider any shades of gray or middle ground that might exist between them. He also presents IEX's speed bump as a simple and effective solution to counter HFT, without considering any drawbacks or limitations that it might have.
The potential bias and agenda of the author. Lewis is also suspected of having a bias and agenda that might influence his writing and reporting. He is a former Wall Street trader who might have a personal grudge or resentment against his former industry. He is also a friend and admirer of Katsuyama who might have a personal interest or stake in his success. He is also a best-selling author who might have a commercial motive or incentive to write a sensational and controversial book.
Conclusion
In conclusion, Flash Boys: A Wall Street Revolt by Michael Lewis is a book that exposes the hidden world of high-frequency trading (HFT) and how it affects the stock market. It tells the story of Brad Katsuyama, a former trader who discovered that the market was rigged by HFT firms, and how he created a new exchange called IEX to counter them.
The book is an engaging and informative read that uses storytelling and characters to explain complex concepts, exposes unethical practices and conflicts of interest in the financial industry, and advocates for transparency and fairness in the market.
The book also has some weaknesses that limit its scope and credibility, such as the lack of counterarguments and alternative perspectives, the oversimplification of some issues and solutions. He paints a black-and-white picture of the market, where there are good guys (Katsuyama, IEX, investors) and bad guys (HFT firms, Wall Street, regulators). He does not consider any shades of gray or middle ground that might exist between them. He also presents IEX's speed bump as a simple and effective solution to counter HFT, without considering any drawbacks or limitations that it might have.
The potential bias and agenda of the author. Lewis is also suspected of having a bias and agenda that might influence his writing and reporting. He is a former Wall Street trader who might have a personal grudge or resentment against his former industry. He is also a friend and admirer of Katsuyama who might have a personal interest or stake in his success. He is also a best-selling author who might have a commercial motive or incentive to write a sensational and controversial book.
Conclusion
In conclusion, Flash Boys: A Wall Street Revolt by Michael Lewis is a book that exposes the hidden world of high-frequency trading (HFT) and how it affects the stock market. It tells the story of Brad Katsuyama, a former trader who discovered that the market was rigged by HFT firms, and how he created a new exchange called IEX to counter them.
The book is an engaging and informative read that uses storytelling and characters to explain complex concepts, exposes unethical practices and conflicts of interest in the financial industry, and advocates for transparency and fairness in the market.
The book also has some weaknesses that limit its scope and credibility, such as the lack of counterarguments and alternative perspectives, the oversimplification of some issues and solutions, and the potential bias and agenda of the author.
Overall, the book is a valuable and eye-opening source of information and insight for anyone who wants to learn more about HFT and its impact on the market. It is also a compelling and inspiring story of courage and integrity in challenging the status quo and creating positive change.
FAQs
Here are some frequently asked questions about Flash Boys and their answers:
What is high-frequency trading (HFT)?
HFT is a form of trading that uses high-speed computers and algorithms to execute millions of orders in fractions of a second. HFT firms exploit small differences in prices across different markets and venues by using sophisticated strategies such as market making, arbitrage, momentum trading, and spoofing. They also pay for special privileges from intermediaries and exchanges, such as co-location, direct market access, rebates, and proprietary data feeds.
How does HFT affect the stock market?
HFT affects the stock market in various ways, such as:
Increasing volatility and instability in prices
Reducing liquidity and efficiency in trading
Eroding trust and confidence in the market
Cheating other investors and traders out of their money
Who are the flash boys?
The flash boys are a group of outsiders who discover that the market is rigged by HFT firms and decide to do something about it. They are led by Brad Katsuyama, a former trader at RBC who creates a new exchange called IEX that aims to eliminate the advantage of HFT. They are also supported by other people who share their vision and mission, such as programmers, engineers, executives, investors, journalists, and regulators.
What is IEX?
IEX is an exchange that was created by Katsuyama and his team to counter HFT. IEX stands for Investors Exchange. It is designed to be a fair and transparent market that protects investors from predatory HFT. The key feature of IEX is a speed bump, a 350-microsecond delay that applies to all orders equally. The speed bump prevents HFT firms from front-running or reacting faster than other investors. It also makes latency arbitrage impossible.
Is Flash Boys true?
Flash Boys is based on true events and real people. However, it is not a factual or objective account of HFT and the market. It is a narrative and subjective account of HFT and the market. It reflects the author's opinions and interpretations of HFT and the market. It also omits or simplifies some aspects of HFT and the market that might contradict or complicate his views. T