Need for Speed – Wall Street Drift with HFT
Quants, engineers and puzzle masters, they all play their part in Michael Lewis’ new book ‘Flash Boys’. ‘Flash Boys’ is a book about High Frequency Trading (HFT) and I enjoyed the light way it handles this topic, so I decided to write a short review.
You might have never heard of HFT, so let me explain it in one sentence. As the book describes, HFT firms make money by scouring the market for buyers and sellers of stock and race ahead of them to transact on the various exchanges in order to burden the original buyer/seller with a disadvantageous price, scalping cold cash in the process. Well, this may still not clear it up for you but it sure shouldn’t sound like ordinary business.
The picture that Lewis paints is one of a corrupted capital market where secrecy has long cloaked the grey area practices of financial intermediaries with HFT. It’s about a market where the common investor gets hit in the blink of a second and an ongoing arms race for speed is approaching the limit, the speed of light. It’s about a market where retirement savings are sucked into the ‘dark pools’ of your trusted Wall Street banks and channelled to the HFT guys. A ‘dark hole’ might better fit the description.
Luckily, the antidote is already on its way in the form of a “fair stock exchange” created by Brad Katsuyama and his band of tech-savvy ronin. Their crusade for transparency is beautifully captured by Lewis in a little north of 250 pages. The last part of the book describes the construction and workings of the Investors Exchange (IEX), the result of Katsuyama’s hard work. The IEX’s purpose is to make sure that all investors have an equal chance for a fair price by intentionally implement delays in its system. As a result, HFT firms won’t be able to detect buyers and sellers before anyone else and so they can’t outrun them anymore. Consequently, market orders are executed at the ‘fair’ mid-point price far more often.
Michael Lewis doesn’t offer an objective view on the HFT phenomenon but rather takes the side of Katsuyama and his endeavour. After reading ‘Flash Boys’, it’s hard not to share his sympathy, because Katsuyama’s story is a story about a man who had the feeling that the market was “rigged”. Once he found out that he and the investing public got screwed with HFT, all he wanted is to develop the right medicine. He assembled a crew of like-minded people and declared war on the status quot. The development of their weapon ‘THOR’, a piece of defence software, and the day Goldman Sachs entrusted the IEX with the first big market orders are some of the climactic events resulting from Katsuyama’s brave fight.
I recommend ‘Flash Boys’ to everyone with a fair interest in Wall Street or investing in general. ‘Flash Boys’ might lack objectivity, but it sure is revealing and has all the great storytelling that we expect from Lewis. Micheal Lewis is known for his accessible financial journalistic work. People interested in the subprime mortgage crisis and the resulting credit crisis might enjoy ‘The Big Short’. But it’s not only Wall Street he writes about, for a combination of sports and the scientific method read ‘Moneyball’ or just watch the movie. 😉
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