"At first sight, the modus operandi of high-frequency traders seems so outrageous that one assumes it must be illegal. In its review, the Economist came up with a useful everyday analogy: high-frequency traders are like "the people who offer you tasty titbits as you enter the supermarket to entice you to buy; but in this case, as you show appreciation for the goods, they race through the aisles to mark the price up before you can get your trolley to the chosen counter".
The Observer, Sunday 6 April 2014 / http://www.theguardian.com/business/2014/apr/06/michael-lewis-flash-boys-high-frequency-traders
 |
If you thought Wall Street was about alpha
males standing in trading pits hollering at each other, think again. That world
is dead. Now, the world's money is traded by computer code, inside black boxes
in heavily guarded buildings. This title tells the story of how one group of
ingenious oddballs and misfits set out to expose what was going on.
Michael Lewis has shown how tech nerds rigged the
stock markets. But who will guard the geeks?
The Moneyball
author's latest book is a warning about the 'politics of expertise' – about how
access to complex technologies confers incredible power and an ability to
outsmart public regulation and oversight
John Naughton
The Observer, Sunday 6 April 2014 / http://www.theguardian.com/business/2014/apr/06/michael-lewis-flash-boys-high-frequency-traders
Light travels at 186,000 miles a
second in a vacuum, which is another way of saying that it covers 186 miles in a
milli-second – a thousandth of a second. Given that much of our contemporary
electronic communications are conveyed by pulses of light travelling along
fibreoptic cables, we are given to extravagant hyperbole about the "death
of distance". After all, if a message – or a file – can traverse the globe
in the blink of an eye, it doesn't matter whether your hard drive is on your
desktop or in a server farm in Nebraska or Sweden
But it turns out that the speed of light is
of great practical interest to some people. One group of them have shelled out
$300m to lay a fibreoptic cable in a straight line from Chicago
to New York New York and Chicago
Therein lies the tale of Michael Lewis's
enthralling new book, Flash Boys, which joins an elite but growing list of
volumes that set out to explain how computing is reshaping our world. For it
turns out that for people armed with the right kit, software and networking
skills, an advantage of a few milliseconds is enough to let them turn a $14m
annual subscription into annual profits of $20bn.
These people are called high-frequency
traders – "high-frequency" because they are incredibly active (they
submit almost 99% of the orders on US stock markets) and buy and sell shares in
milliseconds. They are not really "traders" in any normal sense of
the term, but software algorithms, and they now dominate the most important
stock markets in the capitalist world.
Most of us knew that, sort of. We knew
about computerised trading and probably naively assumed that it was more
efficient than the old system of guys in coloured jackets bellowing at one
another on the floor of an exchange. Well, it is more efficient – for some. But
the significance of Lewis's book is that it explains in user-friendly terms how
the colossal profits of high-frequency traders really amount to an
unconscionable tax on the ordinary investor, or at any rate on the pension
funds and other financial institutions on which our livelihoods depend.
Flash Boys follows the usual Lewis formula:
find a scandalous situation that is too arcane for most people to comprehend;
locate some smart guys (they are usually male) who have spotted the scam and
plan to do something with or about it; and tell their story.
In his earlier book The Big Short, Lewis
focused on the smallish group of shrewd investors who understood that the
sub-prime mortgage boom was sure to go bust and bet against it. In his new
book, the white hat is worn by Brad Katsuyama, a Royal Bank of Canada trader
who discovered the extent to which high-frequency traders were skewing the
stock market and screwing investors and, in the end, set up a new stock
exchange (IEX) designed to level the playing field by making sure everyone's
trading instructions arrived at the same time.
But the most interesting thing about Flash
Boys is what it reveals about the networked world into which we have stumbled.
Once upon a time the New York stock exchange
was a place; now it's a set of more than a dozen "stock exchanges"
scattered around New York and New Jersey
So the stock market has become a virtual
space – an interactive, computer-driven system of staggering complexity. And it
turns out that there are several sides to this complexity: for the banks and
the high-frequency traders who exploit it, it's a marketing tool for
bamboozling investors and a means of intimidating regulators; and for smart
programmers and entrepreneurs it offers limitless opportunities to play the
system.
"From the point of view of the most
sophisticated traders," Lewis writes, "the stock market wasn't a
mechanism for channelling capital to productive enterprise but a puzzle to be
solved."
For society, the system's complexity is
dangerous, because complex systems are intrinsically unpredictable and nobody
really understands this one as a whole – which means that catastrophic failure
is always a remote but finite possibility.
At first sight, the modus operandi of
high-frequency traders seems so outrageous that one assumes it must be illegal.
In its review, the Economist came up with a useful everyday analogy:
high-frequency traders are like "the people who offer you tasty titbits as
you enter the supermarket to entice you to buy; but in this case, as you show
appreciation for the goods, they race through the aisles to mark the price up
before you can get your trolley to the chosen counter". How, one wonders,
can it be legal for a handful of insiders to operate at faster speeds than the
rest of the market and, in effect, steal from investors?
But it is legal, and for an interesting
reason. In 2004 the US Securities and Exchange Commission discovered that some
traders in the old New York
What the SEC did not anticipate was that in
the new fragmented system of a dozen virtual exchanges, this provided the
opportunity for high-frequency traders to outrun the market while staying
within the law. Reg NMS was a well-intentioned measure to restore equality of
opportunity in the US
This is a good illustration of one of the
central problems that society will have to address in the coming decades: the
collision between analogue mindsets and digital realities.
Software is pure "thought-stuff".
The only resource needed to produce it is human intelligence and expertise.
This has two implications. The first is that attempting to regulate the things
that it creates is like trying to catch quicksilver using a butterfly net.
The Edward Snowden disclosures about the US
National Security Agency have revealed how difficult it is to bring this stuff
under effective democratic control. Lewis's account of how high-frequency
trader geeks have run rings around the regulators suggests that much the same
holds true in civilian life. This technology can easily run out of control.
The second implication is that what one
might call the politics of expertise will become much more important. Mastery
of these technologies confers enormous power on those who have it. Sed quis
custodiet ipsos custodes and all that. So in addition to wondering who will
guard the guardians, we may have to start thinking about who is going to guard
the geeks.
 |
Michael Lewis exposes the nefarious world
of high-frequency trading in Flash Boys. Photograph: Richard Saker
Michael Lewis: 'Wall Street has gone insane'
Flash Boys, an
exposé of the murky world of 'rigged' high-frequency trading, has sold 130,000
copies in its first week and is already being turned into a film. Its author,
Michael Lewis, explains why the story is so compelling – and why our brightest
minds make the most dangerous bankers
Emma Brockes
The Guardian, Wednesday 16 April 2014 / http://www.theguardian.com/business/2014/apr/16/michael-lewis-flash-boys-wall-street-insane
On a sliding scale of difficulty, writing a
general-interest book about high-frequency trading is slightly harder than
making baseball statistics interesting, but easier than animating the role
played by quantitative analysis in the 2007 financial collapse.
"Collateralised debt obligations," says Michael Lewis, who has
written about all three, "are impossible to describe. There's nothing
harder. However, trying to show a reader how a market moves? How stock prices
move? You can already see them tuning out."
That was the concern when he wrote Flash
Boys, an investigation into what he calls the "rigged" underbelly of
Wall Street trading. In the event, the book has sold a staggering 130,000
copies in the US 60,000
in its first week.)
Lewis has been on every talk show and
financial news panel in the land, arguing with, among others, Bill O'Brien, the
president of the Bats Global Markets stock exchange, about whether or not he
and his cohorts are ripping off their customers. If the 53-year-old started off
angry, opposition to the book has sharpened his stance into a moral crusade.
"I find this story really upsetting," he says over lunch in LA, where
his publicity tour just ended. "The idea that the smartest, richest elites
of society find this an acceptable activity. This predatory activity."
If it's emotional for Lewis, then the
responses have been emotional too, given how unequivocal his accusations are.
The cornerstone of Flash Boys is a discovery made by an obscure Canadian
banker, Brad Katsuyama, who noticed that whenever he tried to execute a trade,
the stock price moved before the order went through. A long and tortured
investigation revealed that the variable speeds at which trading information
travels down fibre-optic cables to the exchanges was being exploited by brokers
and high-frequency traders – so-called for the volume of trades they make – to
jump the queue, buy the stocks in question and sell them back at a higher price
to the person who expressed the original interest.
"Someone out there was using the fact
that stock market orders arrived at different times at different exchanges to
front-run [orders]," writes Lewis. It was a side-effect of automated
trading and a tough thing for bankers to wrap their heads around, let alone
laypeople. In plain English, as a colleague of Katsuyama's put it: "My
role was to walk around and say to clients, 'Don't you understand you're being
fucked?'"
Lewis looks and sounds a lot like the
people he is writing about. He is slick, well manicured and fluent in the
language of finance – about as far from the Occupy movement as you can get, and
much more dangerous to Wall Street, given that he actually knows what he is
talking about. Since the book came out, the FBI, the US
department of justice and the New
York
"I thought it would create a
shitstorm," he says. "Then I thought, it's too complicated and I've
got a nice Canadian guy as my main character – I'm not sure how much of a
shitstorm this is going to create, because I don't know if even my mother is
going to pick it up. But the noise level has been so great."
Not all of it has been positive. Prominent
in reviews of the book has been the critique that Lewis has created a false set
of heroes and – particularly from financial journalists – that none of this
stuff is new in the first place.
"And that's a ton of horseshit,
because I've watched Katsuyama educate the world. It's his story. His knowledge
starts in '08. And if you knew this already, why didn't you do something about
it?"
Lewis has also been accused of wringing
fake drama from a story wherein the victims, when it comes down to it, are
billionaire hedge fund managers, not the so-called little guys. "Little
people – their money is largely managed by big institutions: mutual funds,
pension funds, endowments, insurance companies – that's where their money is.
It's true that this is a weird place where the interests of mom and pop happen
to be the same as the interests of a billionaire hedge fund manager. But that
doesn't reduce the level of interest of mom and pop."
To outsiders, Lewis's banking expertise
looks pretty solid, which is as much a function of how little most of us know
about that world as it is of Lewis's verisimilitude. As he himself points out,
he really didn't work in the banking sector for long, starting a career in his
mid-20s as a bond salesman at Salomon Brothers and getting out at the age of 27
to become a writer.
Still, for those short years, which he
mostly spent at the Salomon offices in London
The Blind Side, his book about American
football, was made into a blockbuster that earned Sandra Bullock an Oscar. Hollywood
It was while he was still at Salomon that
Lewis realised he had a set of skills that, if he wanted to become a writer,
would give him an advantage in that particular marketplace: understanding of a
world that most writers had no contact with. After an art history degree at Princeton , he studied for a master's in economics at the
London School of Economics under the former governor of the Bank of England
Mervyn King. ("He was fabulous. A lot of the professors I had were crusty
old English guys with hair coming out of their ears. They weren't worldly. He
was; he was very smart.")
There was a crossover between the two
disciplines, trading and journalism, which Lewis identifies now as "a
certain sneakiness. Getting stories often requires an amount of sneakiness.
Beyond that, a certain social ability. You have to get along with people. It
helps to have the minimum necessary analytical ability."
While still at Salomon he started writing
anonymous dispatches from the trading floor and publishing them in the Spectator
and the Sunday Telegraph, and could see from the response that he was on to
something. "They would go the equivalent of viral before the internet.
People would photocopy them and hand them out on the trading floor. No one knew
it was me. So I could see that it was working."
Liar's Poker did so well, says Lewis, that
"I thought: I'm a free man. A lot of the stuff I did afterwards was all
over the place. It was magazine stuff. I'd write essays, I wrote about
everything. There was no pattern to the stuff I was doing. I covered politics
for the New Republic
Of all Lewis's books, it was The Blind Side
that did least well when it was first published, tanking until the film came
out and drove a million sales. "The problem is that people who like
football do not read. And if they read, they don't want an emotional chick
flick buried in their book. It was not a good business idea."
More recently, he wrote a huge, moony
profile of Barack Obama for Vanity Fair, the most incisive part of which was
Lewis's analysis of the president's basketball skills: "Not flashy, but he
slides in to take charges, passes well, and does a lot of little things
well," he wrote. "The only risk he takes is his shot, but he shoots
so seldom, and so carefully, that it actually isn't much of a risk at
all." The rest of it reads along the lines of a 15-year-old's daydream
after a Justin Bieber concert ("I gazed up to find Obama staring down at
me …" "'I feel a little creepy being here,' I said. 'Why don't I get
out of your hair?' He laughed. 'C'mon,' he said …" etc). We all have our
weaknesses.
Thanks to the success of Lewis's books,
people frequently ring him with ideas about what to do next, which most of the
time he ignores. In 2009, he received a call from an old contact, a lawyer, who
said he had a client Lewis might be interested in writing about. This was
Sergey Aleynikov, the former Goldman Sachs programmer arrested by the FBI and
ultimately jailed for "stealing code" from the bank. "It's an
incredible story," says Lewis, "and I said yeah, yeah, yeah and
ignored him for a year and a half." During that time, he mulled over what
could be so valuable as to justify what looked, from the outside, like an
extraordinary overreaction on the part of Goldman Sachs.
"I didn't understand the code – what
had he taken? It was very fishy, the way Goldman Sachs reacted to it. No matter
how valuable it was, calling the FBI was a really extreme thing to do. And to
do it so quickly. And it was pretty clear from the newspaper descriptions that
no one understood what he'd taken." Lewis spoke to a few investors,
started looking into high-frequency trading, and was ultimately told about
someone who would go on to motor his whole story, Brad Katsuyama, or as he was
described to Lewis at the time: "There's this one guy who works for the
Royal Bank of Canada."
One of the criticisms of the book has been
that it doesn't identify any one villain, something Lewis says was deliberate.
"I made a very conscious decision at the beginning not to do that. The
reason is: everyone's involved." Does he understand the 10 lines of code
that execute a trader's orders? No. "But there's a predator, and a guy
figures out he's the prey. Then he figures out how the predator's trying to
kill him and tries to stop the predator. The basic story was pretty
simple."
Given how large the financial stakes are,
it's surprising, I suggest, that there isn't more corporate assassination.
Lewis laughs. "Brad asked me if he should get security. And I thought
maybe before the book came out. But now, it'd be a little obvious."
Lewis takes roughly 18 months to write a
book: a year on the research and structure, and five months to hammer it out.
At the same time, he continues with his journalism, writes screenplays and with
his wife Tabitha Soren, a photographer and former reporter for MTV News, raises
their three children. Lewis's book Home Game was about fatherhood and his
memoir Coach was the story of his high-school baseball experiences, which is in
the process of being turned into a film.
As is Flash Boys. The day before we meet,
Lewis sold the rights to Columbia Pictures and Scott Rudin, who successfully
made Moneyball. The irony is that when Lewis quit banking, it was for a $40,000
(£24,000) book contract that indicated he would never make the kind of money he
had as a 25-year-old bond salesman. Although actually, he says, looking at the
kinds of figures earned by the characters in Flash Boys, who knows?
"I might still have done better in
banking. The thing is, I have a sense of what my trajectory inside the
financial world would've been and I would've ended up in long-term capital
management at Salomon Brothers, and that collapsed. They lost all their money.
I'd have been wiped out."
Anyway, he thought it would be a
meaningless life. "I didn't belong there. It's hard to remember what it
feels like to be 27; you're immortal. You can do anything you want."
The accident of his career is, he says,
that he has been so well-placed to document an industry "that has gone
insane. The financial markets have generated this fantastic material. I don't
think anything else like this will walk in my door."
And he hopes the fact that the world's best
and brightest – French particle physicists, Russian aerospace engineers,
wunderkind Chinese programmers – all go into banking these days, because the
financial rewards are so huge, is a historical anomaly.
"It's very odd. We think of it as
normal, but those sorts of people throughout history have not gone into
banking. They've done useful things. The sorts of people who used to go into
banking were pleasant, jolly chaps, the class monitor who gets on with
everyone. That's who should be in banking. That's what we need!"
Why? "Because the smart people are too
dangerous. They find ways to game the system."
• Michael Lewis is speaking at the Royal
Geographical Society, London
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