Flash Boys: A Wall Street Revolt by Michael Lewis
My rating: 4 of 5 stars
When you start this book, you’re given a vague impression that the “bad guys” are the high frequency traders (HFT) because they are exploiting the market, or cheating people, or what not. In fact, we get that because most of the book is written from the point of view of who we think are the good guys who oppose HFT… we know this because these guys have names and histories. We identify with them. Not with the anonymous HFT firms.
What started off as a scandalous book about brokers and traders who take people’s money and give them less bang for their buck, even willfully doing the opposite of what their clients want, soon takes an unexpected turn, however.
As the story develops deeper and deeper, things seem worse and worse. Constantly, it’s a detective novel. Small changes, small anomalies in their consistency reveal larger patterns that need explaining. The men in this story are as much brilliant as they are idealistic. For if nothing else, than ideas of fairness and free trade are but excuses for a system built on air. After all, money is nothing else but idea. Sure, it moves material, transforms it into anything we like. But its basis is a shared idea. As we dive deeper, the idea seems to become more corrupt and more controlled. But then, an interesting turn happens.
We consider things from the HFT’s point of view: “I think most of them have just rationalized that the market is creating the inefficiencies and they are just capitalizing on them.” Are they not supposed to? What makes it cheating is that they are utilizing a gap in technology to effectively find out orders in one exchange to execute them on another. The lag in the decentralized stock market allows HFT’s orders to travel through time. The way to see it as cheating is to recognize that true market inefficiencies can be corrected by the market. True profit, defined economically, is only available for a short time when the innovation is new and unheard of. But once the market knows about it, the market can adjust. Technological gaps on the structure of executing trades are not something markets can easily account for… at least not of this kind. But it will adjust. New exchanges (such as IEX) will arise and compensate for such HFT advantage, or laws will be passed to counter them.
This last paragraph seems to detract from the scandal of the story. But as Ron Popeil said, “But wait, there’s more.” We see things from the banker’s point of view. With their dark pools. We see things from the trader’s point of view. We see them from the technologists’s point of view. In the end, no one is really behaving badly; or rather they are behaving badly against the client’s wishes… but also, they are also behaving rationally. Maximizing utility. Using what they have to preserve their own position.
Lewis stops short of jumping off this deep end, and that’s okay. He’s not out to critique capitalism itself, although there are a few of these: “It’s rational for a broker to behave badly.” Of course, a true critique would entail a discussion of homo economicus, and to note that the model for this behavior, defined as rationality, isn’t complete because it fails to grasp many actual intangibles that humans do value and gain utility from.
One reason to stop at this point is to avoid becoming mired in academic jargon. The other point is that people may want to read about Wall Street corruption, but it’s unlikely they will want to throw everything out because of “a few bad apples”. For many of us who can read this book, and do so, are living nicely, with freedom and wouldn’t wish to destroy a system which supports us in our leisure (among many other things). Still, it is a myth to think we can simply carve out a group of people get rid of all the corruption that human greed can entail. Because greed isn’t found just on Wall Street or any other capitalist exchange. We are greedy creatures, because the future is uncertain. A system founded on greed is one we hold dear to much of our nature, but it’s also a lopsided system as it only rewards part of how we are. Those of us who are fuller, rounder and more generous as human aren’t often praised by a system that only focuses on a narrow sliver of being human.
So even while I’ve undid the entire premise of the book here… the book is well written. Clear, and deals with fairly complex stock trading information in an easy to understand, distilled form. I rather enjoyed reading it. I kept not wanting to put it down.
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