It’s pretty amusing, and alarming, to read the reviews of Flash Boys: A Wall Street Revolt from people who have not actually, you know, read it. The cynicism and snobbery just oooooozes. I’m not sure where this is coming from. Yes, everyone knows the stock market is rigged. Yes, we all know that the bonus class is busily finding even newer and more clever ways to rig the system. But I think the non-reading reviewers have missed the bigger themes- because they haven’t bothered to read Lewis’s books.
Now, I’m no expert on the stock market but having been in the research industry for a couple of decades, I have come to terms with the fact that even PhDs don’t know everything. (Particularly PhDs.) To paraphrase Douglas Adams, science is big. Really big. You just won’t believe how vastly hugely mindbogglingly big it is. People have to specialize. You become an expert in one sliver of an area and some of the rest of your expertise begins to atrophy. Not that you can’t get it back but, just like anything else, it takes practice. So, it is possible to be a wizard with protein structure and be a complete idiot when it comes to some new reaction mechanism. There’s only so much gray matter real estate.
So, it is with people in the financial industry. It’s possible to be good at concocting collateralized debt obligations to screw pension funds out of billions, for example, while being a complete moron when it comes to High Frequency Trading (HFT). As it turns out, the protagonist of Flash Boys, Brad Katsuyama, runs a trading department of the Royal Bank of Canada. He describes the departments of his bank as highly compartmentalized. This compartmentalization is one of the themes running through the book and we shouldn’t be surprised that it exists and serves the purposes of the predators. The finance industry is all about competition. Information is on a “need to know” basis. Asymmetric information can give you an edge to make you billions.
To make a long story short, Brad figures out what the HFT guys are up to and deconstructs their mechanisms of predation to ensure that the new stock exchange he creates, IEX, eliminates as many loopholes for exploitation of the investor as possible. This theme of the book, the self correcting nature of the market, is both promising and depressing. It’s promising because there are still people out there who realize that their own self interest is better served when trust and accountability is restored to the stock market. It’s depressing because it demonstrates how completely compromised the major stock exchanges are and how the government regulatory agencies have adopted a laissez faire attitude towards predation and exploitation.
And let’s make it clear that we are talking about major investors who were the prey. The people who were screwed by these middle men HFT’s were big pension funds as well as everyone else. Everyone is in on the take from the stock markets that lease space in their data centers to HFTs to benefit from colocalization, to the big banks that kick back money to the HFTs trading in their “Dark Pools” to the fiber optic companies that supply the speed. If big players can be brought down like slow antelope, the small day traders haven’t got a prayer.
But there’s another theme in this book that feels eerily familiar to a former Big Pharma researcher. It turns out that the financiers see technologists as something akin to day laborers. They’re a lower status class of employees. Not only are they not respected, it seems like it’s perfectly Ok to ruin their lives to prevent their expertise from being used by other people. Lewis’s account of what happened to computer science genius Sergey Alenyikov isn’t getting nearly enough attention but the result of Goldman Sachs’ relentless prosecution of Alenyikov is chilling. It has a damping effect on innovation since the consequence of ruining Alenyikov’s reputation is that other companies may be wary to hire him to do coding of any kind.
Michael Lewis is a gifted writer. You may have little or no expertise in the financial industry but he lays out the strategies and game in such precise detail that even the novice will “get it”. The characters in this book are not ivy league grads with pedigrees. They’re insiders from the gray area between technology and the front office. And what makes them able to beat the predators is the ability to sit on their own egos and work as a team. That might be one of the secrets to surviving predation.
One complaint I have about this book is it is almost completely devoid of women. There is one mention of a woman on Brad’s team, his personal assistant. She gets about a paragraph. Brad tries to discourage her from leaving RBC to join him at IEX because he can’t afford to pay her. What’s weird about that is he manages to recruit other people with modest salaries so why is it so hard for him to justify paying the only woman in his group a living wage until he got IEX up and running? It’s a conspicuous little nugget to have survived the editing process.
Lewis ends the book on an ominous note. Technology will advance and we will all need to be vigilant to keep one step ahead of it. It’s pretty clear that the current administration is not going to stop the predators. We need to protect ourselves from exploitation or elect people who will crack down.
They’re going to have to be a lot more clever and less self serving than the current crew in government.