Fast, Faster, Fastest

HFT image 2

Michael Lewis’ book Flash Boys draws a line in the sand regarding high-frequency trading in the financial system.  

 

 

A few days ago Brad Katsuyama, the CEO and co-founder of Investor Exchange (IEX), wrote an article in the Bloomberg News defending IEX from various allegations that had surfaced in the past few months. While people like Katsuyama – and to an extent people at IEX – probably don’t see themselves as revolutionaries or people who rock the boat, to most of Wall Street that’s what they had become. As seen in this CNBC report, these men have become industry outsiders even though they currently run a very credible stock exchange at IEX.

 

I guess they have Michael Lewis to thank for that.

 

Flash Boys is Michael Lewis’ latest book which centers on high-frequency trading (HFTs) and their impact on the US stock market. Reading like an exposé on HFTs, Lewis explains in Flash Boys that the market has become “rigged” due to the explosion in the number of HFT firms. The book contests that HFT firms are manipulating the market by using speed to get to exchanges first then using the information of other incoming buy and sell bids to manipulate market prices. What you get are HFT firms – as well as Wall Street banks – getting an unfair advantage over other traders due to the information being gained by reaching stock exchanges first.

 

flash boys

Interesting note about the title image above. That is a visual representation of high-frequency trading being measured in fractions of a second!

 

Lewis explains this entire concept of high-frequency trading through the story of Brad Katsuyama. Flash Boys takes us through Katsuyama’s journey as a simple stock trader for the Royal Bank of Canada to the co-founder of IEX. Katsuyama acts as Lewis’ moral center in Flash Boys with the book reading at times like an underdog story of misfits banning together to take down the evil Wall Street banks and bring integrity back to the US stock market.

 

While incredibly well written, Flash Boys has come into question with many financial news organizations. Publications such as the Wall Street Journal have ripped Flash Boys for not presenting both sides of the issue. While Lewis does expose the unsavory side of high-frequency trading, their upsides in creating liquidity and more efficient pricing are rarely mentioned.

 

To be fair though, that’s not Lewis’ point in Flash Boys.

 

Lewis specifically focuses on the costs of high-frequency trading. His intention is never to provide the reader with a balanced argument on the subject. Because of that, Flash Boys becomes a worthwhile read. All Lewis is doing is drawing a line in the sand. Whichever side you fall on, well, that decision he leaves to you.

 

 

Reviewer’s Take: When it comes to information on high-frequency trading there is a lot of noise out there. What Michael Lewis does so well in ‘Flash Boys’ is explain the process of high-frequency trading and its costs in an easy to understand narrative. For that reason alone, ‘Flash Boys’ is worth your attention.

 

(Photo Credit: Nanex.net, Amazon.com)

 

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