Flash Boys - by Michael Lewis
Published:
Flash Boys - by Michael Lewis
Read: 2023-09-07
Recommend: 8/10
One of my students suggested this book to me during a discussion about high-frequency trading. I found it to be an enjoyable read.
Notes
Here are some text that I highlighted in the book:
“We would hear how they had this roomful of Indians and Chinese guys. Rarely would you see them on the trading floor. They were called “the Golden Goose.” The bank did not want the Golden Goose distracted, and, when the geese arrived, they had the air of people on leave from some critical mission.
It took 100 milliseconds to blink your eyes; it was hard to believe that a fraction of the blink of an eye could have such vast market consequences.
Ronan could also guess how much money high-frequency traders were making by the trouble they took to conceal how they made it.
high-frequency traders were front-running the orders of ordinary investors.
First, there was nothing new about the behavior they were at war with: The U.S. financial markets had always been either corrupt or about to be corrupted. Second, there was zero chance that the problem would be solved by financial regulators; or, rather, the regulators might solve the narrow problem of front-running in the stock market by high-frequency traders, but whatever they did to solve the problem would create yet another opportunity for financial intermediaries to make money at the expense of investors.
For the first time in Wall Street history, the technology existed that eliminated entirely the need for financial intermediaries. Buyers and sellers in the U.S. stock market were now able to connect with each other without any need of a third party. “The way that the technology had evolved gave me the conviction that we had a unique opportunity to solve the problem,” he said. “There was no longer any need for any human intervention.” If they were going to somehow eliminate the Wall Street middlemen who had flourished for centuries, they needed to enlarge the frame of the picture they were creating. “I was so concerned that we were talking about what we were doing as a solution to high-frequency trading,” he said. “It was bigger than that. The goal had to be to eliminate any unnecessary intermediation.”
The fifty or so places on which stocks were traded were all designed by financial intermediaries, for financial intermediaries.
“It’s hard to be forward-thinking when the whole of corporate America is about the next quarter’s earnings,” said Don. “It went from ‘Is this good for the market?’ to ‘Is this bad for the market?’ And then it slides to: ‘Can we get this through the SEC?’ The demon in this part of the story is expediency.”
The Soviet-controlled economy was horrible and complicated but riddled with loopholes. Everything was scarce; everything was also gettable, if you knew how to get it. “We had this system for seventy years,” said Constantine. “People learn to work around the system. The more you cultivate a class of people who know how to work around the system, the more people you will have who know how to do it well. All of the Soviet Union for seventy years were people who are skilled at working around the system.” The population was thus well suited to exploit megatrends in both computers and the United States financial markets.
“slow market arbitrage.” This occurred when a high-frequency trader was able to see the price of a stock change on one exchange, and pick off orders sitting on other exchanges, before the exchanges were able to react.
To a man, they were puzzle solvers, and yet, to each other, they remained unsolved puzzles.
That was just a sampling from a single year of what were usually described as “technical glitches” in the new, automated U.S. stock markets: Collectively, they had experienced twice as many outages in the two years after the flash crash as in the previous ten. The technical glitches were accompanied by equally bewildering irregularities in stock prices.
Clark-Joseph showed how HFT firms were able to predict price moves by using small loss-making stock market orders to glean information from other investors. They then used that information to place much bigger orders, the gains from which more than compensated for the losses.
When things went well, the HFT guys took most of the gains; when things went badly, the HFT guys vanished and the banks took the losses.
The more money to be made gaming the financial markets, the more people would decide they were put on earth to game the financial markets—and create romantic narratives to explain to themselves why a life spent gaming the financial markets is a purposeful life. And then there is maybe the greatest cost of all: Once very smart people are paid huge sums of money to exploit the flaws in the financial system, they have the spectacularly destructive incentive to screw the system up further, or to remain silent as they watch it being screwed up by others.
The cost, in the end, is a tangled-up financial system. Untangling it requires acts of commercial heroism—and even then the fix might not work. There was simply too much more easy money to be made by elites if the system worked badly than if it worked well. The whole culture had to want to change. “We know how to cure this,” as Brad had put it. “It’s just a matter of whether the patient wants to be treated.”