Saturday, August 16, 2014

With Incisive, Insightful 'Flash Boys,' Michael Lewis Deftly Decodes the Dubious Blur of High-Frequency Trading -- Book Review

Book Review

Flash Boys
by Michael Lewis
Now in hardcover and on Kindle

Truth be told, I'm not really a great reader.

I love the concept of reading and enjoy the knowledge that comes from it. I admire those who are literate and wish I was more so.

Every day, I read some combination of newspaper, magazine and Internet articles, and am always in the midst of one book or another.

But I'm lucky to finish one per month, and that average is largely abetted by my predilection for page turners I might complete in a week, such as by Harlan Coben, Lee Child, Linwood Barclay or John Grisham (though not so much the latter anymore).

I've read everything by Dan Brown, the late Stieg Larsson and--as I recently posted--I've enjoyed both of the mysteries J.K. Rowling has written under the pen name Robert Galbraith.

So it's not that I don't ever read, nor have I ever knowingly had problems with comprehension, reading speed, vision, vocabulary, ADHD or other obvious hindrances.

But even with time on my hands, and now the ease of reading on a Kindle or my iPhone, as an acute act reading books ranks below writing blog posts, watching movies & TV, attending theater, concerts & ballgames, mindlessly surfing the Internet and much else, perhaps just outranking cooking and walking on my treadmill.

It isn't just that when I do read I usually devour user-friendly thrillers, whereas several close friends and family members read much more substantive works of literature, or that they're likely to double, triple or quadruple my rate of about one book per month, if that. The truth is that while I would like to read, say, Infinite Jest--by the late David Foster Wallace and regarded as one of the best books of the 21st century--I gave up just a few pages into the 1104-page novel and perceived that it would take me a full year you even if I stuck with it.

Not to mention that my condo is strewn with biographies--on Lou Gehrig, Paul Newman, John Lennon, Ray Davies, Arthur Miller, Miles Davis, Natalie Wood, Stephen Sondheim, Sandy Koufax, Neil Young, Abraham Lincoln, Frank Lloyd Wright, Mozart and many more--that I really want to read...but only in theory.

So while it might not sound all that impressive to say I read a 272-page book in 10 days, especially when you consider that it was a non-fiction work covering the technology involved in high-frequency trading (HFT) of stocks, allegations of chicanery even many on Wall Street didn't understand, minutia about why differences in milliseconds and microseconds make billions of dollars of difference, the ruse of "dark pool arbitrage" and how a small group of traders tried to take a more ethical stand, this should connote how masterful a writer Michael Lewis is.

I have previously read his Moneyball, The Blind Side, Boomerang and The Big Short, the latter being an amazingly comprehensible chronicling of the byzantine malfeasance behind the financial crash of 2008.

More so than anything else--though I also derived great value from the writings of Matt Taibbi, Paul Krugman, Joseph Stiglitz, Charles Ferguson (plus his splendid Inside Job documentary) and others--The Big Short helped me grasp the truths behind the subprime mortgage scandal, better understand such Machiavellian concepts as collateralized debt obligations (CDO) and credit default swaps (CDS) and glean the complicity among mortgage brokers, Wall Street investment banks and credit ratings agencies.

In Flash Boys, Lewis' sledgehammer is a bit more sly, his targets more oblique, the consequences of the chicanery he chronicles less obvious.

It's not the call to arms The Big Short should have been, if only it had one-tenth the mainstream penetration of your average reality TV show or summertime cineplex tripe.

But Lewis' writing is just as deft, if not more so, in making esoteric concepts not only understandable but truly enjoyable reading. And though the reader will have to connect more dots beyond the book to recognize the import and feel the ire of stock market machinations that seemingly only a select few would innately care about, Michael Lewis continues to not only be a master of his craft, but a seemingly rare and remarkable crusader for fairness. (Though he, and the book, also has a fair share of critics.)

Unlike The Big Short, Flash Boys isn't a book that I insist everyone read--not reflecting its quality, but in deference to the dense subject matter--yet anyone who invests money in the stock market definitely should.

And while in tackling complicated material with a colloquial finesse--largely through capsules of the characters who would come together to start a supposedly more principled stock exchange--Lewis does wander relatively deep into the woods of HFT technology, there are many points he makes that should have great resonance to anyone.

In the book's introduction, Lewis explains this, which I must admit I didn't know:
"Over the past decasde, the financial markets have changed too rapidly for our mental picture of them to remain true to life. ... Since about 2007, there have been no thick-necked guys in color-coded jacket standing in the trading pits; or, if they are, they're pointless. ... The U.S. stock market now trades inside black boxes, in heavily guarded buildings in New Jersey and Chicago."
In short (unless I've misunderstood something), stock trades are now made entirely through electronic means and can be done so through several entities beyond the the New York Stock Exchange (NYSE) and Nasdaq.

With the caveat that high frequency traders have supposedly taken issue with some of Lewis' claims and assertions, and the book includes no interviews with any current HFT practitioners, Lewis makes a strong case about how--having maneuvered to attain speed-of-trade advantages measured in microseconds (a millionth of a second)--high frequency traders have made billions of dollars gaming the system for no benefit beyond their own.

Without risking a thing.

Let's say you tell your stock broker you want to buy 1,000 shares of Proctor & Gamble at the $80.00 share price the broker quotes. The broker punches that into his computer and relays back that the buy went through at $80.01.

This may not seem like a big deal; on an $80,000 purchase, you're paying $10 more. But in the scenarios Lewis explains much more astutely than I ever can, the .01 jump wasn't due to other legitimate investors buying or selling P&G. It's because HFT traders were able to see the buy was ordered at $80.00, blazed through the electronic pipeline to the exchanges, bought up all 1,000 available shares and sold them back (essentially to you) for $80.01, before even your broker had a clue what was happening.

This cost you $10 and made the HFT firm $10, which millions of times over results in billions of dollars in profits. And unlike you, who could see P&G stock drop, say 10 points, while it's in your holdings, the HFT guys are taking absolutely no risk. They get "into the market" only as a consequence of the buy & sell orders that are already made, and then "jump the trade."

Because (again, per my understanding) HFT trades and those made in dark pools of large investment bands--a dark pool being a bank's private stock exchange, in which they have vast holdings of stock and make trades among their own customers, without going through the NYSE or other exchanges--aren't subject to the type of financial statements and disclosures one might expect, just how much money is made through high frequency trading and shady dark pool practices isn't exactly known, at least per Lewis.

But it certainly seems to be many billions. At least.

So sure, there are a whole lot of injustices in life and you'd go goofy thinking about even a few of them. But there are people mining coal, forging steel, building cars, fighting fires, teaching kids, driving buses, etc., etc., struggling to make a subsistent living and others reaping millions, perhaps billions, simply because their fiber optic connection to the "stock market" is a few millionths of a second faster than someone else's.

As Lewis conveys, HFT firms virtually never lose money, nor do they typically hold any stock at the end of each day. As they aren't actually "investors," they have no stake in the game, but they are making fortunes off of it. In essence, per Lewis, they are scalpers, except unlike ticket scalpers, they run no risk of losing their shirts if the ticket market is flooded; buyers (or sellers) are guaranteed before HFT types invade the market.

Anyway, I am trying not to reveal too much that Lewis does, because Flash Boys is certainly worth your while, but I felt the need to expound on why the subject matter is important and compelling.

Even if you think you don't care.

And even if you really don't, Michael Lewis is such a gifted writer of non-fiction that his latest work--like his others--is a really good, insightful and informative read, nonetheless. 

No comments: