Flash Boys: A Wall Street Revolt

This is another excellent book by Michael Lewis, who has written quite a few books about Wall Street (not many of them very complimentary). In it he details how high-frequency trading works, what it means for average investors, and what one team chose to do to try and add trust and honesty back into the market. It’s a gripping book, well written, and kept my attention the entire time.

Lewis does a good enough job explaining high-frequency trading that, by the end, I felt like I had a good idea on how it works. He was unable to identify individuals who work in that field, as they are few and highly focused on pressing their advantages, but did find characters who work around it and who are trying to make an impact on the inherent fairness of the stock market. He uses plenty of names, some high-profile, and builds intrigue over the course of the book. I learned that it takes light, via fiber optics, only a handful of microseconds to travel from Chicago to New Jersey, where most stock trading now takes place. And crazily, people are able to make millions of dollars off of that fact. It’s a fascinating question as to who they are making money from, and the answer is: basically anyone who owns stocks, either themselves or through a retirement account. It’s not a huge theft, but it does add a tax onto a transaction — so whereas a buyer and seller used to agree on a price of, say, $34.50, now the seller sells at $34.49 and the buyer buys at $34.51, and the HFT makes $0.02. Which sounds small, until it is amplified over millions of transactions each day. And these are not simply fast buyers, who add liquidity to the market, which is their argument for existing; they identify both the buyers and sellers in advance, and then buy/sell to each before they know the other exists, taking advantage of that arbitrage opportunity. It does not make a huge impact on a purchase price, and so it feels like a fairly minor offense; however, as the totals are in the billions per year, it does add up, and adds further support to the idea that the markets are rigged against regular investors.

A few guys ended up learning how all of this works, and they researched and investigated and reported and told large-scale investors what was happening. They raised enough noise to help people see that it was a problem, and then created their own fair exchange, the IEX. Many of the features they instituted for fairness have been adopted by other exchanges, which implicitly acknowledges that they were unfair before. The exchange continues today, with a modest presence in the industry, although its impact has certainly been larger than simply measuring trading volume.

My big takeaway is to maintain my recent approach to stocks — buy for years, not days, just as Warren Buffett advises. While trades are likely fairer today than 5–10 years ago, it’s not something I want to engage in regularly, and therefore I should leave it to the professionals. Who, happily, seem to be getting that marginal return back for investors like me.

It is an engaging story, and ends with a cliffhanger — which is certainly a rarity for a non-fiction book. But, it is good writing, an interesting story, and shines light on a corner of the American economy that I knew little about. I’m happy to have read it, and would recommend it to others.