on 2 April 2014
I can't believe no one has posted a review saying they are totally outraged by everything this book has documented. The worlds largest banks knowing they are totally ripping off their customers, and getting away with it.
The absolute shocking treatment of Serge Aleynikov by Goldman Sachs infuriated me, and they got away with it with no criminal charges against them, and managed to ruin a guys life in the process. The guy used open source code to write code for Goldman Sachs system, and they didn't allow him to deposit that code back, as is the etiquette of open source. However when he downloaded the code he had written for Goldman Sachs, they called in the FBI who flung him in Jail in 2010 - TOTALLY CORRUPT. You might say, there's always two sides to the story, but wait until you read it.....
Okay, outrage over.....
The book is jaw droppingly good. I honestly could not put it down, and all the while I was reading it I kept on saying 'no way!'. The people who we entrust our money to every single day are so corrupt it's beyond believable: that being the banks.
The story itself is about High Frequency Traders (HFTs) and their need for high speed data, before anyone else gets it. The huge banks of America were more than willing to supply these HFTs with information in order to manipulate stock orders placed by unsuspecting clients so that the HFTs could front run them and make money. The HFTs in turn paid for this information in the form of Dark Pools.
Well, a bunch of guys sought to change the practice of high frequency trading,led by Brad Katsuyama and bring a bit of honesty and integrity back to Wall Street. They wanted to open an exchange, IEX, that was not being led or manipulated by HFTs and give their clients real time quotes which they could buy at without the HFTs being involved.
Goldman Sachs, or the two partners who were brought in changed things, somewhat redeemed the name of Goldman Sachs by 'going straight' and using the IEX exchange to do their trading, and yet there was still resistance from the top of Goldman Sachs, because they would be losing money by not having the HFTs front running.
Obviously I am only reading one side of a complicated story, but Michael Lewis has written an excellent book about the inner workings of Wall Street, and he has managed to make complicated material readable to the lay person.
I'm still aghast at everything written about, and I'm by no means a naive person, but this is just incredible.
If you're really interested you should also watch Michael Lewis, Brad Katsuyama and William O'Brien (BATS Exchange) in a heated debate about this, and then make your own mind: [...] up.
on 2 April 2014
To begin, you should be aware that that the majority of the negative reviews are from people who are (indirectly) being described as stupid or greedy in this book. If you're either stupid or greedy and work in financial services, I agree that you may not like this book.
For everyone else, this is a must read. Lewis has an extremely engaging writing style which makes for a fun read, but the content will leave you speechless. Never before has the greed and dishonesty of the major Wall Street players been so clearly documented.
on 6 April 2014
Flash Boys is not as balls out funny as some of Lewis's other books like Boomerang but it is still incredibly well written and engaging. Part of the reason for the lack of funny is that this isn't really an amusing subject.
Most of Flash Boys is about how a large number of stock brokers and investors on Wall Street simply did not understand what had happened to the market after the 2008 crash. The book focuses on a Royal Bank of Canada employee who gradually worked out not only that the market was being distorted by High Frequency Traders (HFT) but also uncovered the ways in which the major banks and the stock markets were aiding the HFTs in ripping off ordinary people.
While many people will already be aware that HFT existed (think Robert Harris's novel The Fear Index) what is shocking about the story told in Flash Boys is the way that HFTs were allowed and encouraged to distort the stock market in a way that served no purpose other than to generate money for HFT. You can feel the anger that Lewis feels about this and the anger that many of the people on Wall Street felt. It does have hopeful moments towards the end but overall this is a pretty depressing story about how Wall Street and the regulators of Wall Street fail to act in the interests of a free and open market.
Over the past 24 years, Michael Lewis has enjoyed five-star success writing four-star, three-star and occasionally two-star books of the fly-on-the wall variety.
Flash Boys breaks this mould. It is a genuine contribution.
I can pass judgement because my life has run parallel to his books. I read "Liars' Poker" as a college junior in 1990 and used it as a manual to get a job at Salomon Brothers. Six years there was parlayed into a career mostly in finance, but by the time he was writing the "New New Thing" I was already a co-founder and CEO of a disruptive business called book2eat.com. When "Boomerang" came out I was trading Greek government bonds. And now "Flash Boys" is coming out I've just accepted a job to do electronic trading.
In all his efforts that I can judge (so I'll have to leave Moneyball out) he's so far been unfailingly entertaining, but very consistent in getting the wrong end of the stick. Let's take it one by one:
The subject of "Liars' Poker," Salomon Brothers, not only pioneered the use of financial mathematics in the pricing of plain securities like bonds, not only invented all vanilla derivatives such as swaps, it also invented live pricing and for example seeded Teknekron, the pioneer of sending exchange prices into spreadsheets. Its head of IT was a certain Michael Bloomberg whose ground-breaking software had its baptism of fire as Salomon's B-Page.
In his short tenure at the firm, Michael Lewis completely failed to notice any of the above. He also failed to notice that customers in the main seek yield and nothing else. Always have done and always will do. They lack the inclination to understand value and they are not incentivized to seek it. Many feel zero fiduciary duty toward the institution they work for and maximize their own career prospects, while many actually seek out willing accomplices within the banks, often via "introductory agents" etc. and do what they can to monetize the position they hold. Michael Lewis was completely wrong to accuse Salomon as an institution of greed, basically. All they ever did was invent markets and exploit their first-mover advantage.
I've worked at Salomon, Goldman, Lehman, CSFB, ABN, Nomura (the cynical reader will notice the progression is rather monotonic) and my current employer who will remain nameless. Of the above, Salomon was very comfortably the most stand-up toward its customers. It was head and shoulders above the rest. My first week at Goldman I was so deflated by what I saw relative to what I'd known at Salomon, I resolved to leave as soon as my (very juicy) guarantee was cashed in and I still have zero regrets about it. But I did not write a book, because Goldman merely did very well what everybody else except Salomon was doing poorly, let's put it that way. It operated well within the parameters of its industry.
With a total of one observation, Michael Lewis got the wrong end of the stick. He's never seen true rogue behaviour. Even if he'd been at Bear Sterns, of course, he would not exactly have been handed those funky accounts in his first year, would he? Regardless, "Liars' Poker" was a fun book that changed my life.
The subject of the "New New Thing" was the founder of Netscape, who (like Salomon, admittedly) no longer exists. But my main gripe with that book was that it failed to mention that success in entrepreneurial business is 90% about hard work and 9% about getting backed by the right people and at most 1% for everything else. It isn't at all about the idea. Not even half a percent. My favorite example is Amazon. Jeff Bezos got his start in the least sexy, most replicable, zero-network-effect, clicks-and-mortar corner of the market. He now runs the most important business on earth and is getting into all the sexy stuff through brute force. In celebrating genius, Michael Lewis showed he did not understand what it was all about. But, again, it was a very entertaining book. I loved it.
The author truly hit rock bottom with Boomerang. For one, while it undeniably has its moments, it has to resort to grotesque exaggeration to elicit any laughs. I've lived in the same Germany he describes and never noticed anybody having any obsession with fecal matter. And as a Greek I'm totally appalled that he visited one of the most beautiful spots on the planet, and probably the only way anyone can time-travel to year 1400 (Prince Charles regularly does, recently with his sons, in the past with Prince Philip) and take away tawdriness rather than grandeur from Haghion Oros.
The guy had a budget to go visit the most amazing places on earth and rather than celebrate what was great about them or get to the bottom of what was wrong about them (and God knows plenty is) he came back with a bunch of trite observations. So I vowed never to read Michael Lewis again.
And then comes this.
"Flash Boys" is AWESOME. It has a plot, it has fully-developed heros and villains, it has a subplot that you suspect got lost but comes back with a vengeance (and a twist!! I won't spoil it for you) at the end of the book. It has a second subplot that is also a morality story, which I found totally gripping. It's as tightly packed as "Pulp Fiction" and I say that with no exaggeration.
Most importantly, it seems like Michael Lewis finally "gets it." His description of "Scalpers Inc." on pages 107 to 112 (which incidentally gets left out of the New York Times short version of the book) should be required reading for all politicians, let alone Business School students. It's really QED in terms of why HFT is a scourge. His description of the three ways HFT works ("electronic front running," "rebate arbitrage" and "slow market arbitrage") on pages 172-3 is concise and irrefutable. His description of "dark pools" is damning. For all of that I'll pardon him that he fails to explain how the IEX 350 microsecond delay really works... Check it out on page 176 and see if you get it, I didn't.
The other way this book is different is Michael Lewis consciously wrote this as an epitaph. Salomon had its scandal that spelled the beginning of the end exactly one year after "Liars' Poker" appeared on the bookshelves. Netscape barely outlasted "The New New Thing." And Greece defaulted roughly as "Boomerang" appeared. And all of the above would have been a surprise to the author. Not this time. In "Flash Boys" he shows you step-by-step how HFT as an industry is coming to a close and provides the intellectual argument to back his case. It's a new new Michael Lewis.
I thought I'd read PIketty first and this later, but I was wrong. "Flash Boys" is my candidate for book of the year and I doubt anything will appear to change my mind. Yes, I know, it's like comparing "Lives of Others" with "Wedding Crashers" but I can't help it, the truth is I enjoyed "Flash Boys" more than "Capital"
The average small investor when buying or selling shares via their home computer assumes that the bargain will be struck at a price somewhere in the range quoted on his screen. More surprisingly, so did major brokers, despite evidence to the contrary. It became clear to some investors that their dealing intentions were somehow known to a third party before their order was fulfilled, and although the price difference on a single share was minute, on large transactions the total sum was very substantial. This book tells the story of how this `mystery' was unraveled by a broker called Brad Katsuyama from the sleepy Royal Bank of Canada.
He had noticed this effect in his own trades and after much investigation placing test transactions and talking to backroom computer specialists in the finance industry, he deuced that the `culprits' were a new breed of traders known as high frequency traders (HFTs), who had arisen following the computerization of share dealing. Often working in very small companies, they had invested heavily in laying dedicated optical fibre networks and high-speed routers so that they could receive data quicker than other dealers, banks, and investors. They also developed techniques of making numerous very small offers to probe the intentions of investors. They even paid the owners of stock exchanges for the privilege of placing their routers inside the buildings where the exchanges had their matching equipment, in order to reduce the access times by a few microseconds. These enabled them to `front run' other investors, a bit like knowing who had won a horse race before accepting or placing a bet at on off-course betting shop, except what they were doing was legal and even encouraged by the exchanges, who stood to profit in fees and other charges. The losers were the investors, and ultimately, given that our pensions and much else is bound up in stocks and shares, that means all of us.
Brad and his associates set out to beat the HFTs by establishing a new fair exchange that through a combination of clever software and hardware would ensure that no dealers could access data significantly sooner than others. In so doing he also believed that this would reduce the inherent volatility of the existing computerized systems and the major role of HFTs. To do this he recruited a remarkable collection of computer geeks from many different backgrounds who were more interested in the challenges than what they could earn. They were a difficult bunch to work with and the author describes these characters very well. It was an uphill struggle to raise the money to establish the exchange, which was called IEX, and to persuade brokers to use it, when they stood to lose money in the short term. The turning point came when he persuaded two people at Goldman Sachs, the bank we love to hate, to channel large deals through IEX, and thereafter other major players followed. It was very strange that Goldman Sach led the way because they had vigorously pursued one of their programmers, even having him jailed, when he left the company, on the grounds that he had stolen software, despite the fact that much of it was open source coding and none of it could be used on other systems.
The book is well written, but a bit heavy on technical details and there is considerable repetition about the techniques used by HFTs. It also ends without a clear statement about the current situation. Has IEX has really broken the power of HFT, or are they still a significant force, `ripping off' the rest of us? There is also an intriguing brief mention in the final few pages of data transmission using microwaves, which is even faster than existing fibre optics, but this is not followed up. Overall, though, this is a well-written fascinating insight into one important aspect of the far from `squeaky-clean' world of share dealing.
on 3 April 2014
We all suspected something fishy was going on, but exactly what could never be explained to us, until now! Fascinating!
Michael Lewis is still a solid bet when it comes to translating aspects of the financial market dynamics into language understandable to the layman reader and 'Flash Boys' - focusing on the rise and effects of high frequency trading is no different.In spite of no longer being actively involved in the Wall Street life (Liar's Poker (Hodder Great Reads) - being his autobiographical work on the subject - has covered the late 1980s) he is still both sufficiently connected and adequately well versed in the subject matter to be able to lucidly describe developments, such as here or in The Big Short: Inside the Doomsday Machine.
The book focuses on a group of people, with Brad Katsuyama perhaps the protagonist, who have through their work uncovered a lot about high frequency trading for the general public, as well as created a new exchange - the IEX - helping to protect investors from the predatory behaviour of HFTs. While the latter were a fully legal development, exploiting loopholes in well meaning legislation, one does at times wonder to what extent legislation is simply written with such and similar loopholes built in. Hence a case of unintended consequences if one is generous.
The author manages a well judged balance of uncovering and presenting facts, without being judgmental of the players - he does allow his protagonists to voice their opinion but does not villify or crucify anyone as such.
I guess the book may be of a slightly lesser interest than The Big Short: Inside the Doomsday Machine to the general public, as fewer people will have suffered badly from the dynamics of HFT (big investors would but then they get less compassion on Main Street) but it will be equally easy to understand and quite useful to piece together a more comprehensive understanding of trading activities for the uninitiated.
on 6 June 2014
Like everything Lewis writes, this is a book about an arcane subject matter of limited apparent relevance to most people that is written in such a way as to be very hard to put down. Lewis's secret is to write books about people, and, like his previous work, this is at its heart a biographical study of some oddballs, misfits and eccentrics who set out to change their small corner of the world. The formula is pretty familiar to Lewis fans by now and, as I note below, this one is full of bias and fallacy, but for me this does not diminish the appeal of the book as a gripping page-turner.
Having said that, I found the Lewis formula slightly less convincing in this context than some others - it's certainly not hard to believe that Jim Clarke is a renegade or that Michael Oher is an outsider; but the head of equity trading at RBC? Really? It is inconceivable to me that anyone in the sharp-elbowed, politically ruthless world of Wall St just falls into a $2m-a-year job without having pretty clear and aggressive ambitions to get there. And the other characters, likewise, must have played the game pretty well and been reasonably focussed and compliant to have forged the careers they did.
And Lewis clearly cut corners on his research here. Whether his success has made him lazy, or whether he was more keen on pushing an agenda than reporting facts, I don't know. However, unlike Liar's Poker, whose appeal came from being written by an true insider, this book is written from the point of view of a man whose many decades away from the coal face have left him substantially out of touch with the world he writes about. Combine this with the fact that, by his own admission, he could not get any successful HFTs to talk to him, and you end up with a poorly informed narrative biased by the agendas of its sources. Some of the more glaring errors included the claim that no inside finance knows about HFT (co-location was first explained to me by a Spanish literature student with no connection to finance, back in the late 1990s) and that HFT barely existed prior to 2007 (again, I was interviewing HFT traders back in 2003 and 2004, and most had built substantial careers in that business by that time).
It is a pity that this book is so transparently factually inaccurate, but if read as a novle it is highly entertaining, and something that I would nevertheless recommend to anyone who wasn't likelt to take it too seriously.
Every time I read a Michael Lewis book I get sucked in and, before to long, it's finished. Yet they are always well written and gripping. He is also able to make the world of finance sound interesting. Usually authors bog you down in dry, boring detail but he knows how to bring it alive.
This book tells us what happens in the shady world of the U.S. stock market, yet this also what happens in every other market. Investors are being robbed by the financial institutions they trust and the High Frequency Traders who are waiting to screw you over.
Why don't the big banks protect you? That's because they earn from the HFT's. Everyone is out to nibble away at your trades and those of the large pension, hedge and mutual funds that invest our money in the markets.
Yet this is also the story of some guys who saw what was wrong and did something about it. A group of people who put the concerns of the investor above their own interest and even took large cuts in income to do something to help those being ripped off.
Don't believe all the day trading hype either, they get to earn even more money off you. They charge you to trade and then take money from HFT's who make money off you as well.
on 8 June 2014
Lewis is as always a joy to read. This book - highly technical and abstruse at points though it may be - simply slides past you leaving you a clarity of understanding that lets you explain the problem to others.
The book is not about High Frequency Trading per se - it's mostly the canvas upon which the story of a particular fibre cable and a sympathetic Canadian trader play out. It did still manage to finally get me to understand concepts such as front running and why latency really matters. At the end you can explain to you Dad why this stuff seems bad,
I say seems as the greater story - one in which the banks rip us all off by spending ever more on speed - is already playing out in the real world. Though there seem to have been transitory advantages, HFC is no longer a licence to print money. The banks having noticed a golden goose have not only killed it, they've systematically salted and destroyed the wetlands its was based in, shot anything that looks like a goose and then burnt the whole area to the ground.
In short High Frequency trading has become a high speed flash in the pan and Lewis feels like he's writing about history as a result.
None the less the stories he focusses on are mostly original and previously unknown. It's touch to sympathise with a good hearted Canadian trader who feels everyone is being ripped off when you find out he's making $2m a year but Lewis does make him sympathetic.
What he doesn't do is finish the story. The book ends as a new exchange - designed to remove all the banks speed advantages - comes on line. But then it ends. We are left wondering if it helped the problem or faded into the background.