Rating: 4 / 5
Flash Boys is a detailed look at high frequency trading, and the lack of transparency and sense of fairness that is at the heart of the Wall Street vs Main Street debate. Some keen institutional investors have wondered why they are unable to fill client orders at prices that appear on their screens, but instead of just abstractly thinking about it, RBC’s Brad Katsuyama actually made it his mission to figure out the root cause of the discrepancy and how to fix it. What he discovers is that flash traders have used speed to muddy the proverbial investing waters, skimming hundredths of a penny here and there. But those hundredths of a penny has added up to millions upon millions of dollars. Flash traders have built a system to see what orders are coming in, buy them on another exchange, increase the price, and then sell it back to the original buyer. This front-running has undermined the markets, but has also generated millions of dollars for high frequency traders, and these traders are not even providing a service.
If you’ve read any previous Michael Lewis book, then you know his style, and Flash Boys is no different. Lewis has the ability to take a complex matter and break it down to the base components in an understandable and compelling way. High frequency trading is (probably one of) Wall Street’s dirty little secrets, and thank goodness for Lewis shedding light to this practice. Also satisfying is knowing that there are some people, albeit a significant minority, that are trying to bring fairness and transparency to the market.
Flash Boys is both fascinating and infuriating. The only aspect of it that I am critical about is truly understanding who the ‘bad guys’ are. Profiling a high frequency trading firm would have made the book more robust, but as is, half the time it seemed like Goldman Sachs was trying to do good, and half the time they were helping high frequency trading.
The Bottom Line: Flash Boys is great for a basic understanding of high frequency trading, and for making the general public aware of how stacked the odds are against retail investors. Also, it’s a great lesson in regulation and how precarious the balance is in promulgating rules that help society but don’t go overboard and leave the door open for manipulation or promote adverse actions.