Flash Boys has been in the news a lot, but what is it?
Michael Lewis’ latest book, ‘Flash Boys’, looks to expose the world of high-frequency trading (HFT) and raises questions about its impact on markets. It charts the development of technology in trading, covering the replacement of the traditional trading floor with computer hardware, increased emphasis on pushing the boundaries of data transfer speeds and the impact this has had on the average investor.
The book begins telling the tale of how an 800-mile cable was constructed in secret to shave milliseconds off the time it takes to send messages between Chicago and New Jersey, which was key to latency arbitrage strategies that were becoming increasingly popular. It also dives into the story of a frustrated broker at Royal Bank of Canada’s New York office, Brad Katsuyama, as he discovers the extent to which HFT is harming his ability to execute trades, and then charts his creation of IEX, a dark pool designed to serve investors and prevent latency arbitrage.
So why has this book been hitting headlines across the world?
The book has been controversial and influential. A demonstration of just how powerful the book has been is shown in the legislative and regulatory response to HFT in the US since it was published. The day after its release, the Federal Bureau of Investigation announced it would be looking into HFT firms to seek evidence of frontrunning, market manipulation and insider trading. The Securities and Exchange Commission’s (SEC) chair Mary Jo White was also questioned on the book’s claims that US market were rigged, something she denied. However, the SEC did fine the New York Stock Exchange US$4.5 million over claims made in the book.
Financial services organisations, including HFT firms, have been highly critical of the book, with many disputing its claim that markets are rigged while also criticising Lewis for failing to actually speak to any HFTs and failing to balance the concerns with the positive aspects HFT provides, such as improving liquidity.
Should I add it to my reading list?
Absolutely, even if just to see what all the fuss is about. It was an enjoyable read, though perhaps doesn’t really tell someone who works in the industry anything new. The individual stories are interesting and may add a bit of extra background to some well-known stories about how HFT rose to prominence and the background to the development of IEX.
However, its critics are right in that it falls far short of tackling all the issues and has sought to create a dramatic story of good vs evil in electronic trading that is perhaps a little inappropriate. Regardless, it is having an impact on the regulatory debate and public opinion, and for that reason alone is worthy of further investigation.
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