The results of August's TRADE Poll will come as little surprise to readers. Asked which work of financial literature they would be reading on the beach this summer, participants placed Michael Lewis’ ‘Flash Boys’ well ahead of the alternatives at 63.77%.
Up against stiff competition in the form of Thomas Pikkety’s ‘Capital in the 21st Century’ (27.54%) and John Lanchester’s ‘Capital’ (8.70%), the palpable impact of Lewis’ literary assault on high-frequency trading (HFT) and its damaging effect on markets has evidently continued to attract interest and popularity throughout the summer since its release back in March - when it sold 130,000 copies in its first week of publication.
Literature focusing on the increasingly advanced automation of global markets is, of course, always going to attract interest and enthusiasm from industry participants directly affected by such works’ very subject matter. Yet Flash Boys is not unique in its focus on, and critical portrayal of, high-frequency trading (HFT).
In the past couple years alone, prominent works such as Scott Patterson’s ‘Dark Pools: The Rise of the machine Traders and the Rigging of the US Stock Market’, Amuk and Saluzzi’s ‘Broken Markets’, and Haim Bodek’s ‘The Problem of HFT’, have all explicitly detailed the perceived scandal of high-frequency trading. Lewis was far from the first author to expose the issues now capturing so much attention within the public sphere.
As Richard Balarkas, managing director of Quendon Consulting, commented, “Flash Boys certainly stirred up interest, but the industry has obviously been aware of these issues all along. In that regard, the biggest outcome of the book is probably that it’s made the topic so public.”
This view was shared by Adrian Fitzpatrick, head of investment dealing, Kames Capital. “It’s not rocket science – we all knew what was going on – I would say the great thing that Lewis has achieved is that he’s actually brought it to the forefront of regulators’ attention.”
There is certainly no denying that. The day after Flash Boys’ release, the Federal Bureau of Investigation launched an inquiry into HFT and its facilitation of market manipulation and insider trading. Later it was reported that the Securities and Exchange Commission had fined the New York Stock Exchange US$4.5 million over claims made in the book.
“It’s sad that the industry needed this book to be woken up,” says Balarkas, “although it may not necessarily have provided any new insights that those in the industry were not already aware of, it has greatly fuelled public concern that the financial services industry is still not managing its affairs properly.”
Within the industry then, the popularity of Flash Boys appears to stem, not from the exposing of market abuses, but rather it’s the publicity it has generated regarding those abuses and those involved.
The importance of the public platform that Flash Boys has provided for HFT reform in this way cannot be overstated. The US Commodity Futures Trading Commission now reconsidering its definition of HFT, and new algorithmic trading restrictions and classifications being proposed through MiFID and Market Abuse Directive II (though these were already in the works prior to the book’s publication), the regulatory response HFT set to create a much more level playing field for the world of trading.
“For industry participants,” adds Fitzpatrick, “the major thing was that, in a way, the book brought it all to a conclusion, which is what I think people wanted. All we as institutions want, and have ever wanted is to have a level playing field.”
“Two out of ten for providing those working in the industry with new information,” concludes Balarkas, “but full marks for embarrassing industry participants into taking action that should have been taken a long time ago.”