Michael Lewis's "Flash Boys": lifting the rock on crooked high-speed trading



Can’t wait to read it.

The most important point in his books (and in Matt Taibbi’s reporting) is that these plutocratic robber barons are NOT “the best and the brightest” or “the smartest guys int he room” outsmarting everyone else - they are merely cheating, and engaging in regulatory capture to enable them to continue to cheat.

They aren’t sharks. They are tapeworms.


Wow. I think I’m going to be sick now.

Some choice quotes:

“There is a guy in here with suspenders walking around with a baseball bat in his hands.”

“They’d be just five guys in a room. All of them geeks. The leader of each five-man pack is just an arrogant version of that geek.”

A fourth investor was told by three different banks that they didn’t want to connect to IEX [the new fair exchange] because they didn’t want to pay their vendors the $300-a-month connection fee.

The same system that once gave us subprime-mortgage collateralized debt obligations no investor could possibly truly understand now gave us stock-market trades involving fractions of a penny that occurred at unsafe speeds using order types that no investor could possibly truly understand.


Lewis might have been an insider in the 1980s when, you know, he actually worked on Wall St. But now he’s no more than a misinformed observer. He can’t even get some of the basic facts right: http://www.businessweek.com/articles/2014-04-01/what-michael-lewis-gets-wrong-about-high-frequency-trading

Comparing the most transparent market in the world (the US stock market) to the market of OTC securities like CDSs or CDOs is laughable and seems to be just an effort to tie the previous financial crisis instruments to HFT.

The irony of the whole thing is that Lewis’ main point is about the complex routing rules which were created about 10 years to guarantee that investors always get the BEST available price. The SEC sold this regulation as a way to help the small guy. At that time, some HFTs actually warned the SEC it could make the market too complex. Oh well.

We’re not going to be anywhere closer to the truth as long the discourse is so one-sided.

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I’d like to see a follow up piece discussing net neutrality’s influence on high speed trading.

Lewis did a nice interview with NPR’s Terry Gross yesterday. URL. What an amazing mess.


Net neutrality’s influence on high-frequency trading? None at all. Net Neutrality is about public internet connections, where you’re sharing service with other people, and your ISPs and their equipment has to decide whose packet goes first if two packets arrive at the same time, and whose traffic rides for free vs. getting charged extra.

High-frequency trading can’t waste that kind of time, it’s something you run on private line because you can’t afford the extra few microseconds of waiting for somebody else’s packet, nothing (or everything) rides for free because you’re renting the whole pipe yourself, and you’re not letting the ISP’s routers route your packets because they might put something on a cheaper route instead of a shorter one, and you care about how many feet your packets travel because every foot costs you a nanosecond, and too many nanoseconds can cost you a trade.

Lewis’s book talks about one service provider who secretly bought up a lot of right-of-way and dug a lot of tunnels so they could run a fiber from Chicago (where the futures exchanges are) to New Jersey (where the stock exchanges are) that was 5ms shorter, about 30-40% faster than the next-fastest circuit from Verizon that probably ran along railroad rights-of-way (because that’s how most long-haul fiber in the US runs.) And then they walked into a bunch of HFT brokers’ offices and said “Hi, you want to pay us $10M to rent capacity on our fiber, because your competitors can now trade 5ms faster than you can”, and the brokers all cussed them out and paid them the money.

Some of this change happened because Moore’s Law is relentless. Some of it happened because technology change means that stock exchanges moved to computers instead of guys running around the floor of the NYSE and American Stock Exchange buildings yelling a lot. Some of it happened because once you’re on computers instead of in a physical building, it’s a lot easier to create competition and diverse markets. Some of it happened because the Stock Exchanges are now private businesses (with competitors.) Some of it happened because 9/11 meant that lots of financial business data centers moved out of Manhattan, over to New Jersey, paying much more attention to how physically diverse the real estate is and where every piece of cable runs, including how many feet the backup routes run, and what parts of New Jersey are too swampy for cables or have more or less reliable power or need new bribes for new politicians who otherwise won’t let you rent city right-of-way or whatever.

And a lot of it is because you don’t have to outrun the bear market to make a profit, you just have to outrun the other guy. And many of the other guys are trying to outrun you instead of the bear. But a few of them aren’t, like the guys in this story who figured out that most of the players in the market (including themselves) didn’t really know how the market really worked, and decided to change the system so finance could be about finance instead of cheating.


How is the publication on one book a one-sided discourse? Don’t the HFTs have more to say, more information to provide - aren’t they able to fully rebut all the claims?

Can you counter the “dark pools” argument? That would tarnish the idea that the US stock market is as transparent as investors need it to be. Can you say unambiguously that no investor has suffered in any sense due to HFT?

Even if only one bad apple used the signalling capabilities of a network to beat one trade, that would throw the entire system into question.

The only truth that matters here is whether investors’ cash was funnelled through a system that was not oriented to benefitting them. On the evidence thusfar presented, the question as to this occurring is a resounding “Yes”.

The book is totally one-sided. The vast majority of the articles about the book is also one-sided etc. Are you under the impression HFTs get equal air time? If you think HFTs can’t counter the arguments brought against them, look for the Manoj Narang debate on CNBC.

Dark pools is not an argument against the transparency of the US markets as a whole. They represent such a small portion of the US trading (~10%). They have to publish their trades at least and obviously they’re totally lit to the SEC. Fewer dark pools would be a step in the right direction - I agree. You do realize though that the IEX folks , Lewis’ buddies, are in fact a dark pool. Lewis IS advocating moving trades from a lit exchange (say BATS which publish lots of information on their website in the market date section) to a dark pool. Sweet, sweet irony.

The whole notion of beating one trade is entirely misleading. First, the number of trades where this could possibly happen is extremely small. It has to be a very large order. The average order on a stock exchange is less than 500 shares. Second, it’s all about placing a very large order without moving the market. It’s been a problem to solve for (very) large institutions since the beginning of the stock market. That an actor on the market is not allowed to take a partially filled very large order as a signal that the market is moving is entirely open to interpretation (see http://www.bloombergview.com/articles/2014-03-31/michael-lewis-doesn-t-like-high-frequency-traders for a detailed explanation).

There are tons of evidence that the current US equity is in fact good for investors

  • documented reduced commissions
  • documented reduded spreads
  • guaranteed executions at the best displayed price by regulations
  • price improvement programs for retails investors and others, see the BATS website (BB won’t let me paste the link)

Also realize that the average retail investor’s order does not make it to an exchange and could not be possibly executed by HFTs: http://www.businessweek.com/articles/2012-12-20/how-your-buy-order-gets-filled

If you’re trying to get me to say that no firm (HFT or otherwise) has ever done anything wrong or illegal, I will certainly not say that. Lewis is talking gross generalities about a whole industry, not about a particular firm.

I get it, but many institutions invest on behalf of individuals. Like me. If even 10% of the volume of trade has any distortion, I’m not getting the best possible deal - which is what I pay my agents to get.

What’s the overall annual trading volume in USD of the USA? So what does 10% of that make - that’s in the dark pools?

I do prefer a lit exchange.

The average order might be <500 shares, but that’s semantics. If we’re looking at averages, we should look at the average value of trades that suffered distortion.

I’m not saying the US equity market is not good (it’s better, for instance, than the Kuala Lumpur stock exchange) - but it is not as good as we should want it to be. And if anyone profits from that differential by gaming the system, that’s out of order.

Trading equity is breakneck capitalism. When the temptation and opportunity to exploit markets arise, a proportion of traders (who aren’t in it for the charity, are they?) will exploit that. That diverts money flows in the wrong direction.

I’ll let you google for the numbers but you seem to be assuming that trades on a dark pool have distortion. That’s not the case. To be clear, the alleged scenario that Lewis describes in his book happens precisely on lit venues. Dark pools have to provide the best available to their customers as well. But only the SEC can tell for sure if there are any violations while it’s much easier for a 3rd party to find out on regular markets.

Now back to the alleged distortion of large orders on lit venues. It simply does not exist. It’s stupid to think you can place a giant order that needs to be executed that needs to be routed to 6 different exchange and hope that either nobody will notice or nobody will think that your giant order will move the market. Take a different domain. Try to buy 20K play stations. Buy all the amazon, best buy ones. Then Walmart will hear about it and raise its prices. That’s just the nature of markets beyond a certain unit price

However, the transparency and technology of the US stock market allow ANY actor on the stock market that need to place a large order to do it intelligently. They’re plenty of people working for brokers whose sole job is to do that. They have come out to state very clearly that they can do their job better and cheaper than 10 or 15 years ago because of the lower commissions and spread. See for example http://webcache.googleusercontent.com/search?q=cache:http://online.wsj.com/news/articles/SB10001424052702303978304579475102237652362?mod=WSJ_Opinion_LEADTop&mg=reno64-wsj&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a&channel=sb

Another example, Vanguard - which basically only buys large quantities of stock who - claims that their executions are better and cheaper: http://www.bloomberg.com/news/2014-04-03/vanguard-says-minority-of-high-speed-traders-may-abuse.html

I’ll admit that obviously the market structure is not trivial and it takes a bit of studying. But this market structure is entirely due to SEC regulations (RegNMS in particular) and all market actors have to deal with the consequences (the good and bad ones).
I’d like to point out that when RegNMS was introduced a bunch of HFTs argued that it made the market too complex. The SECs has all the commentary for their regulation available on their website


Boing Boing won’t let me reply to you again. So I am editing this one.

You seem to believe that there is such thing as buying instantaneously a large number of stock (just like you would never be able to purchase 20K PS4s from retailers). But that does not exist on the US stock market. As I mentioned above, the market structure created by RegNMS basically prevents ANY large order to be executed instantaneously on the market and makes ANY partially filled order public information. I am just telling you that it’s not surprising when market actors react to public information esp if they think they’ll lose money if they do not.

I am not defending RegNMS or the current market microstructure. I think it’s probably the best one in the world but it certainly can be improved. If you bothered reading the links I pasted, you’ll know most large institutions understand the microstructure and know on to execute their large orders cheaply and effectively.
I mentioned Vanguard that made it clear that directly benefits investors instead of impacting them. Nobody is siphoning your 401(k) or mine.

Wrt Lewis, yes, I contend that he published a book full of inaccuracies and mistakes whose central point is a complete misunderstanding of the current regulations of the market. It seems he liked the story of new IEX buddies and never bothered to check his facts. Don’t take my word for it, look at all the links I pasted.
I don’t really know any people that understand the market and do not have some money in the game defending Lewis. Look for the CBNC clip with Manoj Narang and the NYSE floor trader: a NYSE floor trader is defending Lewis’s point of view, that’s the world upside down and that should tell you something. Tell me between this guy and Manoj who’s the Wall St insider…

Your generosity knows no bounds. I’ll put you on my Christmas card list.

So Lewis published an entire book, along with the entire team required to do that, criticising one of the most vocal, aggressive segments of society, all based on a stupid premise, knowing that the trading community would shoot him down in flames of derision and easily haul his reputation across the hot coals of public embarrassment? Huh. Note to self - don’t take publishing advice from Michael Lewis.

Not forgetting of course the innumerable reporters, editors and media managers who have published sympathetic accounts of Lewis’s book?

The point is, if you buy them simultaneously, there is no opportunity for the market to respond to the increased demand. Sellers have merchandise to sell, they determine an appropriate sticker price that they feel will shift their product at an appropriate speed and margin, and they advertise that price, and will witlessly sell 5k PS4s at that price, in utter ignorance of the purchases from other suppliers.

If, however, they get to hear about it, and they suspect someone is buying up all the PS4s in all inventories, they would be silly not to raise their prices, and their investors would certainly kick them if they didn’t.

But they can only hear about the purchases if there is not one moment in time that the purchases occur.

The equities market may have improved, but again, if one trader can exploit the system and divert profit to themselves that they would not have captured were the system working correctly, then the system needs to be fixed.

If all 401K holders realised that 5% of their growth was being siphoned off as margin due to a fractured system, they’d be angry. As luck has it, the average Joe doesn’t understand the possibilities for that, and no-one within the financial community wishes to publicise the possibility.

You’re defending the market and its practices; fair enough. Are you a participant? I am not. But let’s be clear so we understand points of view.

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