Weekend Reading: Flash Boys

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flash boys

I admit to being a Michael Lewis fanboy. I consider him one of the best business writers. He has a knack for using characters as a lens to explain an issue.

The issue in Flash Boys is high frequency trading. Or high speed trading. Or electronic trading. It’s a bit of a confusing mix. Uncharacteristically, Lewis seems to stumble a bit around what the problem is. I think that is in part because the problem is complicated in a technical, legal and financial directions. Many of the people involved don’t fully understand it. Those that do fully understand it don’t want to explain it. They are too busy making money exploiting the issue.

Based on the speed you receive information, you can trade on that information and make money if you find out faster and trade faster than others. That has been true since markets existed.

For stock exchanges, the days of floor pits and individuals yelling buy and sell orders are long gone. It all happens in server stacked on top of each other with an algorithm matching buy orders and sell orders. There are multiple exchanges where trades can take place. That’s good for competition and innovation.

But those exchanges are located in different places. Not necessarily far apart, but milliseconds or microseconds apart. Just far enough that watching trades happen in one exchange can give a strong indication about what will happen in another exchange a bit further away. High speed traders exploit that information and make money. Lots of money if they are fast enough.

Lewis explores the issue in great detail and provides a good understanding. He uses Brad Katsuyama, a trader at the Royal Bank of Canada, as the focal point of his story.

The most disappointing part of the book is that it ends without resolution. The problems with high speed trading are still in the system and its hurting investors not involved in high speed trading.

 

Author: Doug Cornelius

You can find out more about Doug on the About Doug page

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