BookNotes: Flash Boys: A Wall Street Revolt
By Michael Lewis, W. W. Norton & Company, March 23, 2015, 0393351599
Flash Boys is complex book about a complex subject. It’s real, and written well. Michael Lewis is no stranger to writing about complex subjects, and I’m glad he took up this subject: the crazy business of high frequency trading.
I learned a lot in the book. I’ve worked in financial modeling, and I know people who worked in high-frequency trading. Lewis does a great job of documenting the details, which matter. If nothing else, the business is about little details that allow some people arbitrage their inside knowledge. Can you run your own wire from NY to Chicago, why not? An important detail.
The fact that people were crushed by rich people makes me angry, especially people that worked hard for the rich. You probably don’t know about Sergey Aleynikov. I didn’t.
Definitely a good read. It took me about two weeks in the late summer of 2017.
[k42] I’d thought it strange, after the financial crisis, in which Goldman had played such an important role, that the only Goldman Sachs employee who had been charged with any sort of crime was the employee who had taken something from Goldman Sachs. I’d thought it even stranger that government prosecutors had argued that the Russian shouldn’t be freed on bail because the Goldman Sachs computer code, in the wrong hands, could be used to “manipulate markets in unfair ways.” (Goldman’s were the right hands? If Goldman Sachs was able to manipulate markets, could other banks do it, too?) But maybe the strangest aspect of the case was how difficult it appeared to be–for the few who attempted–to explain what the Russian had done. I don’t mean only what he had done wrong: I mean what he had done. His job. He was usually described as a “high-frequency trading programmer,” but that wasn’t an explanation. That was a term of art that, in the summer of 2009, most people, even on Wall Street, had never before heard. What was high-frequency trading? Why was the code that enabled Goldman Sachs to do it so important that, when it was discovered to have been copied by some employee, Goldman Sachs needed to call the FBI? If this code was at once so incredibly valuable and so dangerous to financial markets, how did a Russian who had worked for Goldman Sachs for a mere two years get his hands on it? At some point I went looking for someone who might answer those questions. My search ended in a room looking out at the World Trade Center site, at One Liberty Plaza.
[k738] Brad had no idea how dark and difficult the picture he’d create would become. All he knew for sure was that the stock market was no longer a market. It was a collection of small markets scattered across New Jersey and lower Manhattan. When bids and offers for shares sent to these places arrived at precisely the same moment, the markets acted as markets should. If they arrived even a millisecond apart, the market vanished, and all bets were off. Brad knew that he was being front-run–that some other trader was, in effect, noticing his demand for stock on one exchange and buying it on others in anticipation of selling it to him at a higher price. He’d identified a suspect: high-frequency traders.
[k1089] Brad had observed and encouraged a lot of Wall Street careers, but, as he said, “I’d never seen anyone’s star rise as quickly as Ronan’s did. He just took off.” Ronan, for his part, couldn’t quite believe how ordinary the people on Wall Street were. “It’s a whole industry of bullshit,” he said.
[k1749] “I was totally shocked when John started to pull out these resumes,” he recalled. “The banks had adopted a policy of saying as little as possible about what they were actually doing. They’d fire people for being quoted in the newspaper, but in their LinkedIn pages those same people said whatever they wanted.” From the way the engineers described their roles in the new financial system, he could see that they had no clue about the injustices of that system. “It told me that these tech guys were completely oblivious to what they were working on,” he said. “They were tying these things they were working on–helping the bank to make markets in their dark pools; building automated systems for the bank to use with its customers–in a way you never would if you understood what the banks were doing. It’s like saying on your LinkedIn profile, ‘I have all the skills of a robber and I know this one house intimately.’ “
[k1789] He wasn’t religious in any conventional sense, but he’d been born a Jew, which had been noted on his Russian passport to remind everyone of the fact. As a Jew he expected to be given especially difficult entrance exams to university, which, if he passed them, would grant him access to just one of two Moscow universities that were more accepting of Jews, where he would study whatever the authorities permitted Jews to study.
[k1799] He applied to switch his major from mathematics to computer science, but the authorities forbade it. “That is what tipped me to accept the idea that perhaps Russia is not the best place for me,” he says. “When they wouldn’t allow me to study computer science.”
[k2298] “You are designing a system,” said Puz, “and you don’t want the system to be gameable.” The trouble with the stock market–with all of the public and private exchanges–was that they were fantastically gameable, and had been gamed: first by clever guys in small shops and then by prop traders at the big Wall Street banks. That was the problem, Puz thought. From the point of view of the most sophisticated traders, the stock market wasn’t a mechanism for channeling capital to productive enterprise but a puzzle to be solved. “Investing shouldn’t be about gaming a system,” he said. “It should be about something else.”
The simplest way to design a stock exchange that could not be gamed was to hire the very people best able to game it, and encourage them to take their best shots.
[k2569] But these investors had no way of determining if the Wall Street brokers followed their instructions and actually sent the orders to IEX. The report investors typically received from their brokers–the Transaction Cost Analysis, or TCA–was useless, so sloppily and inconsistently compiled as to be beyond analysis. Some of it came time-stamped to the second; some, time-stamped in tenths of microseconds. None of it told you to which firms or markets your order was sent. As a result, there was no way to determine the context of any transaction, the event immediately before it and the one immediately after.
[k2868] “I know what to do when things are exploding around me,” he later said. “But when nothing is exploding, the overthinking comes into play.”
[k2954] In a stock market now defined by its technology accidents, nothing actually happened by accident: There was a reason for even the oddest events.
[k3221] Watching him string together sentences without profanity was like watching someone try to swim across a river without using his arms or his legs.
[k3595] At one point, one of the people at the table stopped the conversation about computer code and asked, “Why aren’t you angry?” Serge just smiled back at him. “No, really,” said the juror. “How do you stay so calm? I’d be fucking going crazy.” Serge smiled again. “But what does craziness give you?” he said. “What does negative demeanor give you as a person? It doesn’t give you anything. You know that something happened. Your life happened to go in that particular route. If you know that you’re innocent, know it. But at the same time you know you are in trouble and this is how it’s going to be.” To which he added, “To some extent I’m glad this happened to me. I think it strengthened my understanding of what living is all about.” At the end of his trial, when the original jury returned with its guilty verdict, Serge had turned to his lawyer, Kevin Marino, and said, “You know, it did not turn out the way we had hoped. But I have to say, it was a pretty good experience.” It was as if he were standing outside himself and taking in the situation as an observer. “I’ve never seen anything like it,” said Marino.
[k3625] His mind still worked fine, though, and a lifetime of programming in cube farms had left him with the ability to focus in prison conditions.
[k3814] Anyone in an established industry who stands up and says, “The way things are being done here is totally insane; here is why it is insane; and here is a better way to do them” is bound to incur the wrath of established insiders,
[k3963] If this story has a soul, it is in the decisions made by its principal characters to resist temptation of easy money and to pay special attention to the spirit in which they live their working lives. I didn’t write about them because they were controversial. I wrote about them because they were admirable. That some minority on Wall Street is getting rich by exploiting a screwed-up financial system is no longer news.