Michael Lewis is less a journalist than an advertiser of ideas. In books like Moneyball, The Big Short and The Blind Side, he crafted narratives that created intellectual brands. Brands that stuck. More than any other popular writer, Lewis has the ability to spur epistemological change. His books can alter the way the public thinks about and conceives of entire worlds, from baseball management to football pass protection to the subprime mortgage crisis.
Little wonder, then, that when Lewis’s new book was released this April, it caused something akin to full-on panic in certain financial circles. Flash Boys is vintage Lewis: a tear-ass adventure story about crazy outsiders fighting a system gone wrong. Like all Lewis books, it has verve. It has energy. And it has a big fat Wall Street villain—in this case, high-frequency trading—sitting right in the middle.
In Flash Boys, Lewis argues that the financial system has rigged the markets in favour of high-frequency traders. Ordinary investors, he says, are losing billions to unscrupulous middlemen who gain huge profits without taking any risks. Worst of all, the very bodies that should be looking out for investors and market fairness—the big brokers and public exchanges—are helping the middlemen along. Little in Flash Boys will be new to the expert audience. But the expert audience isn’t the point. Lewis wasn’t the first to write about advanced statistics in baseball; he was the first to give it a Hollywood script and make the rest of the world care.
And make no mistake, people care about what’s in Flash Boys. In the first week the book was on shelves, Virtu, a large high-frequency trading company, delayed its IPO; KCG Holdings, another big HFT player, saw its stock drop 15%; E-Trade, Charles Schwab and TD Ameritrade, brokers that together earn hundreds of millions of dollars by selling orders to high-frequency traders every year, saw their stocks tumble; Eric Holder, the U.S. attorney general, announced a federal probe into HFT; the FBI, the SEC and at least two other bodies confirmed their own investigations; the New York Times published 41 stories, blog posts and columns that mentioned the book while the Wall Street Journal put out 43; and the entire high-frequency trading world organized a concerted, borderline frantic defence of its business, debating Lewis on CNBC, penning op-eds and telling anyone who would listen that it was not the financial manifestation of Beelzebub, here to create Lucifer’s kingdom on Wall Street.
Lost in all the panic and hype was much of Flash Boys itself. For all the post-publication focus on high-frequency trading, Lewis spends very little time with high-frequency traders in the book. Instead, he zeros in on an unlikely hero: a Canadian trader, working for the Royal Bank of Canada in New York, who almost by accident became Wall Street’s leading critic and combatant of HFT.
Brad Katsuyama, a former football player at Wilfred Laurier University in Waterloo, Ont., had been buying and selling stocks for RBC customers for years. It was a relatively simple process: If his trading screen showed a particular number of shares available at a particular price, he could buy those shares at that price. But sometime in the spring of 2007, the whole thing went a little wacky. As Lewis describes it, Katsuyama would enter an order, hit the command to execute and then watch the available shares disappear.
Katsuyama would later learn he was being “front run.” High-frequency traders were using superior connection speeds and access to exchanges to suss out his orders and get ahead of them in the market. If, for example, he wanted 10,000 shares of Apple, the HFTs would know about it after he bought the first 100. They’d rush in, buy the other 9,900 and drive up the price. All of this took place in a fraction of a second. And to Katsuyama, it was deeply unfair.
To fight back, Katsuyama created a product at RBC called “Thor.” By delivering an order to all exchanges simultaneously, Thor could thwart the HFTs, who relied on tiny lags between delivery times. Katsuyama left RBC and set up his own exchange, called IEX, built on the Thor principle. Financed primarily by large mutual and hedge funds, the exchange opened for business last year. Its motto:“A Market that Works for Investors.”
Much of the drama near the end of Flash Boys relies on the “will they/won’t they” tension of Katsuyama and his team (including another Canadian, Robert Park), trying to set up their business in the face of concerted opposition from various Wall Street power players. Two different reviews in the New York Times said the book was sure to make readers’ blood boil. And Lewis at one point has a character’s internal monologue describe the “entire history of Wall Street” as the “story of scandals…linked together tail to trunk like circus elephants.” But on a much more significant level, Flash Boys is a subversively pro-business book. It might be the most optimistic story about Wall Street published since the end of the financial crisis.
A rigorously constructed morality tale with a well-paid Wall Street investment banker as its hero, Flash Boys could hardly be confused for Das Kapital. Instead, it’s the story of banking insiders who saw a problem and decided to fix it rather than exploit it. The solution they devised involves private-sector innovation, not government regulation. And they succeed thanks, in part, to the help of hedge-fund billionaires like Bill Ackman and David Einhorn. It’s practically a Wall Street fairy tale.
If anything, the Flash Boys narrative is a bit too neat. Like all Michael Lewis books, it’s a fabulous read. But it also feels like an incomplete one. There’s no ambiguity here. No doubt. No sense that the story might be blurrier than Lewis lets on. And while Lewis is certainly the most gifted business storyteller of his generation (sorry, Malcolm Gladwell), that doesn’t make him the best business journalist. To read Flash Boys—or really any Lewis book—is to be constantly entertained yet constantly bothered by the nagging wonder of what the writer might have left out.