Flash Boys - Michael Lewis

I left finance recently, so I'd claim I have a reasonable understanding of it, without too much personal investment. So, I mostly read this book to see what Mr. Lewis made of high-frequency trading, rather than to learn things, although I must admit I did learn some stuff.

The narrative of the book concentrates on a group of people working at RBC who were starting to figure out how HFT was working around 2008. The book paints the area as a mystery, but... I don't think it really was. It's a very secretive area, sure, but the (profitable) devil's in the details, and a lot could be inferred from the wider shape without digging too far down. The degree to which it's treated as a detective story is a bit unfortunate, making the characters seem a little incompetent to me, rather than it feeling like a hard mystery to crack.

I must admit, I've interviewed for jobs in HFT, and considered it as an area to move to. I don't have a strong philosophical objection to it - it's effectively making money by solving interesting technical challenges, and market microstructure stuff is far away from the causes of the global financial doodah. The zero-sum arms race element looked depressing, and I didn't want to move to an area that looked like it could be killed off any moment by new regulation. And here we are, years later, and nothing's changed!

So, much is made of how the people at RBC didn't know what was going on, and the big hedge funds and pension funds didn't either. This is pretty horrific to me. They are moving a lot of money around, and these costs are considerable, and if they're not paying attention to that, they're basically incompetent. As the saying goes, "Look around the poker table; if you can't see the sucker, you're it". (*)

(*) This is not to say win-win business deals can't be made in finance, or that everything is purely cynical money-grabbing - the point is that you will often be dealing with mis-aligned incentives and the like, and it's important to be very aware of that, if you want to have a pleasant time.

The book lays the blame on the HFT companies and the brokers that steer flow to them, but the funds are another layer of people dealing incompetently with other people's money. Furthermore, there have always been people making money from information advantages. Traditionally, it was the brokers, now it's HFT.

Going back to RBC, there are quite a few interesting insights. In the crunch, RBC was able to hire people from big banks they would never have managed to take otherwise - "By the time he was finished picking their collective brains, he had spoken to more than a hundred employees at too-big-to-fail banks but hired only about thirty-five of them." Only? They're hiring one in three interviewees. That's horribly unselective, even with decent initial screening, and they're probably not doing that because part of the point of interviewing was also to extract information from the rest of the market. Quite how unprestigious a place it was had never been so clear to me!

There are some good bits to this book. Zoran's view of complex systems is interesting and a good sign of experience. Nanex and a few other well-informed sources are referenced. The book digs into the inner details of particularly grotty... well, not regulatory capture, but perhaps "exchange capture" by the HFT companies.

The contents of the book aren't really surprising, and the presentation is a bit hyperbolic. However, it's pretty entertaining, and the central premise, that the markets (the same as ever) aren't set up for the optimal benefit of the end users, is hard to deny. The same cynic who is not surprised by the revelations of the book is also not surprised that not much has changed since it was published. On the other hand, the book's "fair" market - IEX - is still trading, with around 1% of the market by volume - a pleasant surprise!

Posted 2015-06-19.