Saturday, May 31, 2014

Book review: "Flash Boys" by Michael Lewis

Michael Lewis, author of the acclaimed "Blind Side" and "Money Ball", recently published a book about high speed trading on Wall Street.  His new book is called "Flash Boys", and this is a review of it.  A very positive review of it.  Michael Lewis has done it again.

About ten years ago, at a party in Princeton, NJ, I (who am a computer programmer who was then teaching computer science at the Univ. of Penn.) had a long conversation with a young mathematician working on a high-speed trading platform for "a small company" in Princeton, NJ.  This young man was full of enthusiasm for his work--it was going to be wonderful (and I was thinking, it's going to make someone a ton of money--but not for people like me).  I listened with half an ear and an inner sense of disgust.

In "Flash Boys", there is described just such a group of high-speed trading software developers, in (of all places) Princeton, NJ at about the time I met this young man.  As with each of Lewis' previous books, which I have also read, this one is a tour de force.  If most of us already wondered, in regards to financial matters on Wall Street, whether the whole thing were not rigged against us, the average EveryMan, now we can be certain of it.  Because Lewis can tell the story in terms that lay people can understand.  And it is a story that, until recently, even supposed experts in financial matters were not necessarily sure of.

It didn't take long for me to develop a feel for the odd, and to me unfamiliar, lingo of the financial world: "the flow", "flash trades", "the hammer", "prop shops", and arbitrage, to name a few.  The appearance of "Boys" in the title is accurate: this is a world of men, testosterone, vicious competition, and high risk.  It is no longer a safe world for EveryMan's retirement investments, or at least, not unless people are willing to pay the hidden, unacknowledged "tax", or percentage of all trades being skimmed off by the high-speed traders on practically every transaction now occurring on stock markets.  The hidden tax does not benefit anyone, except the rarified owners, employees and partners of high-speed trading ventures.

And how do they do it?  This work of non-fiction unfolds like a detective story.  It is, perhaps, mainly the story of one small group of financial workers, sheltered within one Canadian bank, who set out to try and find out what was really happening, and eventually succeeded in uncovering (and explaining to Michael Lewis) how the hidden tax works, how it is inadvertently legal, and why the government regulators have no incentives to stop it (their career path, if they leave the government, is in fact to be hired by high-speed tradings).

The reviews of Lewis' book that I have read, including the New York Times Book Review, do not do this book justice.  If anything, they tend to dismiss the author as paranoid, or exaggerating, or mistaken.  His is "just an opinion".  What?  Not only does he provide names and dates for every nail he drives into this story, but it also dovetails with everything I had perceived over the years, having been acquainted in my profession with both telecom matters and financial programming salary incentives and the rumored drive for ever-increasing speed in trading platforms.  I don't detect anything of paranoia at all.  Nor even of the kind of rage and frustration that many of us of the EveryMan variety must feel towards Wall Street, which has abused the public trust far beyond the wildest expectations even of a sceptic like myself.

The most amazing thing is that Lewis has also managed to make the sobering and sorry tale into a gripping, and sometimes amusing, story.  That is his talent, to expose complex material to lay persons in that field and to bring not only understanding but compassion to the process.

Even if you are certain that you hate Wall Street and all matters financial, consider reading this excellent book.  It will further your understanding of how the world now works, even of how it has always worked, and you may find yourself amused along the way.  And you might just decide to manage your financial resources a little bit differently as a result.

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