Michael Lewis, the revered author of The Big Short, brings us yet another sharp insight into the confounding and often shady world of finance: Flash Boys: A Wall Street Revolt. This book specifically focuses on the role of high-frequency traders by following the journey of numerous individuals who all arrive at the same conclusion: that financial markets are rigged against the investor. Overall, the book is both illuminating and intellectually stimulating, posing enlightening questions that are often ignored in the wake of making a trade.
In the era of consumerism, it is very hard to turn down a free experience, and business models selling data for targeted advertising have therefore become both effective and popular. Companies will sell ‘your data’ to other companies so that advertising can become more targeted and more individual and thus effective. The trading platform Robinhood does alike. Contrary to the name and supposed values of the company, Robinhood takes from the poor and gives to the rich by selling customers’ buy or sell order information to high frequency traders (HFT) so that they can front-run you, giving you a worse price while taking a profit.
That all sounds very complicated, and it is. The essence of it, as Lewis concisely explains and investigates throughout Flash Boys, is that everyone walks away with a hefty paycheck, except the investor – they lose out. In this analogy, Robinhood is happy, as the sale of your information is profitable to them. The HFT firms are happy too, as they get to buy a stock before your order is filled, meaning that your order pushes up the price and they can sell for a profit (all within a fraction of a second). Finally the market makers are also happy, as they get more liquidity and therefore larger commissions. This leaves you as the investor short-changed, a consequence that leaves the protagonists of Flash boys raging at times as they come to terms with the fact that ordinary people are getting poorer as their pension funds are being eaten at the edge.
Throughout Flash Boys, Lewis considers the market makers as the ones playing the role of Robinhood, by selling your data to the HFTs. while Lewis follows the journey of a collection of individuals who all figure out what the market makers are doing and act to change it. Our main protagonist, Brad Katsuyama, rounds up a team of like-minded individuals, who have come to the same embittering conclusion that the market is rigged, in order to create and open a new exchange. This exchange called the Investors Exchange (IEX), is the real Robinhood of our financial markets as Lewis explains in the book, making an attempt to limit the enormous profits HFT firms are taking home. These profits which are comprised entirely from skimming off the top of retail investors and pension funds alike. The average person, therefore, would be better off without the interference and existence of HFT firms.
This book is thrilling, more so than any other non-fiction book I have read. It follows the true stories of real heroes: a group who have the passive option of staying quiet and taking home 7-figures salaries but instead fight, often at their own detriment, for the good of the investor. Brilliantly written and thoroughly explained, Michael Lewis’s Flash Boys is accessible to anyone with a vague interest or understanding of finance. With a bit of computer science included for good measure, this book is the most amazing concoction of topics all coming together in a completely true tale that leaves you astounded at the range of integrity in the financial world.