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Book Review by Maxwell Austin: Flash Boys

  • October 3, 2024

MaxEditor’s Note: Welcome to the 19th review in our Get Paid to Read contest series! Previously, Vasu Golyan shared his thoughts on Too Big to Fail.

You can explore the rest of the reviews we’ve published in our Reading List section.

This week we feature one of my personal favorite books, Flash Boys by Michael Lewis, reviewed by Maxwell Austin. Maxwell is an aspiring consumer discretionary investor.


Flash BoysDark Pools, front-running, and FBI agents arresting computer programmers–interested yet? These are all woven into Michael Lewis’ Flash Boys. Lewis uses his generational gift with the pen to expose high-frequency trading for what it is while spinning a captivating narrative of Wall Street insiders vs. idealists. Whether you have a Roth IRA or are an investment professional interested in the origin of HFT, this book is for you.

Lewis got the idea for the book by looking into issues that were foreign to the average investor before the Flash Crash, which occurred on May 6, 2010, at 2:45 pm. Why are unheard-of HFT firms responsible for upwards of 10% of daily traded volume in the stock market? Why are large banks paying millions of dollars for access to fiber-optic cables to cut a few milliseconds off their execution time? Why was the only employee arrested at Goldman Sachs in the fallout of the Great Financial Crisis, a computer programmer who took some open-source code for his next job?

Flash Boys brings light to a textbook case of Wall Street insiders incentivized to disregard the long-term effects of short-term decision-making without facing the consequences after the fact. Even immediately after the Great Financial Crisis, the banks went right back to screwing over their clients, ranging from hedge funds that have weathered multiple market cycles to the average consumer’s mutual fund. This is where the protagonist, Brad Katsuyama, enters the picture.

Brad was a trader at RBC; after he moved from Canada to the New York office and RBC hooked up their trading systems to a recently acquired electronic trading firm’s systems, he soon realized that the market was moving against him whenever he tried to place a trade for his clients. Over the course of the book, Brad assembles an unlikely team of misfits to expose high-frequency trading and develop The Investors Exchange (IEX), which drives superior execution quality for broker-dealers by eliminating slippage from HFT.

So, were high-frequency traders providing liquidity to markets? Well, technically, yes, but mostly no. In the early 2010s, latency was a foreign concept to the average population, bar the competitive PC gamers and those in and around high-frequency trading. Typically, market makers (e.g., CitSec, Optiver, etc.) are paid to “make a market” by creating liquidity, charge a spread between the bid and ask, and are paid for assuming the risk while takers send their orders to be executed. However, exchanges such as BATS (Better Alternative Trading System) would pay takers to place their orders on said exchanges. That got Brad thinking, why is this perverse practice occurring? After all, there is no free lunch, so there must be a reason makers are paying to be on the exchange and takers are paid to place orders.

The reason is BATS had a lower latency than other exchanges, so HFT firms would use these exchanges as a place to gather info. They would gather info by placing small bids or offers that were above or below market price. So why would brokers route their client’s large orders to initially go to an exchange with only a couple of 100 or thousand shares offered at the lowest price to buy or the highest price to sell? The reason is due to Reg NMS (Regulation National Market Security). Reg NMS requires brokers to find the best market prices for the investors they represent. Brokers lost their ability to use discretion when it was clear that buying a smaller amount of shares slightly below market would give away their hand for the rest of the order. So, for a cheap price, the faster HFT firms can front-run orders for a small initial loss. Reg NMS was passed in 2005, the same year when the NYSE announced plans to merge with Archipelago, making it a “for-profit” corporation rather than the utility it had been operating as since it became a not-for-profit corporation in 1971.

All the liquidity HFT firms provide is bait for unsuspecting fish. Once the broker-dealer bites, the HFTs bid the market up or down in front of large orders. This was what Brad noticed when the market was behaving erratically and seemed to be predicting every move, which he had not experienced before in his career as a trader. One of the most criminal aspects of high-frequency trading was how banks’ own electronic trading divisions would trade against the clients’ orders they were executing. When Brad realized what high-frequency trading was and some of the other morally ambiguous and outright fraudulent activities of some of the larger banks, he realized he could make a difference by creating an exchange that worked for investors instead of against them.

The circumstances above led to a speed arms race. Every trading firm’s servers had to be co-located within the same data center as said stock exchange matching machine; everyone wanted the lowest latency responses, and speed was everything. Because although the vast majority of retail and institutional investors were nowhere near the lightning-fast latencies as high-frequency trading firms, it is a winner-take-all game.

A study by Berkely researchers, cited in one of the footnotes of Flash Boys, found that the discrepancies between Apple’s stock price on a typical market processor and lower latency trading channels differed by over 55,000 times a day. Michael Lewis does a great job of shedding light on the foreign world of high-frequency trading while spinning a captivating narrative. Whether you want to learn more about the origins of high-frequency trading, understand what people are referring to when they use the term, or enjoy a classic Michael Lewis story with a compelling narrative of outsiders with integrity versus a broken system, Flash Boys is an enjoyable and informative read well worth your time.