Flash Boys: Michael Lewis' Latest Book Makes Waves Across the Capital Markets

I don't think I've ever seen a business release generate such discussion in such a short period as Michael Lewis' Flash Boys. Removing good or bad from the equation, nobody can deny that the book has stimulated fierce debate among both market practitioners and the market commentariat, not to mention the vendor space, judging by the sheer number of e-mails I've received offering comment on it. Guess what most of them said...

Waters doesn't run reviews as a rule, or at least, not product reviews, the reasons for which are obvious. But I started my life as a journalist on literary desks, so if you'll permit me a few paragraphs, I think a dissection of the book is a key part of understanding a lot of the fire and fury that it's provoked since its UK release on Monday (March 31, 2014).

Lewis is, of course, a well-known writer through both his journalism and previous novels. Liar's Poker, a bildungsroman of his experiences as a bond trader during the 1980s provided incisive and meaningful observations, not just on his journey at Salomon Brothers, but in a wider commentary on Wall Street in general. It became a sensation, and Flash Boys follows that trend, except this time it's not semi-autobiographical, but focuses on the journey of a Royal Bank of Canada (RBC) executive, Brad Katsuyama, from participant to proselytizer about the effects of high-frequency trading (HFT) on the market structure.

Easily Likeable
Lewis writes with élan and fluidity, his inter-narrative style infectious and easily likeable, while giving his prose an authoritative sense of instruction and purpose. The wider structure of the book is choppy, to say the least, with a change in dramatis personae early on, a desultory attitude toward chronology, and an overriding sense of confusion in both target and purpose. He veers between writing for the lay reader, with an inordinate number of footnotes and simplified explanations of processes underpinning some of the more esoteric aspects of the market, through to assuming in-depth capital markets knowledge on the part of the reader by casually dropping in industry-specific terms. It requires a base of knowledge, albeit relatively small, to read through it, with the kind of inertia that the writing is geared toward.

And that, in itself, is the central problem with Flash Boys. It has an agenda, and makes no excuses for, or obfuscation, of it. It's one quarter entertainment, one quarter long-form journalism, one quarter company profile, and one quarter treatise on market structure. But for all of these aims, it never quite satisfies any one direction. The entertainment factor is hampered by the technical nature of the subject matter, while the journalism aspect is corrupted by its one-sidedness when addressing the broader HFT issue. The company profile is not objective, and is curiously off-putting by its canonization of the central cast, while the treatise is flawed through the lack of data and recognition of current trends.

Nobody wants to be called a crook, and indeed, compared to boiler-room operations and Ponzi schemes that genuinely ruin the lives of ordinary investors, HFT does seem to get more than its fair share of criticism.

Violent Opposition
Much of the criticism of Flash Boys, both from people such as Bats Global Markets' president William O'Brien and respected columnists in the form of Felix Salmon focus on this. HFT volumes have dropped, after all, and the practice is not as profitable as it once was. The book hardly spells out anything revelatory for anyone inside the industry, although it will likely be a scare factor for those middle-class investors who do put money into the market and have some knowledge ─ but not an overall perspective ─ of how the mechanisms of modern trading work. Anyone who has read Scott Patterson's excellent analysis of how electronic trading grew from its birth to the current day in Dark Pools will find little to be shocked at in Flash Boys, while the cautionary tale of how impenetrable Satyajit Das's otherwise formidable Traders, Guns and Money can be, should demonstrate how an over-reliance on technicals can bury the lede.

As previously mentioned, however, it's not clear whether the book is aimed at mom and pop, despite their sector being the ones who apparently are jilted by the markets, or whether it's simply conceived to foster wider discussion of the market structure. This is why I find it difficult to understand the outrageously public, and at times unreasonable, debate.

Nobody likes to be criticized, least of all firms in the financial services industry where reputation is everything. Nobody wants to be called a crook, and indeed, compared to boiler-room operations and Ponzi schemes that genuinely ruin the lives of ordinary investors, HFT does seem to get more than its fair share of criticism. But there has been an undercurrent of discussion around the perceived unfairness of the practice for years now, notably led by individuals such as Sal Arnuk and Joe Saluzzi of Themis Trading, and Eric Hunsader of Nanex. The unfortunate direction of the publicity has meant that the genuine discussion that should be taking place as a result of the book's content has been replaced with a polarized argument between venue operators and sycophantic vendors, and people such as Lewis and Katsuyama, delineated by a television-show strapline that says: "The markets are rigged."

Something For Everyone
Essentially, Flash Boys gives you what you want. If you go into it believing that HFT is a scalping operation designed to make money at the expense of pension plans ─ a gross simplification in my view ─ then you'll find plenty of anecdotes to bolster that notion, backed up by a beautiful, if somewhat insidious, style of narrative flow. If you believe that HFT benefits the market through increased liquidity, tighter spreads, reduced trading costs, and a decentralization of the old, corrupt regime of brokerage ─ another gross simplification of HFT's overall effects ─ then you'll find that too, in addition to a wealth of other information in the surrounding commentary to help validate your opinions. And let's not overstate the effect that has been cited in recent days: The FBI's investigation into HFT began over a year ago, and Eric Schneiderman's closer look at co-location was announced weeks before this book was published, although he has since referenced it.

At heart, the story isn't HFT in Flash Boys ─ it's the journey of Brad Katsuyama and others from RBC's electronic trading division learning about HFT, finding a related technology solution, and eventually taking the risk of starting out on their own in the finest traditions of pious capitalistic fervor. HFT is a driver of that central narrative mechanism, but it's not the machine itself. The frenzy around this is simply not justified. While it raises valuable arguments about how the market structure has changed, it fails to take a dispassionate approach to asking the basic question of whether that is necessarily a good thing. It just assumes the answer.

The views expressed in this editorial are those of James Rundle. Therefore, they are not a proxy for, and do not represent, the views of Waters magazine or Incisive Media.