Flash Boys: A Wall Street Revolt
“Flash Boys is mandatory reading for anyone who has ever owned a share of stock or might do so in the future. It’s the clearest indication yet of why they ought to hang a sign on Wall Street, and now on the 45 locations in New Jersey where the real stock market exists: Enter at your own risk.”
Michael Lewis, the preeminent chronicler of the excesses of Wall Street, has done it again. He’s better than anyone on the planet at sussing out the stories that show exactly where and how the geniuses of financial investing are essentially tanking the economy. Flash Boys is his latest installment.
The book makes a compelling case that pretty much every American who invests in stocks, from your Aunt Millie’s investment club all the way to giant-sized retirement funds, get ripped off every single time they buy or sell a share of stock.
The key term here is “front running,” which means that Wall Street has discovered ways to see your buy or sell order, jump in front of it, and charge you more to buy or sell the shares you desire.
In fact, Lewis explains, there is no longer a “stock market.” Instead, there are over 45 markets on which any given order might be traded on any given day. The problem is that you, as an individual investor, have absolutely no way of knowing which market out of those 45 your order was traded on. Nor can you tell how much money you left on the table when Wall Street exacted a tax from you.
It’s a little like those guys who stole identities of Target shoppers. They may have only taken a couple of bucks from each shopper, but it adds up fast. In this case, the amount that Wall Street frontrunners basically steal from investors runs into the billions and billions of dollars. We’re talking Carl Sagan numbers here.
It gets worse. Many of the biggest name brands on Wall Street essentially have their own stock markets called “dark pools,” something you might expect on Star Trek and not in lower Manhattan. A dark pool is a mini-stock market where companies like Goldman Sachs or Credit Suisse match buyers and sellers, keeping their orders for themselves instead of bringing them to the broader marketplace for stocks. The problem is that each of these companies controls only a small percentage of the marketplace for stocks. So how do you know if you are their customer that they are putting your interests above their own and making sure that you are getting the fairest possible price when you buy or sell?
You’ve probably guessed by now that you cannot figure that out and that the temptation for these big investment houses to put their priorities above yours is just too much for them to avoid.
Every epic needs a hero, and in this case, it is the “Canadian Nice” Brad Katsuyama, a young employee of the Royal Bank of Canada or RBC, the ninth-biggest bank in the world, but a virtual unknown on Wall Street.
Katsuyama is perplexed when trades he attempts vanish into the ether. Actually, it’s not really the ether. It’s New Jersey, where dozens of these hidden stock exchanges exist, with investing groups paying small fortunes to build either next door to these markets or actually inside them, so as to transmit and receive information about trades a few milliseconds faster than the next guy.
Painstakingly, Katsuyama puts the puzzle pieces together and discovers the awful truth: that Wall Street, which brought you the subprime loan scandal and subsequent meltdown of the U.S. economy, is doing it again. What happens, Katsuyama wonders, if suddenly American investors wake up to the reality that they are being screwed six ways to Sunday? What will happen to the stock market then? Will the economy tank?
And what about Naomi? Once Katsuyama puts the puzzle pieces together, he takes an astonishingly brave and potentially career-destroying step: He decides to start his own stock market, assisted by an international team of experts who are stupendously brilliant and at the same time use many expletives. Imagine George Clooney playing a 26-year-old Asian Canadian, assisted by an Ocean’s Eleven type crew who, individually and collectively, are absolutely the last people you would expect to transform Wall Street.
Spoiler alert: The new stock market they create actually works, bringing transparency and fairness to the wilds of Wall Street. Along the way, we also meet a Chicago-based trader with a face out of a Walker Evans photograph who decides to build his own information pipeline from Chicago, through the mountainous miles of Pennsylvania, and all the way to New Jersey, and then a Russian programmer so profoundly asocial that he doesn’t even mind getting arrested for a financial crime he didn’t commit.
The book is a little harder to follow—okay, make that a lot harder to follow than many of Lewis’s previous works, from Liar’s Poker through his sports books, The Blind Side and Moneyball. But there’s nothing wrong with sitting up straight and paying attention to a master storyteller who has the ability to take abstruse financial concepts and make them not just real but compelling to the reader.
And on top of that, he has very nice hair.
Flash Boys is mandatory reading for anyone who has ever owned a share of stock or might do so in the future. It’s the clearest indication yet of why they ought to hang a sign on Wall Street, and now on the 45 locations in New Jersey where the real stock market exists: Enter at your own risk.