Thursday 3 September 2015

Book review : Flashboys - Michael Lewis

16:53 Posted by G No comments

Michael Lewis is a great writer in my book, the ability to find an interesting story to tell in the first place is a decent trick, but then to research it, and distil a complex story to make it readable and entertaining for the average bloke is a real skill. I read Flashboys over a couple of days on holiday, and had trouble putting it down.

It’s not a subject that I know about High Frequency Trading (HFT), although working at the slower end of financial services I've come across people who left my teams to move into this space, and been peers of some of the banks that are mentioned in the story.

Flashboys is essentially opening the veil of secrecy between big Wall St. Banks, their dealers, and high frequency traders. It starts in 2007 with a new fibre optic line between New York and Chicago, which cuts 3 milliseconds off there round trip time. It cost $300m to install, and made about $3bm in sales, so that HFT could buy and sell stocks quicker that other traders and make a profit without taking any risk (many HFT’s boast about never making a loss, which is no great shakes when you can see the other players card, and you’re not actually taking any risk).

It’s a great expose of a very murky world, where everyone was making money (bank, dealer, exchange and HFT) and the poor general public were losing out; it was as Lewis describes a tax on dealing that the HFT companies were making. Having read this much I was intrigued as to how the main character in the story (Brad Katsuyama a trader a Royal Bank of Canada ) would try to fix the problem, in the end what he did was to set up a completely fair exchange where there was no selling of data to competitors, no deals to buy or sell on the exchange, and that they (counter-intuitively) deliberately slowed down all access to their new exchange so that no-one could gain an unfair advantage. This made it fair to everyone and becoming (I think the book was first published in 2012) a successful exchange. I find the idea that they slowed it down by coiling up 38 miles of fibre somewhat unusual but there more to that story than is in the book I'm sure.

What makes the book interesting it that it’s written around about 10 main characters, most of whom get a decent back story so you can empathise where they came from, and why they were motivated to do what they did (some interesting links to 9/11 in there as well). There’s also quite an extensive piece on a Russian coder who worked for Goldman Sachs and was arrested for storing source code in an open code repository. What’s clear is that his case was the blind leading the blind, and a stunning miscarriage of justice, which puts the fear of god into me about the american legal system (I've not got any confidence that ours would be much better).

What I guess is most surprising is that this could be a complete fictional tale, but it isn't, it’s all true and rather scary. Overall a great read, and if you've read Liar’s poker, Money ball or 'The new new thing' you’ll really like this (even if you haven’t you will, and then read these others!)