JANET MASLIN, N.Y. TIMES
Michael Lewis writes that before he began working on “Flash Boys,” he had little interest in the stock market, “though, like most people, I enjoy watching it go boom and crash.” And like most people, he had an antiquated notion of what the stock market was. At the start of “Flash Boys,” his dazzling, troublemaking new work of reportorial storytelling, Mr. Lewis summons that sweet old image of a trading floor full of screaming brokers, slamming telephones and hysteria-inducing ticker tape. Picture that, he suggests. And then forget it, because it’s gone.
Flash Boys” describes the surreal-seeming technology that replaced it. And it also explores the breakup of big, central stock exchanges into many small ones; the impossibility of investors’ knowing exactly what is being done with their money; and the immense new opportunities for skimming, kickbacks, secret fees and opacity that the new system has spawned.
Because Mr. Lewis is at the helm finding clear, simple metaphors for even the most impenetrable financial minutiae, this tawdry tale should make sense to anyone. And so should its shock value. “Flash Boys” is guaranteed to make blood boil.
And because this is Mr. Lewis, it’s a book about white-hatted heroes who set out to rectify the system. The principal figures in “Flash Boys” were not widely known outside the business world, or even within it, though they will be now. You could find some on LinkedIn, but Wikipedia had never heard of them or their accomplishments. That only adds to the excitement surrounding a book that has been kept carefully under wraps. It went on sale Monday.
Mr. Lewis’s first illustration of high-frequency trading depicts the kind that can transmit stock market information from New York to Chicago and back in one-tenth of the blink of an eye and has divided the world of stock traders into the haves and have-nots, depending on what speeds they can afford. It involves the stealthy building of an absolutely straight tunnel to run fiber-optic cable through the mountains of Pennsylvania. The firm building the tunnel calls itself Spread Network, and the job is monstrous. Huge mountains need to be drilled through. Every small town needs to grant permission. No one can know what the tunnel is for, and the cost of the digging is beyond astronomical.
But this was 2010, when the stock market was obsessed with speed, and Wall Street traders considered no proposition too unreasonable, no cost too steep. Sure, they asked questions. “Where is the backup if your line goes down?” (“Sorry, there isn’t one.”) “When can you supply us with the five years of audited financial statements that we require before we do business with any firm?” (“Um, in five years.”) But they also paid $14 million each just for initial access to the thing because milliseconds could be worth huge fortunes if properly and secretly manipulated. With the story of the cable, “Flash Boys” inspires both awe and horror at the same time.
That wound up being the response of staid, mild-mannered Bradley Katsuyama to United States business practices. Mr. Katsuyama was happily ensconced at the Royal Bank of Canada in Toronto when, in 2002, he was transferred to New York. The bank wanted more of a Wall Street presence, but Mr. Katsuyama turned out to be a lot more than that. Mr. Lewis, who clearly got to know his subjects very well, is full of colorful stories about Mr. Katsuyama’s New York stint (one colleague swung a baseball bat in the office) and the effect it had on him.
Like this book’s other heroes, Mr. Katsuyama has an inquisitive, scientific mind; the more clearly he saw that the markets were rigged, the better he wanted to understand what was wrong with them. He began experimenting on his own and developed a better understanding of how the hoodwinking worked. Federal investigators and New York State’s attorney general have begun looking into whether such trading practices ought to be monitored and regulated.
One of his first colleagues, in what would eventually become a gutsy, game-changing new venture, was Rob Park, an algorithm guy. “All Brad needs is a translator from computer language to human language,” Mr. Park told Mr. Lewis. “Once he has a translator, he completely understands it.” With the funding of the Royal Bank of Canada, the two conducted a series of experiments that provided invaluable information about how high-frequency traders could predict imminent stock movements and exploit them. They even created a weapon, called Thor, that was meant to level the playing field for the ordinary investor. “It would have been very easy to make money off this,” Mr. Park says of Mr. Katsuyama. “He just chose not to.”
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| From left: Rob Park, Brad Katsuyama and Ronan Ryan. Credit Stefan Ruiz for The New York Times |
The rest of the book tells the riveting story of how this detective work exposed more and more dangerous flaws in the present market system. Mr. Katsuyama consistently sounds like a force for decency and good, even if Mr. Lewis gives him a “Batman” moment or two. To his future wife he declared (really?): “It feels like I’m an expert in something that badly needs to be changed. I think there’s only a few people in the world who can do anything about this. If I don’t do something right now — me, Brad Katsuyama — there’s no one to call.”
So he did something, in this book’s one true movie moment. “Let’s just create our own stock exchange,” he proposed to Mr. Park. That was in 2011, and it occurs less than halfway through the book, because Mr. Lewis needs room to talk about why changing the world wasn’t as easy they expected it to be. Many a dirty trick awaits anyone trying to push back against common Wall Street practice with a firm dedicated to fairness and transparency. But the firm, which was called the Investors Exchange until someone realized that the Internet address could be read as Investor Sex Change, and then became IEX, opened in October 2013. It has had support from Goldman Sachs, because, according to Mr. Lewis, events like the “Flash Crash” of May 6, 2010, are ever more apt to occur in a fast, computerized system and scare American investors out of the market. One of the book’s most controversial points is that affiliation with a fair and square IEX will be good for larger firms’ reputations.
But Mr. Lewis hardly means to suggest we’re out of the woods. He ends this book with a trip through the forest, up a mountain and right to the base of a sinister microwave tower with an F.C.C. license number that he provides. Got a computer and a free day? He claims you can track down that license to find another Wall Street nightmare in the making.