“Flash Boys, A Wall Street Revolt”, by Michael Lewis, 2014
This non-fictional account of high-tech rigging of the stock market reads like a novel with a dramatic storyline and a cast of fully developed characters. True to the non-fiction genre, it is also full of detailed information about electronic trading and addresses a pertinent, real issue of unfairness in the current economy and financial sector. The time period is from 1987 (the “flash-crash”) to the end of 2013 with an emphasis on the years from 2007 onward, after a regulation took effect which allowed high frequency traders to “front run” orders (interpose themselves between buyer and seller for profit). Collusion between the nine big banks on Wall Street, the for-profit exchanges, and a compliant SEC, allowed this fleecing to exist and perpetuate. The cost to the economy is between $10 and $22 billion dollars per year. If you have a 401k invested in stock funds, a pension fund, a mutual fund, or own stocks through any other vehicles, the high frequency traders are taking your money.
“That money is a tax on investment, paid for by the economy; and the more that productive enterprise must pay for capital, the less productive enterprise there will be.”
Brad Katsuyama, a Canadian trader for the Royal Bank of Canada, noticed after 2007 that his computer screens weren’t showing him an accurate picture of the market. Over the course of several months, he figured out why, and set about assembling a team of computer and market experts to overcome the problem. They began an informational campaign to inform fund managers and other legitimate traders why the market seemed to be “running away from them” when they placed large orders. Eventually, they concIuded that opening up their own exchange with a built-in delay was the best way to undermine the high frequency traders and achieve a fair market. As of December 2013, Brad Katsuyama’s exchange, “IEX”, opened for trading and the large banks were gradually persuaded to route orders there. The release of “Flash Boys” has triggered law suites against the firms involved in high frequency trading, including the exchanges which facilitated it, on the grounds that the practices “violate the anti-fraud provisions of the federal securities laws”. Throughout the history of the US stock market there have always been ways to game the system. As new laws fix one set of problems they create new loopholes to be exploited, and the cycle repeats itself.
In stark juxtaposition to “Flash Boys”, is the classic novel “Reminiscences of a Stock Trader“, written by Edwin Lefevre and published in 1923. It is a fictionalized biography or roman-a-clef of the legendary trader, Jesse Livermore. He was active in the markets from the 1890’s up until 1940. In this book he is referred to as Lawrence Livingston. The larger events were told accurately and only the names of characters and minor details were changed from their historical counterparts. In spite of the fictionalization, it gives sage advice, much of which is true even today for market investors. In the story Lawrence progresses from a fourteen year old “Boy Plunger” in bucket shops (venues for legal betting on stocks) to “The Great Bear of Wall Street”, buying and selling millions of dollars of stocks at a time. In each chapter new circumstances arise and he learns a lesson, sometimes from losses, sometimes from profits. Through analyzing these, solutions emerge to each of his trading problems, thus advancing his skills. The real life Jesse Livermore was known for building multi-million dollar fortunes, going broke, and then regaining his fortune. In contrast to “Flash Boys”, in which modern high-tech parasites without trading skills make risk-free transactions, Lawrence does it all the hard way; with courage, talent, perseverance, and discipline. Needless to say, the pace of the markets: modern vs. turn of the 20th century is drastically different. What both books have in common is the endless supply of scoundrels employing subterfuge to gain unfair advantage. “Reminiscences” is full of shady characters attempting to rig the game. Lawrence plays by the rules even though his huge successes suggest to the public that he is also a rogue. Author, Edwin Lefevre’s turn of the century slang and colorful tales help bring the setting to life. He was an author, journalist, and stock broker who knew Jesse Livermore personally.