Michael Lewis Reflects on His Book Flash Boys, a Year After It Shook Wall Street to Its Core
When I sat down to write Flash Boys, in 2013, I didn’t intend to see just how angry I could make the richest people on Wall Street. I was far more interested in the characters and the situation in which they found themselves. Led by an obscure 35-year-old trader at the Royal Bank of Canada named Brad Katsuyama, they were all well-regarded professionals in the U.S. stock market. The situation was that they no longer understood that market. And their ignorance was forgivable. It would have been difficult to find anyone, circa 2009, able to give you an honest account of the inner workings of the American stock market—by then fully automated, spectacularly fragmented, and complicated beyond belief by possibly well-intentioned regulators and less well-intentioned insiders. That the American stock market had become a mystery struck me as interesting. How does that happen? And who benefits?
By the time I met my characters they’d already spent several years trying to answer those questions. In the end they figured out that the complexity, though it may have arisen innocently enough, served the interest of financial intermediaries rather than the investors and corporations the market is meant to serve. It had enabled a massive amount of predatory trading and had institutionalized a systemic and totally unnecessary unfairness in the market and, in the bargain, rendered it less stable and more prone to flash crashes and outages and other unhappy events. Having understood the problems, Katsuyama and his colleagues had set out not to exploit them but to repair them. That, too, I thought was interesting: some people on Wall Street wanted to fix something, even if it meant less money for Wall Street, and for them personally.
Of course, by trying to fix the stock market they also threatened the profits of the people who were busy exploiting its willful inefficiencies. Here is where it became inevitable that Flash Boys would seriously piss off a few important people: anyone in an established industry who stands up and says “The way things are being done here is totally insane; here is why it is insane; and here is a better way to do them” is bound to incur the wrath of established insiders, who now stand accused of creating the insanity. The closest thing in my writing life to the response of Wall Street to Brad Katsuyama was the response of Major League Baseball to Billy Beane after Moneyball was published, in 2003, and it became clear that Beane had made his industry look foolish. But the Moneyball story put in jeopardy only the jobs and prestige of the baseball establishment. The Flash Boys story put in jeopardy billions of dollars of Wall Street profits and a way of financial life.
Two weeks before the book’s publication, Eric Schneiderman, the New York attorney general, announced an investigation into the relationship between high-frequency traders, who trade with computer algorithms at nearly light speed, and the 60 or so public and private stock exchanges in the United States. In the days after Flash Boys came out, the Justice Department announced its own investigation, and it was reported that the F.B.I. had another. The S.E.C., responsible in the first place for the market rules, known as Reg NMS, that led to the mess, remained fairly quiet, though its enforcement director let it be known that the commission was investigating exactly what unseemly advantages high-frequency traders were getting for their money when they paid retail brokers like Schwab and TD Ameritrade for the right to execute the stock-market orders of small investors. (Good question!) The initial explosion was soon followed by a steady fallout of fines and lawsuits and complaints, which, I assume, has really only just begun. The Financial Industry Regulatory Authority announced it had opened 170 cases into “abusive algorithms,” and also filed a complaint against a brokerage firm called Wedbush Securities for allowing its high-frequency-trading customers from January 2008 through August 2013 “to flood U.S. exchanges with thousands of potentially manipulative wash trades and other potentially manipulative trades, including manipulative layering and spoofing.” (In a “wash trade,” a trader acts as both buyer and seller of a stock, to create the illusion of volume. “Layering” and “spoofing” are off-market orders designed to trick the rest of the market into thinking there are buyers or sellers of a stock waiting in the wings, in an attempt to nudge the stock price one way or the other.) In 2009, Wedbush traded on average 13 percent of all shares on NASDAQ. The S.E.C. eventually fined the firm for the violations, and Wedbush admitted wrongdoing. The S.E.C. also fined a high-frequency-trading firm called Athena Capital Research for using “a sophisticated algorithm” by which “Athena manipulated the closing prices of thousands of NASDAQ-listed stocks over a six-month period” (an offense which, if committed by human beings on a trading floor instead of by computers in a data center, would have gotten those human beings banned from the industry, at the very least).
http://www.vanityfair.com/news/2015/03/michael-lewis-flash-boys-one-year-later