Review of Flash Boys
A great book on all kinds of levels: a takedown of high-frequency trading; a Dirty Dozen yarn of outsiders taking on the Wall Street establishment; a righteous tirade against the excessive complexity and insanity of the financial system; a cry for finance to stop sucking money and smart young people out of the rest of the economy. (There is even a wonderful echo from Lewis’ previous book, The New New Thing. On one side of the HFT industry, building a fiber-optic line from New York to Chicago to carry financial data, is Jim Barksdale, the former CEO of Netscape. On the other, backing an HFT-proofed exchange, IEX, is Jim Clark, Netscape’s co-founder. These guys never go away. They are always there applying technology in new, disruptive ways.)
My only caveat is that Lewis may be over-stating the villainy and importance of HFT. Long-term investors don’t worry about a few fractions of a cent when they buy or sell a stock. And even short-term investors may not either. Then there’s the ever rising cost of building the infrastructure for HFT, paying to see order flow etc. This is not a cheap business to get into and sustaining healthy margins is a sweat.
(I note in the review that there are reasonable arguments that the HFTs provide liquidity and greater price efficiency. You don’t have to agree with them, but here’s one, a paper published by the European Central Bank last fall.)
More convincing to me was Lewis’ point that all the frenzied HFT activity renders the exchanges unstable, and has already caused flash crashes and other market spasms. But again, how much of this is due to the simple onward march of technology vs. HFT? Standing athwart progress and shouting “stop, it’s all getting too complicated for the human mind” doesn’t seem the right answer.
Regulators are already all over HFT. I wonder if they’ll find any evidence of actual criminality. Even Lewis concedes the HFTs’ actions are legal. Not pleasant, but legal, the result of a regulatory loophole.
Flash Boys provides yet another cudgel for those who loathe Wall Street and blame it for all the economy’s ills. HFT will likely now be squeezed out of existence. I never thought I’d say this, but I hope this marks a temporary end to this recent era of Wall Street bashing. What’s transforming economic life in America isn’t Wall Street anymore. It’s the vaunted technology companies of Silicon Valley. They are rightly admired for their innovation and daring. But they’re also draining the economy of jobs much faster than they create them. And their revenues dwarf any made on Wall Street. They represent the toughest paradox in the US economy today. Taking them on will make HFT bashing look as one-sided as seal-clubbing.