Flash Boys

A Wall Street Revolt

Michael Lewis, CENTRAL 332.82 L6752f 2014

This is a well written, exciting book, and I stayed up way too late to finish reading it. Left handed attaboy to Michael Lewis. The book does not have an index. That sucks, so I won't buy a copy for my personal library.

High frequency trading (HFT) exploits information propagation delays to prey on transactions between sellers and buyers of stocks. This does not lubricate transactions, merely adds friction that hurts long term investors.

Computerized trading, in theory, quickly connects buyers to sellers and facilitates negotiation. However, fast connections (microseconds!) allow middlemen to insert themselves in each transaction, and shave a few pennies off of each sale. This is helped by the stock exchanges, which get a percentage of this unnecessary middleman "tax". It is an added cost for individual and institutional owners of stocks intending to negotiate directly with each other.

The rapid interaction rates can quickly build into a "flash crash", with the supposed value of the entire stock market plunging by 10% in a few minutes, perhaps recovering in a few hours.

The real value of a global economy increases over time, a few percent per year. Visionary investors can move assets to better uses, and downsize under-performers; that is the value of a market. But real value changes over months and years, not microseconds; amplifying noise makes real economic signals more difficult to detect. Processes that hinder real economic development may make their parasitic promoters wealthy, but it does not help the economy, nor does it help the 99% of the participants in that economy. One message of this book is that if ordinary citizens understood what was happening, the high frequency traders would be stripped of power and assets and sent to prison.

Russian immigrant programmer Sergey Aleynikov did go to prison, for leaving Goldman Sachs with a thumb drive containing some of the code he wrote for them, but mostly containing the open source code he based it on. Goldman Sachs put their own copyright notice on that open source code, which is a much larger crime, but the individuals who wrote it do not have enough money to prosecute. "Intellectual property" is a license to sue. Winning an IP lawsuit costs millions, and isn't profitable on average, except in the sense that it usually damages the defendant more than it does the plaintiff. This facilitates oligopoly.

To facilitate economic power assymetries, high frequency traders use faster connections. They co-locate their trading computers in the exchange data centers. They build their own cross-country data networks, microwave and optical fiber. This helps HFT; it does NOT result in the more efficient delivery of goods and services to citizens.

The "heros" of this book, Brad Katsuyama and Ronan Ryan, founded the IEX stock exchange to thwart HFT. IEX trades about 2% of the market - much of the rest is presumably managed to support undocumented predation. The core technology is based on the THOR Tactical Hybrid Order Router, which Allen Zhang created for Katsuyama while working for the Royal Bank of Canada (RBC).

IEX is built around two major features - a coil of fiber optic cable that delays transactions by 700 microseconds round trip, and transaction delays adjusted to deliver trade results to all the other exchanges simultaneously, reducing or eliminating the time spread used by high frequency traders.

And What Does This Have to do with Server Sky?

The delay to server sky platform is milliseconds - perhaps this could be the basis of an even better "global IEX" exchange. The communication will need to be safely encrypted. This could create economic opportunities for the 99.999% of the world without a fast connection to US stock exchanges. Worth thinking about; I don't have time for that right now.

FlashBoys (last edited 2019-05-18 20:03:47 by KeithLofstrom)