Flash Boys

A Wall Street Revolt

Michael Lewis, CENTRAL 332.82 L6752f 2014

High frequency trading 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 50% in a few minutes, perhaps recovering in an hour or two.

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.