Wednesday, April 2, 2014

Flash Boys Book Review

Michael Lewis's book, Flash Boys was dutifully read and digested by yours truly and I thought that I would give you my review of it. Mr. Lewis is a talented writer and I felt as though I was watching a movie rather than reading a book. It was a novel with a story line full of interesting characters that could definitely be made into a movie. Since Mr. Lewis has other books of his that were made into movies, then I am certain he wrote it with that possibility in mind. Pretty smart on his part, don't you think?

The content is probably not easily understood by your average investor who doesn't understand trading securities or how Wall Street works. However, people like me can follow along without much effort, because of our background in the business. Regardless whether you are in the business or not, it provides a good education and the book is well researched.

I always admire people who achieve success in their endeavors and Mr. Lewis is no exception. He is extremely talented at telling a story. Although, I learned something long ago about these people. Generally, they are not that different from you and I. In fact, at some point in his writing career he was an unknown, but this did not deter him from his dream of being a successful writer. He kept at his dream and worked very hard to achieve that status. Other people give up too easily. People like Mr. Lewis show a tenacity to achieve their dreams no matter what obstacles stand in their way. That is the major difference in his success and the success of others like him. They have the tenacity to never give up.

In Flash Boys, he talks about a group of guys that you would never think could work together. It was almost like they were a bunch of misfits, weirdos and nerds. However, it was evident that Brad Katsuyama knew what he was doing. He is the guy with the talent to put the team together and that is precisely what he did. Most managers who hire people make the mistake of hiring people who are just like them. Mr. Katsuyama understands that he needed people with skill sets that were totally unique from his own. In fact, almost none of the people he hired for IEX had the same skills. They all were specialists who were very good at what they did. Mr. Katsuyama was the guy with the draft board, if you will. He had some spots to fill at each position and he and his team set out to draft the players.

Mr. Lewis goes into intricate detail about the personalities involved and how each of these team players found their way onto the IEX team. That is the story of the Flash Boys. The guys who worked at different jobs, but still managed to find their way to IEX. I have no doubt that IEX will be a success. All of the players on the team are focused to deliver their trading exchange services in a transparent manner. Sunlight is always good in business as opposed to the hidden tactics of some Wall Street firms. I would bet on the transparent guy over the opaque guy every time.

I think the people jumping up and down about high frequency trading have not read the book. They are making assumptions. My suggestion is to read the book, before you go on TV and spout off.

High frequency trading has it place. To me, like I mentioned in my last blog article, it is not much different than the market maker on the floor of a stock exchange with an order book. He can see all the people with the buy orders and all the people with the sell orders. He matches the orders and keeps the spread. This is similar to what they high frequency traders do, although I will admit that they have an advantage. Keep in mind however that their advantage might be fleeting. Nothing ever stays the same for very long, especially when it comes to technological innovation. Something else is sure to come along and upset the apple cart.

Unfortunately, this book is liable to get people all emotional about high frequency trading and cause some problems for these firms and their principals. Supposedly some of these firms are already under investigation by the FBI and the SEC. My advice is before you slap the cuffs on people, you should read the book and pay special attention to the story about Serge Aleynikov. What they did to him was totally ridiculous. His arrest was a result of a rush to judgment by people at Goldman Sachs who didn't know their ass from deep center field and conned the FBI into believing the he was stealing Goldman's secret sauce. All Serge was doing was being a computer geek and saving his open source work in a manner highly typical of computer geeks. Here is a lesson for anyone working in Corporate America. Whatever you make, design or write as an employee is not yours. You cannot take it with you when you leave, even if it was taken innocently like it was in Serge's case. Goldman was just sending a message to all computer programmers that worked for their firm and poor Serge was the sacrificial lamb.

Anyway, I hope cooler heads prevail, because slamming the brakes on high frequency trading firms will shut down over half of the stock market which is already weak since the 2008 Wall Street and banking debacles. If you want to guarantee another market meltdown, then do something really stupid and stop high frequency trading. Let's hope they don't do it.