Published on 2014-08-25 by John Collins. Please follow me on Twitter for more:
For many years I have been of the opinion that computer algorithms, not humans, should be running the financial markets. Little did I know that is already happening to some degree via High Frequency Trading, which is the topic explored in Flash Boys by Micheal Lewis.
The book begins with the author questioning why the only employee of Goldman Sachs to be imprisoned after the recent financial markets collapse was Sergey Aleynikov, a computer programmer from Russia who was a HFT platform programmer at Goldman Sachs. The book explores the events that led to Sergey's arrest, the vital role that programmers and network specialists now play in the financial markets, and the lack of understanding by these technologists in their own role in a financial market system where the speed of HFT platforms can make or break a trading company.
The book reminds me of the tensions that exist between business consumers and technology providers in every business, but this seems particularly viscous in the HFT area: with technologists having little clue about how the financial markets work, while traders have little clue about how their trading platforms work.
The disconnect between traders and technologists became very evident in the chapters about Brad Katsuyama, formally of Royal Bank of Canada, who started to realize that markets were reacting to his purchases and pushing up prices just as he was submitting his trades. The realization led Brad to discover that HFT platforms were detecting his purchase orders and buying stock ahead of him, therefore pushing up the price, and then selling the stock back at the higher price, making thousands of tiny profits in fractions of a second. Eventually Brad formed IEX1: a trading exchange designed to reintroduce fairness into the market by limiting the ability of companies to engage in HFT there.
Despite the complexity of the subject matter, the book is a fascinating insight into the modern financial markets and the technologies behind it. I learned a lot by reading this book, while still being entertained, which is the hallmark of a great writer.