The haves enjoyed a perfect view of the market; the have-nots never saw the market at all. [Page 69]
There was a moment in business school when I realized that I looked at the stock market different from almost everyone I would every meet in the hallowed halls of future MBAs. In a discussion with our first-year finance professor I made the assertion that the appearance and behavior of modern stock exchanges appeared to be strikingly similar to sports books populated with degenerate gamblers. There was never a compelling counter argument and as the financial crisis in 2008 unfolded I felt somewhat vindicated after taking some major heat for the rest of that semester. Not that I am bitter.
What we did not know in 2008, but is strikingly apparent now is that the way modern stock exchanges work is rigged against the average investor and even the large institutional investor for the express gain of a class of predatory traders. Michael Lewis, the author of Moneyball and The Big Short, details the nature of high frequency trading (HFT) and one exchange’s efforts to circumvent the trend in Flash Boys.
The lens through which the evolution of exchanges as tools to serve the interests of HFT is Brad Katsuyama and the exchange he founded, IEX. This is not a happy story in that you will be stunned at how certain firms are given a no risk way to extract money from financial markets, essentially a tax on capital formation, for nothing more than the cost of high speed computers and transmission equipment. Furthermore, many firms will make choices counter to the best interests of their clients in the name of making commissions and kickbacks. In essence, HFT has distorted the market to make it incredibly inefficient.
Proponents of high frequency trading will make all sorts of arguments trotting out Wall Street boilerplate about liquidity and capital flow. It’s all bunk because they are motivated to make money, not make the markets liquid or provide you a way to amass capital for business purposes. If they could make the same amount of money slapping themselves on the internet you would see a flood of well-dressed Ivy League pukes posting short videos of slapping themselves silly. Too often pundits and commentators get lost in the processes of Wall Street when they need to realize that all that matters is the result of making money. All decisions are made with that in mind. It is the prime directive.
The funny thing about HFT is that it is perfectly legal for these firms to manipulate the market to extract their financial tax. If you or I acted on a piece of information that the rest of the market did not have access to then it would probably end up being insider trading. If an HFT firm does the same thing in millisecond and nanosecond time frames then it is considered perfectly legal. It helps that there is a veil of secrecy about the exact mechanics of HFT and regulations are byzantine enough to provide cover for the activities. Always be suspicious when a guy in a five thousand dollar suit puts up his hands and says, “Hey, I’m just following the law.” No one believed it when the people doing the same thing had names like Al Capone or Meyer Lansky and there is no reason why we should believe the people doing the same thing on Wall Street.
What Flash Boys really turned me onto was the idea, not promoted in the book by the way, that we should not trust our future, primarily 401Ks for most of us, to the vicissitudes of Wall Street greed. Our financial future needs to have a foundation built on something other than the gussied up sports books breathlessly promoted by CNBC. I believe that future looks like a place where people rely less on debt and achieve security through community. Sure, it’s a little utopian but spend a couple nights reading Flash Boys and you might be selling out to join a commune.
By the way, since cancelling pay television I have been cranking through the books. My reading list went from long to wanting. Sweet.