It’s a dead giveaway: When someone tells a reporter that the story they’re chasing “isn’t news,” you can be fairly certain that: a) it is news; and b) its publication will cause discomfort to the person trying to tell you it is not news. Which is why it has been fascinating to watch this week as the mavens of Wall Street – bankers, traders, and in some cases the journalists who are supposed to hold them to account – slapped down Michael Lewis’s latest book by insisting that it is old news: so, really, why waste your time reading it when you could be buying some tasty equities instead?
But if the story in Flash Boys doesn’t seem like a big deal to the street, it will be received among the general public as a bombshell: More proof of legally authorized skullduggery by an industry that, apparently through natural selection, has eliminated its gene for shame.
Lewis’s primary achievement is in making the opaque world of high-frequency trading (HFT), in which computer algorithms execute millions of trades within seconds, accessible and sometimes even thrilling to the lay reader. He argues that HFT creates a “class system, rooted in speed, of haves and have-nots,” in which deep-pocketed, technologically astute and savvy traders can, in a practice known as “front-running,” sniff out others’ trade orders and then insert themselves between sellers and buyers to make a profit without any risk.
The criticisms of Flash Boys began early. Hours after its release on Monday, the Reuters blogger Felix Salmon wrote that even though he’d read only half the book, he was ready to declare it didn’t contain any shattering scoops. Besides, he added, HFT is no longer as profitable as it was at its peak five years ago (a.k.a.: it’s old news) .
On Tuesday, William O’Brien, the president of the private stock exchange BATS Global Markets, attacked Michael Lewis during a panel on CNBC for saying HFT firms have the market “rigged.” O’Brien also went a few rounds with Brad Katsuyama, a former Royal Bank of Canada executive who is the hero of Flash Boys.
In Katsuyama and his colleagues, Lewis has found a rich collection of white-hatted geeks and familiar misfits (see: Moneyball’s Jonah Hill). He sees them as the true spirit of America, even if they are Russian, Canadian, Irish, Croatian, and from the unloved New York City borough of Staten Island: They are morally upstanding folk who stick up for the little guy against corruption and The Establishment.
Katsuyama may be an unlikely hero of an American story. When RBC relocated him from Toronto to New York in 2002 at age 24, he was turned off by the city’s notorious excesses. But he stayed, and thrived at the bank, rising ever higher until one day he found that trades he was trying to make would simply disappear from his computer screen after he pressed the button to execute an order.
After years of research, he put all of the pieces of the puzzle together and realized HFTs were beating him to the punch. He felt a calling. “I think there’s only a few people in the world who can do anything about this,” he told his wife one night. “If I don’t do something right now – me, Brad Katsuyama – there’s no one to call.”
He hired a ragtag bunch straight out of Shaggy Dog Story Central Casting: Zoran Perkov, a Croatian-born exchange operator who excels under pressure but is often a pain in the ass when everything is going fine; Ronan Ryan, an Irishman with an expertise in telecom routing; John Schwall, a former Banc of America Securities executive who still resented that so many of his former colleagues lost their jobs after the financial crisis while bankers at Merrill Lynch, which his company had purchased, rewarded themselves with huge bonuses.
Brad quit RBC, and the team set out to create IEX, a unique stock exchange which would level the playing field by denying HFT traders access to market information ahead of others. In shopping the exchange around town, Katsuyama told Lewis, he had to back off all the talk about trying to make the world a better place. Instead, he took to saying “We are long-term greedy.” It was easier for the banks to understand.
IEX launched last October; by December, after Goldman Sachs decided to funnel some of its big orders to the exchange, it was beginning to handle about 50 million shares a day. Its long-term success – and therefore the market’s move against HFT – is still to be determined.
So, okay, some of the criticisms are correct: HFT isn’t the same appalling story that it was in 2009. But Lewis’s central point – that the financial services industry continues to extract exorbitant wealth and other resources from the rest of us – remains more urgent, and galling, than ever.
Simon Houpt is The Globe and Mail's senior media writer.