Michael Lewis has a softball emergency.
Midway through an interview in the lobby bar of a Los Angeles hotel – part of a multi-week press tour for his new book on high-frequency trading, a staggering and possibly illegal loophole in the world of stock trading – he receives a text from a parent who coaches a girls’ softball team with him. There’s a game today, and his fellow coach has forgotten all the equipment.
Given the gregarious 53-year-old’s role as perhaps the most famous decipherer of America’s myriad financial calamities over the past half-decade, it is somewhat surprising to discover that this is what constitutes a crisis for Mr. Lewis. And he is quite content to let the other coach handle it.
Indeed, while his new book has shaken Wall Street – the U.S. Department of Justice recently announced that it is investigating the practice of HF trading, and a major HF trading firm, Virtu Financial, which was set to go public this month, has postponed its initial public offering until some of the chatter surrounding Mr. Lewis’ book subsides – he rejects the notion that he’s on any kind of anti-capitalist crusade.
“The misperception,” he says, “is that I wrote a book because I wanted to blow the world up.”
Certainly, the free market has been exceptionally good to Mr. Lewis. The one-time fine arts student at Princeton has had several bestsellers, and his books have been turned into blockbuster movies (Sony has rights to this latest, too). But the father of two teenagers and a seven-year-old is laid-back and warm, coming across more Average Joe than Superstar Author or Renegade Journalist.
Still, every few years, Mr. Lewis temporarily abandons his otherwise serene California lifestyle of coaching softball and forest walks to lob a grenade of explanatory journalism at one of America’s hallowed institutions.
In 2003 he did it with Moneyball, the story of a man’s quest to completely redefine the way baseball teams measured the value of their players. Following the financial crisis of 2008, he wrote The Big Short – an attempt to explain to the average reader the roots of the Great Recession.
Now, with Flash Boys, Mr. Lewis takes aim at Wall Street. Specifically, the phenomenon of high-frequency trading. That’s what happens when traders find miniscule time and speed advantages in automated, computer-led trading systems – then game them to get ahead of their competition. For example, while another trader is still waiting for his order for a block of $100 shares to get to the stock exchange, an HF trader can use a digital advantage to speed ahead of the order and buy up those stocks; that forces the trader with the original order, in turn, to pay for any stocks they want at a slightly higher price.
On individual trades, HF traders might make a few dollars by exploiting this speed advantage – in aggregate, however, such run-arounds can generate tens of billions of dollars a year. And because it relies on extremely sophisticated software and expensive hardware, HF trading is essentially off-limits to all but the most powerful players on Wall Street.
But Mr. Lewis is not interested in the minutia of algorithms and network latency alone: His book is really a narrative about good versus evil. The baddie is a broken financial marketplace, in which HF trading not only creates an unfair playing field, but also a deeply unstable one, liable to so-called “flash crashes.” The hero: an unlikely character, 35-year-old Brad Katsuyama, a trader at the Royal Bank of Canada.
Flash Boys centres on Mr. Katsuyama’s discovery of HF traders’ advantage and his outrage at what he sees as a rigged system – which prompts him to quit his million-dollar-a-year job with RBC to start a new stock exchange with a mandatory delay (thus quashing the capacity to play off speed) on all trading requests. He then goes to Wall Street’s power players to try to sell them on the idea of more ethical trading.
“This Canadian guy was in the offices of some of the most prominent investors in America, telling them how their stock market worked,” Mr. Lewis says.
It’s a “metaphor” for the relationship between the two banking systems, he adds. With Canada – “very sane, well-regulated” – at the mercy of “all this crap” that happens in the U.S. The fact that it’s a Canadian who sees how the market is being gamed?
“To have one of your guys wander in and be the new sheriff in town, that’s kind of great.”
But Flash Boys isn’t just about power plays between the good and evil on Wall Street – it’s about their impact on all of us.
“I think the most corrosive part of this story is much more personal,” says Mr. Lewis. “I think there’s a poison right now in our society and the poison is the relationship of the elites to the rest of the society, and it’s because the financial sector has created a lot of perverse incentives for elites.
“There are lots of ways that rich and powerful people have advantages over everyone else. In this case what’s peculiar is that it’s literally built into the structure, it’s systemic.”
The part-time softball coach is quick to note that his problem is with the rules, not the game itself. Indeed, he is optimistic that the free market can solve the HF trading issue, as major Wall Street players start seeing the advantages of systems such as the one Mr. Katsuyama has built.
That said, Mr. Lewis is done with high-tech Wall Street (for now). His bedside reading these days is a tower of old census documents from the 1920s and 30s – research for a TV show he’s writing based on the life of a depression-era stock trader. Convinced he’s made an airtight argument against a fundamentally unfair market loophole, Mr. Lewis says if Flash Boys doesn’t prompt change, someone else will have to carry on the fight.
“I’m done,” he says. “This feels like an open and shut case.”