News Journal: ‘Flash Boys’ should – and will – make your blood boil

Will a No. 1 best-seller finally get people’s attention?
That’s my hope for “Flash Boys” by Michael Lewis, whose previous books include “Liars Poker” and “The Big Short.” He has an enviable knack for explaining complex Wall Street activity in entertaining language we can all understand, and his new book offers the best explanation I have seen of High Frequency Trading and why it threatens the integrity of our markets.
The jacket copy accurately says Flash Boys “is about a small group of Wall Street guys who figure out that the U.S. stock market has been rigged for the benefit of insiders and that, post-financial crisis, the markets have become not more free but less, and more controlled by the big Wall Street banks.”
“What’s the headline here?” Steve Kroft asked Lewis on “60 Minutes” two weeks ago. “The stock market’s rigged,” was the answer. “The United States stock market, the most iconic market in global capitalism is rigged.” “Who are the victims?” Kroft asked. “Everybody who has an investment in the stock market.”
Strong stuff. I’ve been railing about HFT since 2009, when I made a series of speeches on the Senate floor. I appeared on “60 Minutes” myself in October 2010, in a segment about HFT that was in part an examination of the flash crash of the market in May of that year. The day after it happened, I had released a statement that said, in part, “I have been warning for months that our regulators need to better understand high frequency trading, which appears to have played a role today when the U.S. market dropped 481 points in six minutes and recovered 502 points just 10 minutes later. The potential for giant high-speed computers to generate false trades and create market chaos reared its head again today. The battle of the algorithms – not understood by nor even remotely transparent to the Securities and Exchange Commission – simply must be carefully reviewed and placed within a meaningful regulatory framework soon.”
Four years later, that still hasn’t happened, and I have to admit I have begun to sound like a broken record whenever I talk about HFT.
What’s so bad about it? Maybe the simplest way to explain it is to go back a few years when stocks were traded the old-fashioned way, with screaming traders and specialists inside a building called the New York Stock Exchange. If a broker got a huge order to buy a stock and realized that the order would raise the stock’s price, he might be tempted to first buy some shares for his own account before placing the huge order, knowing he could sell his own shares minutes later at a guaranteed profit. That was called “front running,” and it was and remains illegal.
Back then, when it took a minute or two and there was a paper trail actually made of paper, regulators had a good chance to identify cases of front running. Today, literally billions of trades are conducted electronically in milliseconds, allowing what Michael Lewis contends is high-tech front running – legal today, but only because regulators haven’t caught up with the technology. He is right, and his book explains in detail exactly how it happens.
Maybe “Flash Boys,” and the media attention it is getting, will spur the SEC to do what they promised me five years ago. At least they are still promising. On March 31, responding to questions about the book, the SEC’s spokesman said: “The staff, at Chair White’s direction, is conducting a comprehensive data-driven analysis of a range of market structure issues, including HFT trading practices and their impact on the fairness, efficiency and integrity of our markets.”
Eternal optimist that I am, I hope that is so. Meanwhile, let me turn this column into a rave book review. If you or your pension plan has any money in the stock market, reading “Flash Boys” will be enough to make your blood boil. Just to get that started, here is one quote from it:
“By the summer of 2013, the world’s financial markets were designed to maximize the number of collisions between ordinary investors and high-frequency traders at the expense of ordinary investors and for the benefit of high-frequency traders, exchanges, Wall Street banks and online brokerage firms. Around these collisions an entire ecosystem had arisen.”
Ted Kaufman is former U.S. senator from Delaware.