Friday, April 25, 2014

Flash Boys: Cracking the Money Code, by Michael Lewis

Staff Review by Chris Saliba

As computer technology enables stock exchanges to trade shares in milliseconds, it's also enabled those with access to the most speed to pretty much game the market. Michael Lewis explains this complex system, and shows how too much complexity means many, even expert players, are ignorant of what's actually happening.

American financial journalist Michael Lewis has a peerless reputation for exposing some of the worst aspects of the financial system, in books such as Liar’s Poker and The Big Short. In his latest book, Flash Boys: Cracking the Money Code, he turns his attention to the mind-bogglingly complex world of high-frequency trading. In this new, computer enabled world, the trading of stocks is not done by humans but rather by machines. Trades are executed faster than the blink of an eye. High-frequency trading firms employ algorithms that can buy and sell stock in milliseconds. In the process they can also gather lots of information about the buying patterns of traders and use that information to predict their behaviour. In essence, the speed of the trades allows them to game the market and siphon off huge amounts of money.

It’s all legal, although perhaps the bigger problem is that regulatory bodies and even the stock market’s main players themselves, simply can’t keep up with the speed of technological change. Another impediment to honest trading is the sheer complexity of what’s going on. Many of the high-frequency trading firms would employ computer technologists that they purposefully kept in the dark as to what their companies were doing. The technologists wrote the code but had no idea what it was used for. And then there are the traders with no background in high-frequency trading who had absolutely no clue as to how the market was being manipulated. It’s scary how much complex technology is ruling our lives and how little we understand of it.

The genius of this book is to bring so much difficult and complex material together, make it accessible to the non-specialist, and finally weave it into an appealing narrative. Flash Boys, with its sense of suspense, moments of revelation and outsiders turned heroes, reads like a novel. It seems incredible that it’s all true and not some science fiction film set fifty years in the future.

 Flash Boys: Cracking the Money Code, by Michael Lewis. Published by Allen Lane. ISBN: 9780241003633  RRP: $39.99

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