Michael Lewis’s high-speed journalism

By Felix Salmon
April 7, 2014

My full review of Flash Boys is now up at Slate. Tl;dr: he’s right for the wrong reasons. HFT is a bad thing, but not because it rips off small investors.

There’s a separate question worth asking, though: why is this book weaker than Lewis’s other books?

Partly, it’s because Lewis took a bet on the unknown. Lewis tells stories by focusing on individuals, and he clearly felt that he hit the jackpot when he found Brad Katsuyama, the founder of IEX. Katsuyama would in any case have been a compelling choice as the person through whom to explain HFT. But in this case Lewis managed to go one better: he caught Katsuyama at a very auspicious time, which meant that he could actually follow him, in person, through the launch of his new company. As a result, Lewis found himself unable to control the arc of his story: from the point of view of the narrative, Flash Boys was going to go wherever IEX went, even if IEX’s future was very unclear at deadline.

And while first-person access should in principle make the book better, because Lewis can add the kind of details which he can never find by talking to participants ex post, in practice, it often doesn’t. Rather, it means that Lewis seemingly felt compelled to, well, add the kind of details which he could never find by talking to participants ex post:

Don leaned with his back against the window, along with Ronan, Schwall, and Rob Park, while Brad stood in front of the whiteboard and took a whiteboard marker out of a bin…

Schwall looked over the desks and shouted, “Whose phone is that?”

“Sorry,” someone said, and the ringing stopped.

This isn’t novelistic color, it’s more akin to the famous drunk looking for his keys under the lamppost. When Michael Lewis knows exactly what story he wants to tell, he can talk to people and piece it together like no one else in the business. But in this case, Lewis chose the story before he knew how it was going to end, and so he ends up writing what he saw. Which is sometimes important, and sometimes isn’t. It’s a common problem when a journalist gets exclusive access to something: just because you’re the only person to witness something, doesn’t mean it’s particularly worth witnessing.

To make matters worse, Lewis felt the need to bulk up the book by dropping in, more or less verbatim, his entire Vanity Fair article on Sergei Aleynikov. That story was excellent: one of the best things that Lewis has written, which is a very high bar. But its narrative doesn’t fit with that of Brad Katsuyama; in some ways, the two are diametrically opposed. Aleynikov should probably have appeared in the book somehow, as an example of the way in which the big banks were thrown in panic by the rise of HFT. But that would have required Lewis writing the Aleynikov story all over again, a second time around — when the first time was already such a success. So he simply did a copy-and-paste job, which is not what his bigger story really required.

Overall, a lot of the weaknesses with this book are ironically the same as the weaknesses with the stock market: it’s just too fast. With a bit more time and care, Lewis could have broadened his story a bit, put Aleynikov into better context, and explained the real dangers of HFT rather than just the “you’re being ripped off” hyperbole. He could also have avoided some silly mistakes: Secaucus is west of Weekhawken, for instance, not east.

Then again, maybe Flash Boys is a sign of where book publishing is going. It will probably be read more on electronic devices than in print; it will probably be read mostly in the next few weeks, and become dated very quickly. It’s an event; it’s highly salient right now, but it doesn’t have the legs that, say, Liar’s Poker does. Books used to be objects with permanence; as they become increasingly electronic, they can start moving towards the more disposable model of, say, Vanity Fair style magazine journalism.

Which makes possible what you might call the Reputation Arbitrage. The Newsweek cover story on Satoshi Nakamoto got enormous amounts of attention just because it was a Newsweek cover story, appearing, in print, on the front page of a physical magazine with a storied brand. If exactly the same story had appeared on a lesser-known website, it would have caused much less of a fuss. Similarly, Flash Boys is getting enormous amounts of attention just because it is a book by Michael Lewis. If he had simply written the NYT Magazine story, without a book behind it, the article would still have been shared a lot, but I don’t think we would have seen the same response from, say, US law enforcement.

In the digital age, media are converging faster than people think they are. Certain formats — the magazine cover, the hardback book — retain a certain amount of vestigial reputational capital, which can cause people to write about them more than maybe they should. If only the same amount of attention had been paid to, say, Matt Taibbi’s scoop about SEC document-shredding. That is something to really get angry about.

13 comments

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I agree with you. Lewis repeatedly recounts what his protagonists were doing on the morning of Sept. 11 as the pretext for riffing upon how important has become the need for “meaningfulness” in life—a theme he discussed at some length in this 2008 column:

http://www.bloomberg.com/apps/news?pid=2 0601039&sid=aBabxZ9WD2cE&refer=columnist _lewis

What he told readers in that column was: “[A]sk yourself: Am I looking for a job, or a calling?”

HFT upsets Lewis because it further evacuates meaning from the world—it’s all algorithms. The traditional man of faith seeks transcendence. He wants contact with God, the One, the Truth. But today’s modern economy, financial markets & workplaces have made it nearly impossible to find meaning in our work.

The Flash Boys is a quest-romance—a quest for stable meaning in a world of 9/11 terrorist attacks, missing airliners, and diseases like ALS.

Like Matthew Arnold, Lewis is:

Wandering between two worlds, one dead
The other powerless to be born.

Posted by dedalus | Report as abusive

My evaluation is that Lewis threw all HFT into one big bucket. HFT that is designed to use zillions of market signals to continuously update bid/ask prices would seem to be fine to me, even if done on the order of the microsecond. This type of HFT really does provide liquidity to the market.

What seems unfair to me is to be able to pay an exchange for better/faster information than what is reported to everyone else with the purpose of front-running trades. There doesn’t seem to be any redeeming social value in such HFT. As Lewis/his protagonists say, it’s not “real” liquidity as you cannot actually execute against such quotes.

Posted by DaDaDan | Report as abusive

DaDaDan,

This is the one element of this story I never understood. It seems to me one of the main points of the exchanges is to stop this kind of phantom bidding and front running and such? Why is it put up with? Why doesn’t someone simply make a better product and steal all the business? It is not a hard project when you are talking about the resources of the firms being ripped off?

Are they just all hoping to break into the ripping off themselves or what?

Posted by QCIC | Report as abusive

…and “Weekhawken” is actually Weehawken, speaking of silly mistakes…

Posted by details61 | Report as abusive

Felix, the main new takeaway I got from the book is that individual investors are being scalped. The amount is so small that practically it doesn’t matter to me, but the book has examples of trading in an eTrade account causing a spike on Bloomberg. eTrade even created a dark pool for its trades. So if I put in a market order at 1000 shares I do get front run.

As a long term investor, it doesn’t really matter, but I think the book does show some evidence that retail investors ARE the victims of HFT. It’s just that the .0001 per share isn’t really material to be. Again, it’s big when you add up everyone trading in their eTrade accounts. And my limit orders are giving information to the algos also.

Explain why I’m wrong.

Posted by JuvenalRedd | Report as abusive

Felix, the main new takeaway I got from the book is that individual investors are being scalped. The amount is so small that practically it doesn’t matter to me, but the book has examples of trading in an eTrade account causing a spike on Bloomberg. eTrade even created a dark pool for its trades. So if I put in a market order at 1000 shares I do get front run.

As a long term investor, it doesn’t really matter, but I think the book does show some evidence that retail investors ARE the victims of HFT. It’s just that the .0001 per share isn’t really material to me. Again, it’s big when you add up everyone trading in their eTrade accounts. And my limit orders are giving information to the algos also.

Explain why I’m wrong.

Posted by JuvenalRedd | Report as abusive

Felix, the main new takeaway I got from the book is that individual investors are being scalped. The amount is so small that practically it doesn’t matter to me, but the book has examples of trading in an eTrade account causing a spike on Bloomberg. eTrade even created a dark pool for its trades. So if I put in a market order at 1000 shares I do get front run.

As a long term investor, it doesn’t really matter, but I think the book does show some evidence that retail investors ARE the victims of HFT. It’s just that the .0001 per share isn’t really material to me. Again, it’s big when you add up everyone trading in their eTrade accounts. And my limit orders are giving information to the algos also.

Explain why I’m wrong.

Posted by JuvenalRedd | Report as abusive

Okay, I see you addressed my comment in the Slate review. But your argument that things are much better (I agree) and that management fees are much higher doesn’t really excuse the behavior.

If eTrade wanted to say, we’ll fill all your orders instantly for an absurdly low fee, that’d be fine. But that’s not what they’re doing. They’re assisting the HFT algos so they can extract an undisclosed and unagreed upon fee from all the retail customers and it adds up to a nice profit. This is the type of behavior that smells bad and is why main street distrusts wall street.

Second, the fact that since fees from my broker and from my ETFs are so much higher, I should be worried about that. And I am, much more so, carefully looking at those fees. But if you’re a fund manager isn’t the place to eat your HFT losses in your fees? Again, the customer bears some of the costs of HFT.

So is HFT a bad thing for retail investors? Not really. Is it honest and completely cost free? No way. It’s a value proposition about how much I care that my orders are filled instantly, but its one that is hidden and somewhat dishonest.

Posted by JuvenalRedd | Report as abusive

JuvenalRedd,

The front running occurs because the algos post small orders (usually 100 shares) to extract the information that someone is trying to do bigger trades. The 100 shares are filled at the posted quote, but the amounts over that posted simultaneously at other exchanges are withdrawn before they can be filled.

So, if you’re a retail investor trying to fill only 100 shares, you’re fine. You get your order filled at a great rate. You’re even potentially getting “paid” in some sense for the signal you’re sending by obtaining an artificially low big-ask spread that is being narrowed by algos trying to compete with each order to be at the top of the limit order book to receive the signal that someone is trading.

I think the distinction Felix is drawing (imprecisely) is that he assumes all retail orders are small enough to get fully executed at these best of prices. That may not necessarily be so. There are plenty of retail investors who may want to buy/sell a few thousand shares of a company. Or potentially much more if for example they are selling stock they received in their own company as a result of stock options or something along those lines.

Posted by DaDaDan | Report as abusive

There might be literary issues with the book but given the fact that excerpts from the NYT and other articles and news stories went viral in the day after”60 Minutes” featured the book says one thing – people want to know where OUR money went and is going and now we do. Even more important, we know that there are some people who are trying to change the system. That is what most of us want.

Posted by njglea | Report as abusive

Michael Lewis… Come on… You have been a great investigative journalist over the last 25 years… But the publication of Flash Boys is no more than a “Mad Man” advertising publication for the IEX exchange which is currently on a road show with Brad and Ronan.

The book is uninteresting, uninformative, and very biased,,, something that I thought you would never be.

IEX Group, the six month-old US stock exchange led by the heroes of Michael Lewis’s controversial new book Flash Boys, is to visit Europe for the first time in June as it seeks to build relationships with trading firms in the region.

Ronan Ryan, one of the heroes of Michael Lewis’ IEX’s chief strategy officer and head of business development, will start a 10-day European roadshow from June 18, and will visit the UK, France, Holland, Germany, Norway and Sweden.

Morgan Stanley, Goldman Sachs and JP Morgan plan to help introduce the exchange to European institutions during the visit, one person said. The banks declined to comment.

Come on Michael…. Whose side of the fence are you really on? How many shares of IEX do you own? You should be as transparent as your journalism has always tried to be.

Good luck…

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