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Flash Boys - Michael Lewis


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Former RBC banker is hero of new Michael Lewis book Add to ...

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NEW YORK — The Globe and Mail

 

Published Thursday, Mar. 27 2014, 12:40 PM EDT

 

Last updated Thursday, Mar. 27 2014, 12:40 PM EDT

 

A former Royal Bank of Canada banker has a starring role in an upcoming book by Michael Lewis, the foremost chronicler of American finance.

 

Mr. Lewis – the author of numerous books including Liar’s Poker, Moneyball, and The Big Short – is about to publish a much anticipated account of the way high-speed trading has transformed markets.

 

Entitled Flash Boys, the book is being released on March 31 but select pages can now be viewed using a feature on Amazon.com.

 

In the introduction, Mr. Lewis says that a Canadian – Brad Katsuyama – stands at the centre of his narrative. Mr. Katsuyama’s “willingness to throw open a window on the American financial world, and to show people what it has become, still takes my breath away.”

 

The second chapter of Flash Boys is devoted to Mr. Katsuyama (he is now CEO of IEX Group Inc. in New York, a new stock-trading platform aimed at shielding investors from certain types of high-frequency traders). The book contains both zingers and compliments for Canada’s largest bank.

 

RBC, Mr. Katsuyama’s former employer, is described as “stable and relatively virtuous” but somewhat clueless as it attempted to push into the big leagues in New York a little over a decade ago. “It was as if the Canadians had summoned up the nerve to audition for the school play, then showed up in a carrot costume,” Mr. Lewis writes.

 

“The bank’s run by these Canadian guys from Canada,” the book quotes a former RBC director as saying. “They don’t have the slightest idea of the ins and outs of Wall Street.”

 

In its U.S. hiring, RBC had a “no-asshole” rule and instead looked for people who were “RBC nice,” the book says. It detailed the culture clash that ensued after RBC bought Carlin Financial, an electronic trading firm. The new arrivals rented out a Manhattan nightclub for the firm’s Christmas party, formerly a staid affair, and their chief liked to walk around the office brandishing a baseball bat.

 

Not all of the chapter’s pages are available for viewing, but what can be seen reads like a mystery story, as Mr. Katsuyama and his colleague Rob Park investigate the inner workings of the U.S. stock market.

 

Mr. Katsuyama noticed strange things occurring in the execution of trades, the book said, with prices shifting against him after he entered orders but before they were completed. Increasingly, he realized that he was “running a stock trading department unable to trade properly in the U.S. stock market,” Mr. Lewis writes.

 

The book goes on to describe how Mr. Katsuyama and his colleagues developed a tool called “Thor” to eliminate the advantages enjoyed by high-frequency traders.

 

Mr. Katsuyama and a spokesperson for RBC weren’t immediately available for comment.

 

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  • 2 weeks later...

I am really enjoying the book..it's a great read so far for my simple mind :)

 

I'm enjoying it too so far. Now looking back on the media coverage of it, it's pretty obvious that none of the media people had actually an advance copy to read, they just had an intern do a quick search through the book for certain keywords and asked questions based on the paragraph surrounding whatever that was.

 

Well, they probably always do that...

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I thought this anecdote from the book about IEX was pretty funny.

 

They called their exchange Investors Exchange. They shortened it to IEX because when they registered the website, they realized there was a problem.. See for yourself:

 

www.investorsexchange.com

 

;D

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I thought this anecdote from the book about IEX was pretty funny.

 

They called their exchange Investors Exchange. They shortened it to IEX because when they registered the website, they realized there was a problem.. See for yourself:

 

www.investorsexchange.com

 

;D

 

That is funny. Looking forward to reading the book.

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I thought this anecdote from the book about IEX was pretty funny.

 

They called their exchange Investors Exchange. They shortened it to IEX because when they registered the website, they realized there was a problem.. See for yourself:

 

www.investorsexchange.com

 

;D

 

That is funny. Looking forward to reading the book.

 

It is worth it. By about 2/3 through it, it becomes very clear what the problem with HFT is, where they describe the HFT strategies but also how exchanges works behind the scenes, will all kinds of hidden staircases and trapdoors that most people don't know exist (brokers selling their own customers' info to HFT firms so they can be front-run; 150 different order types, some described by 20 pages of inscrutable legalese, with no obvious purpose except to allow a HFTer to not do the trade that he publicly appears to want to do or to get a kickback without providing the liquidity that the kickback is supposed to incentivize? yeah, that's just random luck that all that stuff is there and that the exchanges make most of their profit from HFT..).

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It is worth it. By about 2/3 through it, it becomes very clear what the problem with HFT is, where they describe the HFT strategies but also how exchanges works behind the scenes, will all kinds of hidden staircases and trapdoors that most people don't know exist (brokers selling their own customers' info to HFT firms so they can be front-run; 150 different order types, some described by 20 pages of inscrutable legalese, with no obvious purpose except to allow a HFTer to not do the trade that he publicly appears to want to do or to get a kickback without providing the liquidity that the kickback is supposed to incentivize? yeah, that's just random luck that all that stuff is there and that the exchanges make most of their profit from HFT..).

 

Interesting! Hopefully all that information will lead to real changes at the exchanges or a push by customers to places like IEX.

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Interesting! Hopefully all that information will lead to real changes at the exchanges or a push by customers to places like IEX.

 

That's what I'm thinking. This kind of stuff hasn't been around that long (there was a legal change around 2006 that made a lot of this possible), and probably won't be around that long now that there's more of a spotlight on it.

 

Note that this is different from the legit kind of HFT, which even IEX wants to encourage. You're a market maker or trying to react really fast to information? That's fine for the long term. But exchanges  and banks (dark pools, etc) and HFT working hand-in-hand to create a rigged game, that's probably going to see the pendulum swing in the other direction sooner than later.

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People are pist because they know things are going to change. Look at how the president of the BATS exchanged acted last week.

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People are pist because they know things are going to change. Look at how the president of the BATS exchanged acted last week.

 

I think people are starting to realize that it doesn't just affect rich people. The narrative is starting to mention more that "big money" is actually regular Joe's pension fund and mutual fund, and that people managing their money are complicit in them getting skimmed and the people supposed to represent them are making a lot of money from it (via their prop trading, dark pools, fees from HFT). That's what creating more outrage on top of the abstract injustice of it.

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  • 2 weeks later...

Just finished reading the book.

 

1- I learned some things about HFT that I had no clue about.  It did not occur to me that HFTs would abuse special order types and that there is publicly-available information about these order types.

 

2- There are some technical errors in the book.  Lewis confuses taking liquidity with providing liquidity at one point in the book.  He gives an example of a trade happening at $30.0001... he says that the the investor bought at that price when he meant to say that the investor sold at that price.

I suppose that Lewis is trying to simplify a very complicated subject. 

 

3- Lewis praises IEX as being the solution.  However, IEX seems like it has some holes in it (which they may eventually fix).  The book even gives an example where a HFT arbitrages dark pool pricing versus IEX's midpoint pricing.

 

The midpoint order seems kinda derpy to me.  In the example given in the book, the client should have placed a limit order instead at the midpoint.  In an ideal world, regulators would allow all investors to price in sub-penny increments.  They would have a solution to "shaving".  Ebay for example has a solution to shaving.  On Ebay, you can bid in penny increments.  However, you need to top the highest bid by a certain amount (e.g. 25 cents or some percentage; I forget the exact number).  If you don't, then the highest bidder will still have the highest bid.  You can't beat a $1000.00 bid with a $1000.01 bid.

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2- There are some technical errors in the book.  Lewis confuses taking liquidity with providing liquidity at one point in the book.  He gives an example of a trade happening at $30.0001... he says that the the investor bought at that price when he meant to say that the investor sold at that price.

I suppose that Lewis is trying to simplify a very complicated subject. 

 

He mentioned in an interview that there were some errors that would be fixed in the next edition, but that they didn't detract from the overall point. He said that it's impossible to publish 100,000 words and not have people find some errors.

 

It's just funny that some people on the financial news media attacked him with the good old subtext of: "Ha! See! There's an error here, hence the whole book is null and void."

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1- I'm not sure if anybody in the financial media picked up on the errors in his book.

 

They did pick up on the lie that the CEO of the BATS exchange told though.  To some degree, I actually kind of liked BATS in the past.  They were the underdog trying to take market share from the incumbents.  It used to be that they were aggressive with pricing.  (I haven't checked if that is currently still the case.)

 

2- What I find bizarre is that some people actually defend HFT, e.g. Kid Dynamite.

 

3- The HFTs are attacking Lewis because he may destroy their entire livelihood.  If the SEC, exchanges, and brokers stop giving them special trading advantages... their business model will be in a world of trouble.  Then they'd actually have to trade based on skill (which is what Swifttrade, Title Trading, SMB Capital, Bright Trading, etc. do).

 

Their business model is based on fleecing investors' order flow and paying kickbacks to the brokers and exchanges.  Obviously I think that this business model is stupid and destroys value.

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  • 6 months later...

Just finally got around to reading this book.

 

I get the sense both from the pre launch PR and the book itself that he expected that the book would be a shot across the bow of the US market and that it would change behavior and regulation, Basically validate the good guys and bring down the bad guys.

 

He also seems to be doing a great sales job for the exchange created by the RBC guys.

 

So since this book has come out besides a bunch of people complaining about being screwed is anyone aware of any changes that have come about as a result of this book? Is the new exchange working as planned and is it being used? any changes in regulations or practices on wall street?

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So since this book has come out besides a bunch of people complaining about being screwed is anyone aware of any changes that have come about as a result of this book? Is the new exchange working as planned and is it being used? any changes in regulations or practices on wall street?

 

http://iextrading.com/insight/stats/

 

Their volume seems to be going up, so that's good.

 

But for other changes, it could take a while. These things are always very slow, but there are certainly a lot more people aware and thinking of these issues than before (regulators, politicians, voters, investors, etc).

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  • 4 months later...

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