Posted by patron and guest blogger, Irv S.
Flash Boys: A Wall Street Revolt by Michael Lewis asserts that "Wall Street is rigged", and that traders, large and small, but especially the large ones, e.g., mutual funds, are regularly taken advantage of by "high frequency traders", which through various strategies manage to manipulate stock prices to the benefit of the HFT's. The HFT's are aided and abetted by the major banks, the stock exchanges, and investment banks.The SEC also comes in for a share of the blame.
A small group of traders and tech people, who were offended by the HFT's tactics and concerned that the system could collapse, undertook a plan to attempt to stifle the HFT's activities. The story is well told, the characters interesting, and the results surprising. The strategies of the HFT's, "front running," "rebate arbitrage," "slow market arbitrage," and "dark pools" are too complex to be described in a short review, but Michael Lewis does an excellent job of exposition and exposing.
The HFT's execute trades in milliseconds (thousandths of a second) and microseconds (thousandths of a millisecond.) They pay huge sums to co-locate their computers next door to an exchange because of the infinitesimal advantage which they can translate into billions of dollars in annual profits. The large banks and stock exchanges are paid handsomely for the co-locations and for routing investors to the HFT's. Your retirement plan or investments likely have been reduced by the actions of the HFT's. Conflicts of interest and breaches of fiduciary duty are rife.
Fans of John Grisham are accustomed to his outrageous but entertaining exaggeration. He can spin a good yarn involving millions of dollars. The HFT's and their allies make Grisham's numbers appear small--and the HFT's numbers are for real. Grisham often relies on evil conspiracies. Lewis does not find a sinister plot, but rather many greedy principals--stock exchanges, large banks, and major investment bankers--each acting independently and supporting the activities of the HFT's because of the huge profits to be gained by doing so.
The book may cause anger and depression but it will also educate and illuminate. Michael Lewis is literate and savvy. His book The Big Short has been made into a critically acclaimed movie.