Michael Lewis is always writing something, and, more often than not, something damning about the financial industry. Most recently, his book “Flash Boys” followed Brad Katsuyama, a Wall Street insider who saw significant problems in high frequency trading.
In a new afterword for the paperback edition, also published in the latest issue of Vanity Fair, Lewis notes, “When I sat down to write ‘Flash Boys,’ in 2013, I didn’t intend to see just how angry I could make the richest people on Wall Street.”
The anger was simply a byproduct of what Lewis thought was a straightforward story.
“The story was: what happens when a good man walks onto Wall Street and finds a problem,” Lewis says. “But of course it irritated all the people who were making lots of money off the problem.”
That problem was a result of high frequency trading, the transactions that happen in microseconds or nano-seconds. Traders at large firms had access to information moments before other investors, essentially a view a just fractions of a second into the future. Multiply a few pennies to their advantage over 2 million trades per second, it adds up.
Katsuyama created his own exchange which, Lewis says, puts a few speed bumps in front of that supersonic trading to create a level playing field. Called IEX, it’s growing, with backing from venture capitalists and institutional investors. Will that be enough to solve the problem?
“I think there’s every possibility, over a period of five to ten years of market-based change,” Lewis says. “I don’t hold a lot of hope of other sources of change.”
Other sources of change could include new regulation, or self-imposed discipline on the part of traders. Regulation would be the purvey of the Securities and Exchange Commission, but officials there have radically different views on how well the market is functioning. On one hand, chair Mary Jo White has told Congress that markets are operating well. Contrast that with former SEC official John Ramsay, who likened the structure of U.S. stock markets to the Death Star. Ramsay is among Lewis’s sources, and has gone on to join IEX.
As for self-discipline, there’s too much money encouraging traders to stick with current habits.
“If you go back to the financial crisis, what caused it wasn’t really bad people, it was people badly incentivized,” Lewis said. “This is that all over again. It’s a very badly incentivized stock market.”
And, depressing as that is, it gets worse. At least when Lewis asked the experts he featured in “Flash Boys.”
“If the market continues to be structured as it is, you’re looking at the next financial crisis.”