Flash Boys versus Dark Pools Book Reviews

By Jeremy Paczuski from P4Capital

Author Michael Lewis (“Liar’s Poker” ,“Money Ball” and “The Blind Side”) returns once again to his Wall Street roots with “Flash Boys: A Wall Street Revolt”, his eagerly anticipated, recently published exposé into the world of High Frequency Trading. (Norton, W. W. & Company, 2014)

The book’s central figure is a Canadian working in New York, Brad Katsuyama, Global Head of Electronic Sales and Trading for RBC Capital Markets, and his struggles to execute trades on behalf of his Wall Street clientele.  Brad discovers that every time he attempts to buy a security at a given price, the price goes up before his order is complete which leaves him increasingly confused and frustrated.

This leads him on a journey of discovery where he soon finds that he is being electronically front-run by High Frequency Traders (HFTs). In its simplest, the situation is analogous to person A announcing that they are about to buy a pack of gum, then person B quickly buying the pack of gum before them and immediately selling it to Person A at an inflated price.

The core issue is that the Smart Order Routers (software programs that distribute orders across the various exchanges) are easily being gamed by the HFTs, who in some cases are also being paid by the alternative exchanges to provide liquidity (or to “cross the spread”).

Brad, who fancies himself as a sort of modern day Robin Hood with his very own band of merry misfits, then leads the design of THOR; a Smart Order Routing System of his own that builds latency into the system to ensure all orders hit the various exchanges at the exact same time, thus ensuring that buy orders don’t sit in cyber space, waiting to get picked off by HFT vultures.

The book is generally an entertaining read, however at times it tends to come off as an advertisement for Katsuyama’s new company (a sort of ethical exchange, called IEX).  While “Flash Boys” may seem revolutionary to some, this topic was previously tackled by Wall Street Journal staff writer Scott Patterson in his book “Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market” (published in 2012 by Crown Business).

Patterson provides an excellent overview of the history of the world of High Frequency Trading and Alternative Exchanges, from technology geniusJosh Levine’s Island Exchange, Stuart Townsend’s Archipelego, various bank sponsored Dark Pools such as Goldman Sachs’ Sigma X, proprietary algorithmic trading company GETCO and mega hedge fund and electronic market maker CITADEL.

If you are looking for some rainy day/cottage reading, I recommend both books for a window into the past (Dark Pools) and a look toward the future (Flash Boys) of Electronic Trading.

Jeremy Paczuski, Client Executive

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Jeremy

Jeremy is our own personal jet setter here at Planet4IT! Having lived everywhere from South Africa to Italy to Toronto, he understands how economies and business operate worldwide.

 

Having been at Planet4IT since 2006, he has shot up the ranks with astounding speed. He started off as a recruiter before moving to client development and account management, and is now spearheading the launch of P4Capital, our new division focussed solely on the technology needs of the Financial Services Sector.

 

If you’re looking for someone to help you out within the areas of Financial Services, Capital Markets or Wealth Management, you don’t have to search any further, because Jeremy has searched worldwide!

 

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