In "Flash Boys," Michael Lewis Misses the Point -- Deliberately

rcwhalen's picture

Michael Lewis’ new book “Flash Boys: A Wall Street Revolt,” hit the top of The New York Times bestseller list a week after its release.   As you would expect, the book is skilfully assembled and quite sensational.  When I first started to read it, I too was convinced that Lewis was on to a big story, an important narrative about the seamy underside of Wall Street.  

But the more I read and, more important, the more I checked his story with my colleagues on the operations side of the financial markets, the more it becomes apparent that Lewis has missed the real story – and perhaps deliberately.  The headline of “Flash Boys” is about Wall Street traders using fast technology and unfair tactics to trade ahead of retail investors – and they do – but Lewis misses the real issues, namely: 1) a lack of transparency and 2) deliberate complexity.   

It is important to distinguish between issues related to the “flash crash” of May 2010, when the deliberately fragmented ghetto that is the US equity markets almost melted down and the daily business of HFT.  The former is discussed in an important 2011 paper by Ananth Madhavan of BlackRock, Inc.  Unfortunately, as the title of his book confirms, Lewis combines the two issues together into an often confusing narrative that is almost impossible for laymen to understand.

The abusive aspect of HFT which Lewis rightly identifies is not so much about the speed of the trading but rather always being first in line.  If you think of the current market price of a stock, a couple of years ago, the trader using HFT used to sit just above and below the current market price, and sought to execute quickly when the market price either went up or down.  The fact of computers and fast network connections enables this HFT activity, but it is not really the key part of the strategy.  Instead the key is to always be first in line.

The important part of the story that Lewis misstates is that there is no conspiracy, no illegal activities.  All of the strategies used in HFT are not only legal, but they are the result of extensive rule making and public hearings by Congress, the Securities and Exchange Commission, FINRA and the major exchanges.  So while Lewis is right to say that these strategies “screw” retail customers in a practical sense, the fact is that the activity has been entirely blessed by Congress, regulators and the major exchanges.

In the first aptly named chapter, “Hidden in Plain Sight,” Lewis describes groups of traders attempting to conceal their activities, great stuff if your chief objective is to sell books.  But the reality is that the top three HFT firms – Goldman Sachs, Morgan Stanley and Credit Suisse – have been very visibly investing in trading technology for decades.  These investments in computers and fast network connections not only give them an advantage over other firms, but afford these firms bragging rights on the Street.  If you are an equity trader, you don’t want to work at a “flow shop” like Merrill Lynch.

Part of the reason that the Big Media is making such a fuss over “Flash Traders” is that they have no idea how the equity markets actually work in the brave new world of Reg NMS – 600 pages of unintelligible rules and definitions.  Lewis notes that as the size of equity trades after 2000 “had plummeted, the markets had fragmented and the gap in time between the public view of the markets and the view of high frequency traders had widened.”  This passage and others give readers the false impression that the speed of the HFT is the key point, but this is incorrect.

Going back to the point about being first in line, let’s take an example.  The BATS order type known as “display-price sliding” allows an investor to essentially position themselves in the center of the equity market for a given stock.  This means that when the market price changes, instead of the HFT “market order” being canceled as per the National Best Bid and Offer (NBBO) rule, it simply “slides” to follow the market.  Most investors and advisors don’t even know that such an order type exists.

For example, when Lewis talks about the fact that Virtu Financial had made money almost every day for five years, the reader is given the impression that the speed of the trading gave Virtu and other HFT shops the advantage.  But the reality is that the high frequency trader not only executes before the retail customer, as Lewis describes, but is always first in line.  This structural duplicity is programed into the system, but is perfectly kosher under Reg NMS.

Indeed, the real scandal is that all of this has been entirely blessed by the SEC, FINRA and the major exchanges and is described in the voluminous public documentation for permitted order types.  But suffice to say, virtually nobody in the Big Media or at most Wall Street firms understand any of this or knows, for example, that there are over 100 different order types allowed by the SEC and FINRA under current law and regulations.

The crime of HFT is that Congress, the SEC and other regulators have allowed a handful of Wall Street firms to assemble a set of opaque market rules that few people understand. You could probably put all of the Wall Street operations people who really understand HFT in a large conference room.  Outside of the small community of traders and operations people who make HFT work, almost nobody else on Wall Street really understand the nuances of the business.  And virtually nobody at the SEC has a clue how this works in practice. 

We should thank Michael Lewis for using his celebrity and considerable writing skills to draw attention to this issue of HFT, but “Flash Boys” incorrectly demonizes individual traders and firms.  Lewis “Puts a Face on HFT,” but in doing so misses the real point of the problem.  Instead of drawing an accurate picture of HFT, namely corruption and stupidity in Washington, admittedly a banal and boring tale, Lewis chose instead to create a sensational and interesting fictional narrative that will obviously sell more books.  

“Flash Boys” is a book written for Hollywood instead of the history books or policy makers. Just as the hyper-popular “Wolf of Wall Street” was not an accurate portrayal of fraudster Tom Prousalis, as his daughter Christina testifies, the story line in “Flash Boys” is more fictional dramatization than fact.  The true perpetrators in Michael Lewis’ tale of Wall Street greed and corruption are, in order of complicity, the US Congress, the SEC, FINRA and major exchanges, and last but not least the community of Buy and Sell Side Advisors, who genuinely do not understand how HFT really works.  That covers just about everybody.    

As illustrator Walt Kelly’s Pogo said famously: “We have met the enemy and he is us.”

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malek's picture

Christopher, you are beating the "speed" issue here a bit too much in my opinion. without providing additional clarification.
Yes, execution speed has nothing to do with it, but communication speed (and/or shortcuts only accessible to insiders) which allow HFT to overtake all other market participants on their way from bid/offer to execution, on a regular basis to front-run them, is still if only loosely covered by that term as well!

Also I wonder if you can provide any pointers where in RegNSM it explicitely states this way of front-running is legal -
I don't think so and I tend to guess that is a loophole in expressed regulations, and as usual nowadays everybody enforces rules by the letter only and nobody looks at rule intent anymore (covering behind deliberate complexity as you mention.)

The Econ Ideal's picture

Dark Pools (Scott Patterson) is a better read than Flash Boys, especially for those looking for a decent historical perspective. Patterson talks about Reg NMS and hidden order types, and one aspect emerges that perhaps is not emphasized enough, that being quote fraud. When bidders are routed to the best quoted price (as required by Reg NMS) only to find that price not honored (completely or at all - the other side "backs away" from the trade through the use of special order types) then that can represent fraud, and isn't different at all from the behavior exhibited by establishment dealers on the SelectNet of yesteryear. Electronic trading on islands and archipelagoes historically arose as an alternative to dealing with dishonorable trader/dealers. The enemy soon returned to re-corrupt the new paradigm. That enemy is by and large those who succeed to run the House (casino), and those who get kickbacks to enable it to happen. Not very original, even though the technology has dramatically changed. 

pain_and_soros's picture

Let's stop pussyfooting around this then & start calling out names....people involved in this conspiracy.

Like the members of Congress & congressional committees who brought Reg NMS into force..the lobbyists who funnelled money to them, and the source of that money.

Get some of the very few members of Congress that aren't corrupt & start hearings into this monstrosity and let them set up congressional hearings & call witnesses....

Then find some state AGs (since Holder is on the HFT side) that have the balls to lay criminal charges & put some of these guys away for life.

The challenge is that virtually the entire government apparatus from the legislators to the courts to governing bodies like the SEC have been almost completely corrupted (& those that aren't face tremendous, if not insurmountable obstacles.)

Let's not go after Michael Lewis for bringing mainstream attention to this matter....let's use that attention to go after the real perpetrators...

Whalen is all over the map in this article - first crticizing Lewis's motives as self-serving, then pointing out the real culprits & finally lamely concluding it is "you & me". 

That is simply total BS and worse than what he criticizes Lewis for - people who claim to know more and/or better should be held to a higher standard than those that don't.  To simply point out the culprits, but then conclude it is "you & me" speaks to which side his bread is buttered.

kchrisc's picture

I have been told, and the 60-Minutes publicity seems to support, that the book is a ruse to assist Goldman in taking back the lead in this profitable area of trading.

Sort of like when Wal-Mart comes out as for an increase in the minimum wage knowing that it will be detrimental to their smaller competitors.


"Propaganda media is the smell, the shit you will have to look for."

ebworthen's picture

All Washington D.C.'s fault?

C'mon Whalen, you know that Wall Street tells them how to write the laws so they can skirt them, and what laws to repeal (Glass-Steagall).

As if Wall Street isn't the problem here?  *cough*

Lewis had to write it the way he did or the dim-witted American Public would not have gotten past the first paragraph or chapter.

Your take is disingenuous at best.

The markets are rigged, and Wall Street is a Ponzi.


Angelo Misterioso's picture

it is corruption- just becasue a lot of various govt organizations get hoodwinked by some HFT firms that they are "helping liquidity" does not make it right - many of our regulators are too stupid to understand what they've allowed....

ptoemmes's picture

This is rhetorical...but anyway...

So I don't like this Reg NMS one bit.  It's complicated on purprose.  I don't understand it.  Moreover my elected representatives don't undertsand it.  But if I get educated by the likes of Lewis and Whalen then I am to try to persuade my elected representatives - of which there are three among hundreds - to change it.  The same ones who (may) sit on committees that draft this stuff and/or vote to approve positional nominations to the regulatory apparatus - such as it is or isn't.  Or vote them out.  Now, these reps - and likely anyone who might be voted in to replace them - don't know sh*t either.  They will listen to the wall-to-wall special interest lobbyists - show me the campaign money - who essentially write the legislation/rules and provide a nice posy-government job home for the legistlators/regulators.

I suggest how the legislative/regulator appartus is captured is at least as important as anything else.  It's how all this other uncovered bullsh*t comes to be.

Like I said...rhetorical.  It's unlikely to change in a representative democracy such as we have become. So, Lewis correcly (IMHO) chooses to fight after this fact.  Would like to see a "why it happens - capture" book though.



Pasadena Phil's picture

" Lewis misses the real issues, namely: 1) a lack of transparency and 2) deliberate complexity. "

What book was Whalen reading? Those were CENTRAL POINTS throughout the book and Lewis addressed them in great detail. Lewis BLUNTLY STATED that the new technology was developed not to make investing more efficient for investors but for intentionally breaking up trades to rerout the pieces into dark pools for banks to trade against or further scattering them to various exchanges for the ONLY purpose of front running those trades.

Why is Whalen even posting on this site?

hankwil74's picture

Could not say it better myself.

Seasmoke's picture

"I like Jamie Dimon." - Chris Whalen (speaking with Max Kaiser)

Downtoolong's picture

Lewis misses the real issues, namely: 1) a lack of transparency and 2) deliberate complexity. 

I’m sure Michael Lewis would be happy to address these issues in a follow on book if the people he interviewed for his research would be a little more transparent and a little less deliberately complex.  

I like what he said in one of his CNBC interviews too. Paraphrasing, “HFT didn’t come about because of some massive Wall Street conspiracy. The real conspiracy begins once the problem is brought to the surface and exposed”.

swmnguy's picture

While we're talking about misdirection, I'd like to mention one of my favorites.  Bernie Madoff.  He's serving what, a million years in stir for running a Ponzi scheme?  He's the worst guy since ever because he took money from widows and orphans and just kept it rather than making any real purchases or trades, and issued bogus statements.  At least, that's the story.

What has always struck me about Madoff was that his "customers" were not in fact widows and orphans. They were, the ones whose names I've heard, wealthy and well-connected investors.  They were clamoring to get in on Madoff's deal because Madoff always got 20%+ annual returns.  Which is, of course, not possible more than about 1 year in a row.  But Madoff had been President of the NYSE.  So all the smart wealthy people like Jerry Seinfeld and Steven Spielberg wanted to invest their money with Madoff.  Why?  Because they thought with Madoff's connections, he was using insider information to front-run the markets and they wanted in on that.  When it turned out he wasn't doing anything at all with the money, and just fabricating fake retroactive trade records, as if he had been prescient, these people were pissed.  They wanted in on the criminal insider trading, to be one of the elite insider club that's above the law and common societal standards that apply to the "little people."  When they found out they themselves had been ripped off, were they ever pissed.  See, the old expression "You can't con a con" is 100% false.  You can only con a con.  An honest person wouldn't have wanted anything to do with Madoff because whatever the hell he was doing, it was obviously dirty.  The only reason we think of Madoff's "victims" as victims is that they played the media really well.  They were would-be co-conspirators who got double-crossed.  Neither pity nor soup for you.

RCWhalen's implication here is that Michael Lewis similarly missed the point.  I don't know about that; I haven't read the book nor do I know more than the average punter how this sh*t works.  My feeling is that HFT is just a novel mechanism allowing a new wrinkle on age-old insider trading and front-running.  I've never run across a new con.  Sometimes new techniques, but the con itself is always an ancient play on human greed.


TrustbutVerify's picture

Interesting, your mention of how Madoff "victims" were portrayed in the press and thought of themselves as victims.  And afterall, they just wanted in on the con.  But the con as you seem to define it occurs when hoped for returns and consistently better than the averages.  

But it wasn't just Madoff and his investor minions...I am reminded how, before the 2008-2009 debacle, so many were involved in various "high flying" bond and stock mutual funds that suddenly were portrayed as victims when the market tanked.  $Billions were paid by financial institutions, coinciding with public pilloring (which continues to this day) to those that suddenly were surprised that their high flying investments could lose money.  

But as a matter of fact, 99% of everyone else lost drastic amounts of money.  The "con" in most people's case was the overall cheerleading that was screamed from all corners. "Doomsayers" were presented as dunces to be laughed at.  

HFT, more accuractly - "frontrunning," is serious and it should be dealt with but its not the big picture as much as Lewis wants to imply it as so.  Unfortunately, too many people will grab onto his books information and think they've gotten to the core of "what's wrong."  They will be mistaken.  

People seem to conciously refuse to see the evidence of danger in front of their eyes - the absolutely giant macro numbers in regard to debt, spending and astounding promises to continue do so here and around the world.  Its simply unsustainable - yet we and those that benefit from serving us will so quickly be looking for scapegoats when the big implosion occurs.  But the finger should be pointed at the lazy individual that sits back and does nothing to prepare. 


mccvilb's picture

Why do you say it's unsustainable?

For thousands of years it's been a combination of currency, commodities, equities, futures, bonds, indexes, data, knowledge, chattel and real estate changing hands willy nilly, occasionally interrupted by occasional acts of forfeiture, assignment, gifting, theft, fraud, conspiracy and war. Some of it lasts longer as in the case of an exchange of hard assets, some is ephemeral like a scientific patent and can lose all value in moments. Some of it gets pushed down the road until it's forgotten. It's all one big self-sustaining fucktard of a fiction.

If anything, history has shown that in the end mythologies win out over facts, because in truth nothing is fact. The people screaming that our politicians are piling a huge burden of debt onto our children that someday they will be forced to pay in taxes is a wonderful mythology that in and of itself becomes a tradeable fiction. On a subatomic level a 1200 pound cubic foot of gold consists mostly of empty space. All we need is a tiny piece we can call our own to sustain ourselves while we are here, but our brains aren't programmed to accept "enough".

Hmmm. Never mind.

kurt's picture

Sounds like a cockroach when the kitchen light goes on, skitterin' to hide. Now wrap yourselves in your walnut paneled termite mound, call out the soldier ants!

Roger Knights's picture

"Indeed, the real scandal is that all of this has been entirely blessed by the SEC, FINRA and the major exchanges and is described in the voluminous public documentation for permitted order types."

That parallels the well-known saying, "What's shocking about DC isn't what goes on that's illegal, but what goes on that's legal."

PT's picture

As Lewis explained in one of his earlier books, when they don't like the laws they get them changed.  It's democracy in action!  (Lewis didn't say the italicized bit.  I did.  To make us think a bit harder.)

Pitchman's picture

PT and Roger Knights you guys hit the nail on the head.

There have been 5 or 6 other tomes on HFT and none got the attention of Lewis;s book. And, it is not that anyone paying attenthion did noit already have an understanding of what was going on.  But hey, he's famous, and there is all this NSA and preemptive war stuff, it's time for a distraction. So, now the main stream fantasy machine must kick it into high gear.

The fact that the SEC, Congress and FINRA were all part of making this possible points to the fact that they created the problem.  So I ask, now that it has whipped the public into a frenzy who will they demand to fix it?

What you are witnessing is classic Hegelian Dialectic, thesis-antithesis-synthesis or more simply put Problem-reaction- solution.  This is the format used in all Western Change for the last 300 years.  It is never about the problem itself, that was baked into the cake.  It is always about the solution that sews the seeds for the next problem.  It is about greater control and limiting the public's ability to seek redress.

A recent shinning example is FIN-REG.  Two men stand out in their complicity leading to the mortgage backed securities debacle.  Barney Frank and Chris Dodd were the two piles of human excrement that passed legislation allowing the crisis to take shape.  

What was the FIN-REG bill called?... Dodd-Frank

And the results: To Big-ger to Fail and the consumer protection part of the bill was watered down and obfuscated to a degree where we are worse off than where we started.

Another pathetic use of the dialectic is the NEOCON, PENAC, CIA use of Al-Qaeda insurgents to destabilize Libya and Syria.

"When we remain locked into dialectical thinking, we cannot see out of the box.
Once we get what's really going on, we can cut the strings and move our lives in original directions outside the confines of the dialectical madness. 
This releases us from the limitations of controlled and guided thought."  - Word of the Day: Hegelian Dialectic

Learn about the Hegelian Dialectic here: One Mans Terrorist... KONY 2.0

Re. 9-11 Here: A Decade of Denial and Deception

Here: The Silent Coup: Para Militarization And The New Reich

And a list of related posts Here:

Please visit: Inflection Point



zipit's picture

Sorry, corruption does out occur without faces.  

ohaitieaqui's picture

Michael Lewis since he started writing on it ,has made finance activities funny, considering the amount of books written , he is first and by far, he is funny and witty, and he does makes money on books that should not sold more than 10 000 if this talent was not there.

pachanguero's picture

Who is this troll?

Bankstein Swissgoldberg's picture

lmao +1


sorry double post. damn i wonder how this happened.

Fuh Querada's picture

you were looking at the tits instead of the keyboard.

pherron2's picture

"We should thank Michael Lewis for using his celebrity and considerable writing skills to draw attention to this issue of HFT" Would have been a great headline for the story

Otherwise, "I'm bitter because I didn't write a best seller that covers this in a way I think it should" works okay.

Here's another title possibility, I'm grateful that his book brought eyes to my article."

MillionDollarBoner_'s picture

R C Whalen writes like a TPTB-sponsored troll ;O)

Fuh Querada's picture

he is a double agent rather like his buddy Jim Ricktards.

Bangin7GramRocks's picture

It's always the gubmints fault. Don't blame the criminals, blame the gubmint. So typical.

Dr. Kenneth Noisewater's picture

I blame the morons who elected the government that was so easy and cheap to capture.

But then again, if a sucker and his money is soon parted, I'd rather be the partER rather than the partEE.  Thanks, suckers!

pndr4495's picture

Trading is trading. The specialist's post and the commodity pit have been removed from a central location in the bowels of a building. Trading behavior is the same. The desire to be first in on a trade is what motivated traders to spend money for the ownership or lease of a trading membership. Whalen is right about the " being first " theme , but also , races are won by the fastest competitor. Fastest does not equal fairest in this steroid filled area.

williambanzai7's picture

I believe the author of the book provided a tremendous service because members of Congress now know that HFT is not the latest Kim Kardashian endorsed eye shadow worn by California Senators and the Chairman of the SE FleeCe.

Big Brother's picture

The author here neglected to ask himself one more "why".  So I will for him:  "why would Congress and the SEC not look to deeply into the lack of transparency and deliberate complexity?"  Because the benafactors of these issues provide large compaign contributions and on occasion offer work to outgoing regulators (with paygrade commensurate to the favorable regulation gained or lack thereof).

I'm on the last chapter- fantastic book.  Basically, Brad Katsuyama sought to "take away the prey from the predator rather than kill the predator".

PeakOil's picture

Precisely. Why would they not look?

Two words:  Regulatory. Capture.

DavidC's picture

In fairness to Chris, I haven't read Michael's book yet but, having seen various of the TV interviews with Michael and Brad, my overall impression has been exactly the point that it's the first in line that the HFTs are aiming for. Indeed, the very premise of IEX is to prevent HFTs from being first in line, its set up being to slow them down so that all the orders (quotes?) arrive at the same time as far as possible.


Casey Stengel's picture

"but Lewis misses the real issues, namely: 1) a lack of transparency and 2) deliberate complexity."

Did you read a different book titled Flash Boys? Lewis talks at length about the lack of transparency and deliberate complexity. It will be a great movie.  

JailBank's picture

Do not look for Flash Boys book Mr. Whalen read. It most likely has lots of pics involving activites in dark alleyways someplace in Thailand.

barliman's picture


Richard Christopher Whalen is a self described author and investment banker. An interesting intersection of two prominent methods of misleading people - which is what he is doing here - perhaps in a straighforward conflit of interest approach since he has a book due out in H2 2014 titled Financial Stability: Fraud, Confidence & the Wealth of Nations.

He removes ALL doubt regarding whose side he is playing for with this quote:

"The important part of the story that Lewis misstates is that there is no conspiracy, no illegal activities. All of the strategies used in HFT are not only legal, but they are the result of extensive rule making and public hearings by Congress, the Securities and Exchange Commission, FINRA and the major exchanges. So while Lewis is right to say that these strategies “screw” retail customers in a practical sense, the fact is that the activity has been entirely blessed by Congress, regulators and the major exchanges."

Horseshit, Mr Whalen - unadulterated horseshit. Rather than conducted in "public hearings" the Congress went out of its way for DECADES to obscure the regulations allowing members of Congress and their staffs to trade on INSIDE information revealed to them in confidence. As recently as last month, Congressional leaders were STILL searching for a way to return this SPECIAL PRIVILEGE to the members of their staff.

S.E.C. rule making is singularly the most obstuse in all of government. If you had read Michael Lewis's descriptions of several S.E.C. meetings contained in the book, you would have realized the man on the street has been clued into the reality YOU don't want him to understand.

Front running IS ILLEGAL. Quote stuffing IS ILLEGAL. These are NOT gray areas, you EXCREMENT spewing P.O.S.

Is it illegal for BATS to have over 150 orders that are ONLY available to the HFT companies that have signed up for colocation of their servers next to the BATS servers? Especially when the orders are specifically designed to EMPOWER front running and quote stuffing.

Is it illegal for the "dark pools" to operate in a completely opaque manner so the market is segmented into a multi-tiered, UNLEVEL playing field?

I know - let's get someone like Rudolph Guiliani to head a Special Prosecutor's Office established to pursue these questions with prticular focus on the R.I.C.O. Act aspects of the activities of the TBTJ banks, brokerage firms, HFT organizations, "Dark Pool" operators and the other slime that "runs" the markets these days.

Given the right person with the right resources, we could end up making the "Masters of the Universe" involuntary attendees at a Federal Maximum Security Prison after having ALL of their ill gotten gains seized under the R.I.C.O. Act.

I've got nothing to worry about ... how about you Mr. "Investment Banker" Whalen?

Bindar Dundat's picture

I read the book three times and did research as well RCW!   The fact that you point out "missed topics" would be laughable if it wasn't that the points you say he missed are the exact points he made in cool unrelenting prose.  

You Sir get an "F" on your book report!

JailBank's picture

I was thinking the same thing. I just finished this book and Lewis talks directly to both of these missed points at numerous times in the book. Did the author read the book at all? This article is shit.

eatthebanksters's picture

Whalen and Lewis both make good points. In the book Lewis states that every time new regulations are passed real smart fuckers figure how to profit from them. Chris states the the problem is lack of transparency and and overly complex system, which benefits those who can exploit it. My take is that there will always be predators and parasites who will rip people off as long as its legal...these people don't suffer from moral or ethical dilemas their behavior creates. Why, because the only guy to go to jail who worked in the big banks (8 years) was a Goldman code writer. There are no laws in this country. (Harry Reid ought o know that).