Flash Boys: Cracking the Money Code by Michael Lewis, review

Michael Lewis tells the compelling true story of one man’s mission to tame Wall Street

By Alex Preston 05 April 2014 • 9:00am

Climbing the money mountain: Michael Lewis and Brad Katsuyama Credit: Photo: Wesley Merritt

John Lanchester’s fine expository piece in the Evening Standard about the “flash crash” of May 2010 had something missing. He talked us through the mechanics of high-frequency trading – the computers that raced each other to execute transactions, the absurdly short timescales involved, the startling fact that these lightning-fast trades make up 60 per cent of the multi-trillion-dollar American equity markets. He went on to explain how a single order placed by a previously little-known firm in Kansas City caused the largest ever points drop in the Dow Jones index in a single day.

What lent the piece an uncanny air, though, was that it barely made reference to human beings.

The replacement of red-braced bankers by polished-chrome computers is the subject of Michael Lewis’s new book, Flash Boys, which charts the rise of high-frequency trading, a strategy by which financial firms use sophisticated computers to execute transactions nanoseconds ahead of ordinary investors, making risk-free profits at the expense of less hi-tech competitors. Lewis outlines the enormous amounts being made by these secretive and cut-throat trading firms that, he claims, are “rigging” the world’s stock markets.

If Lewis’s earlier books uncovered market abuses or elucidated the often wilfully obscure world of high finance, Flash Boys is remarkable for its moral outrage as it reveals how high-frequency traders have hoodwinked both investors and the public.

Lewis’s skill is in unpicking the complexities of the financial world, providing explanations clear enough for outsiders to understand, and well enough informed to appeal to experts.

He is that rare beast: an insider who writes lucid, jargon-free prose and who never loses track of his ultimate responsibility to the story. He is perhaps the American equivalent of John Lanchester, but where Lanchester has produced a non-fiction account of the financial world, Whoops!, and a novel, Capital, dramatising the human story, Lewis has merged the two – factual books that read like novels.

His first book, Liar’s Poker (1989), was a Wall Street classic charting his time working in the London and New York offices of Salomon Brothers, “the world’s most profitable investment bank”.

Written in a chummy first-person voice and full of vividly drawn characters (including the brilliantly profane “Human Piranha”), the book, Lewis claims, was intended to act as a deterrent to young people thinking of a life in finance: “I hoped that some bright kid at Ohio State University who really wanted to be an oceanographer would read my book, spurn the offer from Goldman Sachs, and set out to sea.”

In fact, the genius of Liar’s Poker lay in its author’s ability to sit on both sides of the fence at once, so that it can be viewed both as a satire on all that was gross about venal and corpulent bankers – but also a celebration. Lewis was such a genial narrator, forged such graphic characters from the trading floor and, above all, was such a striking success himself, making $500,000 in one year, that you can see why so many young city types adopted Liar’s Poker as a how-to guide.

Lewis’s subsequent financial books, The Big Short (2010) and Boomerang (2011), demonstrated an author on the lookout for a figure to replace the intimate first-person voice of Liar’s Poker.

In The Big Short, he homed in on the small group of traders and analysts who predicted the credit crisis. Central to the story was Steve Eisman, an eccentric and rebarbative hedge-funder who was one of the earliest to see through the subprime lies. Through the eyes of Eisman, Lewis strung together from the chaos of the financial crash a narrative that was as coherent as it was compelling. In Boomerang, he told the story of the European debt crisis through the national stereotypes of the various countries involved. It sounds like a bad idea on paper and it was, particularly his chapter about the Germans which sought to demonstrate that the shadow of Adolf Hitler was responsible for German intransigence in the face of Greek debt default. It was ill-judged and parochial and showed that Lewis was far less comfortable outside the English-speaking financial world.

The central character in his new book Flash Boys is Brad Katsuyama, a Canadian trader on the Wall Street floor of the Royal Bank of Canada. A prawn in a sea of sharks, RBC is known for being “nice”. Katsuyama himself is a thoroughly sympathetic chap, out of place amid all the posturing and testosterone. He’s an outsider like Steve Eisner, and like Lewis was himself, and it is his status on the verges of the financial highway that enables him to pose questions that others were either too stupid or too conflicted to ask.

It is Katsuyama who realises early in 2007 that the stock markets are not operating as they should; that trades he once would have executed with ease are being snapped up before he can act. Through Katsuyama, Lewis reveals that in recent years the financial world has undergone a revolution “that has ended with computers entirely replacing the people”.

We discover that crises like the flash crash of 2010 – when computers racing against each other to execute transactions chased the market dramatically lower – are just one symptom of the astonishing rise of high-frequency trading.

More sinister and more dismaying is the way these high-frequency traders use the speed of their computers, the information they glean from the markets, to legally swindle everyday investors. Lewis describes the US stock market as having morphed into “a class system, rooted in speed”. What we see is the high-frequency traders leaping consistently ahead of the regulators. Every closed loophole seems to open another, every new law provides an opportunity for risk-free, high-speed profit.

Over the course of eight tightly plotted chapters, Lewis charts Katsuyama’s attempts to take on the high-frequency traders, while working first at RBC, then by setting up IEX, a stock exchange whose mission is to thwart the high-speed front-runners.

Alongside this story is the tale of Serge Aleynikov, a computer programmer arrested for allegedly filching data from Goldman Sachs. He’s a finely drawn figure, like one of Tolstoy’s ascetic priests, and the story of his wrongful arrest, the farce of his trial, assert a vice-like grip. It is the interplay of these two strands – the way the reader at once roots for Katsuyama, outraged at the injustice of Aleynikov’s imprisonment – that lends the book its moral depth.

One difficulty for a writer like Lewis is that the publishing world moves much more slowly than that of high finance. Flash Boys is impressively up-to-date, with the final chapters taking us to the end of 2013. This means that the book’s outrage is still relevant and salutary – the high-frequency traders are still out there making billions from the unsuspecting everyman.

But it also means that the ending is left open, so we don’t experience the satisfaction of the story snapping shut.

Another problem is that Flash Boys allows its villains little say in their defence. We are not shown the human faces behind rapacious giants such as the high-frequency trading operations Citadel and Knight.

Part of this is no doubt to maintain the book’s thesis that we have moved into a world where amoral computers make all the decisions. It perhaps also had to do with the fact that such firms thrive on secrecy and did not grant Lewis an interview. Either way, the lack of counterbalancing voices means that Flash Boys sometimes feels more like a rant than an investigation.

Yet it is the book’s rhetorical drive that knits the narrative together. In one passage, Brad Katsuyama describes his project to overthrow the high-frequency traders as “a situation where a person, through his immediate actions, might change the world”, and this note rings throughout.

The image of 9/11 hangs over Flash Boys like a shroud, with each of the key players at IEX having some specific link to that fateful day. Their aim “to restore fairness to the US stock market – for the first time in Wall Street history, perhaps, to institutionalise fairness” is driven by the fact that, to attack America, the 9/11 hijackers targeted Wall Street and that in the ensuing years Wall Street had in some ways proven itself deserving of attack.

In righting the wrongs of high-frequency trading, Katsuyama and his gang of geeks and outsiders hope to forge a financial system worth believing in. Towards the end, Lewis comes close to summarising the link between 9/11 and Katsuyama’s crusade against high-frequency trading: “Out there, where idealism was either a ruse or a species of stupidity… a lot of things had happened. People built new towers to replace old ones. People found strength they didn’t know they had. And people were coming to their aid, and bracing for the war. Out there, anything was possible.”

Alex Preston, a former bond trader, is the author of the novels This Bleeding City and The Revelations (Faber)