This Flash Boys summary looks at one of the most interesting books I have read in recent times. It looks at the rise of high-frequency trading on Wall Street and whether the stock market was rigged.
I had a limited understanding of the stock market before the reading book, despite investing in stocks by myself, but what I read blew me away and opened my eyes to what goes on in Wall Street.
Michael Lewis is an engaging writer and he weaves a compelling narrative, as a group of investors on Wall Street realise the market may be rigged and work to bring back fairness.
This is not the most shocking aspect of the book. That would be the lengths to which the high-frequency traders went to ensure they made as much money as possible.
The opening chapter is quite possibly one of the most compelling and mind-blowing chapters I have ever read!
Even if you’re not an investor or all that interested in financial markets, I still recommend you read Flash Boys.
It is a rip-roaring, eye-opening and terrifying look into the often murky world of finance that will leave you gobsmacked, outraged and full of hope in equal measure!
Table of Contents
Flash Boys summary
Takeaway 1 – Speed is the name of the game
The most incredible part of this book and there are many believe me, was the first chapter. It describes the efforts of Spread Networks to lay an 827-mile fibre optic cable from Chicago to New Jersey at a cost of $300m.
Right now, you’re probably asking the same question I was, why would anyone go to these lengths to lay a cable that long and for that much money?
The answer is simple: speed.
The cable in question allowed trades to make a round trip from Chicago to New Jersey in 13 milliseconds. That is a staggeringly short amount of time. As a comparison, it takes 300 to 400 milliseconds to blink your eye!
This cable was so secretive that even the workers laying it had no idea what it was for. The even more remarkable thing is the lengths Spread Networks went to ensure it reached New Jersey in as straight a route as possible.
This was to ensure that the speed was as fast as it could be. Any deviations would add unnecessary time to the journey. Something we humans wouldn’t notice, but in the high-frequency trading world, an extra millisecond here or there is a big deal.
The desire for speed led Spread Networks to bore through mountains to ensure the cable reached its destination in as straight a line as possible.
All of this sounds too implausible to be true, but when there are millions and in the case of high-frequency trading, billions to be made, people will go to extreme lengths to ensure they get a piece of the pie.
Takeaway 2 – Regulations do not always work
One of the ironies of life is that our best intentions do not always turn out the way we hoped. The advent of high-frequency trading is a case in point.
It began to be commonplace after the SEC, which regulates the stock exchange, changed the regulations to open the markets to more exchanges, believing this was fairer than limiting investors to a few exchanges.
This seems a good idea in practice. The investor has more choices and the increased competition between the exchanges should mean they work in the interest of the customer too.
However, it didn’t turn out that way.
High-frequency trading sprung up when these traders realised they could make a lot of money off gaming the system.
They were able to front-run the market due to their algorithmic trading methods and super-fast connections. With orders arriving at different times on different exchanges, the traders simply positioned themselves in the middle and picked off the order, siphoning billions in the process.
All of this was the result of the shift from physically trading on the exchange floor to the trading done today, which involves fast computers and smart algorithms.
The regulation meant well, but it opened a can of worms which has been hard to contain. There are arguments that high-frequency trading is not as bad as Lewis makes out and that increases it raises liquidity and lowers the spread of the gap between the amount you pay to buy a share and what you get for selling it.
It’s hard to say which side is right, as both have good points, but what the explosion of high-frequency trading shows is that humans are geniuses at finding ways to circumvent rules and regulations.
This quote from the book sums up the dilemma:
“Every systemic market injustice arose from some loophole in a regulation created to correct some prior injustice. “No matter what the regulators did, some other intermediary found a way to react, so there would be another form of front-running,”
Takeaway 3 – The next crash could be caused by algorithms or high-frequency trading
One of the more interesting aspects of Flash Boys is that the advent of high-frequency trading led to a series of events known as a flash crash.
A flash crash is just what the name suggests, a crash in the market that happens in a flash.
A passage in the book describes it as so:
“Then came the so-called flash crash. At 2: 45 on May 6, 2010, for no obvious reason, the market fell six hundred points in a few minutes. A few minutes later, like a drunk trying to pretend he hadn’t just knocked over the fishbowl and killed the pet goldfish, it bounced right back up to where it was before.”
All of this happens in a matter of seconds. In that time billions of dollars could be lost. It has happened a few times since 2010, so much so that Wikipedia even has a page about flash crashes!
These algorithms are ever-changing and not a lot of people understand what they are and what they do. The danger is that go behind human control and act in a way we can’t control.
Likewise with high-frequency trading, if the practice continues unchecked, there is no saying what could happen to the market in the future.
If Lewis is right and billions of dollars are siphoned from the market in these sorts of trades, it doesn’t bode well for the future or confidence in the markets from investors.
The guys at IEX are doing their best to return the market to a level playing field, but they need the big banks to come on board, if they don’t, their efforts amount to a drop in the ocean.
It’s unlikely that a flash crash will topple the market. It’s more likely that a trade war between America and China will disturb the market, but you never know.
The 2008 crash was not heavily predicted, but it wreaked havoc on the global economy. This leads to Nassim Taleb’s book The Black Swan, where he describes his theory about unforeseen events that cause chaos.
High-frequency trading could be one of the black swans, that he talks about, or it may just be a way for some people to make a lot of money from investors.
Whatever happens, the next crash will come from somewhere in the market and its likely algorithms will play a part.
Flash Boys review
This Flash Boys summary has touched on a few of the issues that the book raises, but to truly understand the world of high-frequency trading, you need to read this book.
The guy is an interesting writer, with the ability to make a topic you’re unfamiliar with, all the familiar.
He did not disappoint with Flash Boys!
This book blew my mind in regard to what goes on at the highest levels of finance. The opening part of the book which mentions the laying of a cable from Chicago to New Jersey to increase computer speeds by microseconds is ridiculous!
This really is another world that many of us have no idea exists. Were it not for Lewis’ excellent investigative skills, it may have remained anonymous to the wider public for longer.
The notion that Wall Street is rigged in favour of the big boys is a compelling one and an idea that has gained traction since the financial crash in 2008.
Judging by the goings on detailed in this book, that notion might just be right.
Who should read Flash Boys?
As far as I’m concerned, everyone should read Flash Boys. The book is an incredible expose of Wall Street ad the workings of high-frequency traders. It’s amazing what’s going on and what some of these traders have gotten away with.
If you have an interest in financial markets or want to learn more about them, this book will be an invaluable, entertaining and eye-opening read.