There you are in the box office queue, snaking your way to the front, anticipation running high on this particular Saturday evening at the movies. “Two for ‘The Martian,’ please,” you politely tell the cashier. Imagine if someone farther back in line were able to imperceptibly zoom to the front and, knowing that you were about to fork over $25 for admission for yourself and your date, somehow bought those same tickets for a nickel or two cheaper in another market and then, in the blink of an eye, sold them to you through the box office register, pocketing the difference. Whew – granted that’s a mouthful of hot, butter-flavored popcorn and Milk Duds, but that’s kind of what’s been going on in the stock market these past several years. High frequency traders, in cahoots with Wall Street banks, have learned to skirt convention and decency by anticipating investor behavior, cutting suckers in line while taking their milk money, all somehow without actually breaking the law. It is this and so much more that the reader learns from Flash Boys, Michael Lewis’ wake-up call of a book about Wall Street chicanery in a tale littered with dirtbags. Mercifully, there are also those who brazenly lead what the author terms a revolt, hints of which Lewis peppers in from chapter to chapter, giving the reader enough reason to hold down the vomit while trying to comprehend a rigged system.
Through his tireless research and boundless curiosity, Lewis discovered that in the years since the global recession the “U.S. stock market was now a class system, routed in speed, of haves and have-nots” with the former enjoying what amounts to the latest high definition big screen view of the market while the latter slaps silly a 13″ rabbit-eared, black & white Emerson, trying desperately to read a fuzzy ticker scrolling by on the bottom of the screen on delay. You’d declare “Game Over” if an actual fair contest was being played; alas, that is not the case. Rather, what happens is a lightening quick prediction of what’s about to occur in the market to which ruthless traders can react accordingly. I flagged three dozen sections of the book to review to try and somehow grasp this reality. Suffice it to say, it’s complicated stuff so for the time being think of it this way: you place an order to buy ABC Corp. stock at $40 a share – considered, at that moment, the fair market price – and before your order is processed, speed demons have raced their way toward buying that same stock a bit cheaper on another exchange and then sold it to you at a profit, or gamed the process such that you ended up unwittingly paying $40.01 per share instead. [Editor’s note: The reviewer begs forgiveness if this is a bad oversimplification of a terribly complex reality.]
So how and where does all this happen? Inside of what are called dark pools in big banks, which are like securities exchanges that are unseen by the regular investor. (Institutional investors may know who’s swimming around, but not the specific trades they’re making – thus the darkness implied.) And in the richest of ironies, this type of trading resulted from a regulation passed by the Securities and Exchange Commission in 2005 to fix “front-running” on the floor of the old New York Stock Exchange. The spirit of the law was that a broker had to sell securities at the best price available, forcing them to consider far more exchanges than they otherwise would have, leading to… more chances to be front-run. What the SEC failed to account for was speed which is measured by traders in microseconds – as in millionths of a second. And imagine your surprise that since the SEC’s intervention ten years ago, more than 200 of its employees have left their government jobs to – wait for it – work for high-frequency traders or the firms that lobby on their behalf. So there you have it, kids. Have you hugged your IRA lately?