Wall Street: More Deeply Corrupt than We Thought (No Really)

flash boys

Flash Boys: A Wall Street Revolt

By Michael Lewis

W W Norton (2015)

 Book Review

 Flash Boys is a true story about front running, the unethical practice of a stockbroker executing orders on a stock while taking advantage of advance knowledge of pending orders from elsewhere in the market.* From the bleak picture Lewis paints, it appears that investors – whether institutional or private – have virtually no way of protecting themselves against front running.

Like Lewis’s 2010 book The Big Short, Flash Boys reads just like a thriller, complete with exquisitely drawn heroes and villains. In this case, the heroes are crusading Canadian banker Brad Katsuyama and the assorted geeks and nerds who helped him start his own stock exchange. Katsuyama started IEX in 2013, after the Royal Bank of Canada and the Securities and Exchange Commission (SEC) refused to support his efforts to expose and end the practice of front running. By purposely slowing their transmission rates, IEX makes it impossible for high frequency traders to “front run” the trades occurring on the exchange. This has enabled Katsuyama to protect investors who use his exchange, while simultaneously collecting data on suspicious trades.

Flash Boys, a bestseller, originally came out in 2014. The 2015 edition includes an afterward in which Lewis describes being viciously attacked by the big Wall Street banks and brokers. He also enumerates a number of prosecutions of high frequency traders and brokerage firms (by the FBI, SEC and Financial Regulatory Authority) resulting from from the publicity Katsuyama’s work received from Flash Boys’ publication.


*The way this works in practice is you order 10,000 shares of a stock at a given price and a high frequency trader somewhere buys 10,000 shares at that price and resells them to you at a slightly higher price. Complex computer algorithms enable high frequency traders to exploit minute differences in transmission frequency to execute these secret trades – which usually take place in “dark pools” – private stock exchanges which keep no public record of their trades. All the major investment banks (Goldman Sachs, JP Morgan, Bank of America etc) have dark pools and high frequency traders pay for the privilege of trading in their dark pools.

8 thoughts on “Wall Street: More Deeply Corrupt than We Thought (No Really)

  1. I’v been trading stocks for 50 years and I am no wiser now then when first started. the Casino is rigged but that’s what life is about cheating the odds and like any game you will reach a point where you will fail but fun is at some point your winning.

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    • Unfortunately, gerry, that’s not how Wall Street is portrayed. It’s portrayed as a fair, well regulated system for ordinary people to invest their savings in productive industry. What I found really scary reading this book was learning about all the institutional investors – pension schemes, retirement funds, university endowments, etc – that are being ripped off.

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  2. Well, I often hear it said that the main reason Kiwis don’t invest in the NZ share market (they invest in real estate instead) is because it’s so poorly “regulated” (ie corrupt). Kiwis are happy to invest in the US share market, though. They mistakenly believe it’s better regulated. This book clearly proves it isn’t – it’s merely a sophisticated form of gambling.

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  3. Pingback: Wall Street: Never Give a Sucker an Even Break | The Most Revolutionary Act

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