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Flash Boys

2014/05/02

“All of a sudden the market is all about algos and routers. It’s hard to figure this stuff out. There’s no book you can read.”

I first heard about high frequency trading more than 10 years ago from a bright person who occupied the desk next to mine at the lab. I thought it was interesting but I could not foresee what it would come to mean today.

Flash Boys is a book by Michael Lewis that deals with the implications of HFT and dark pools to the stock market. It chronicles the journey of Brad Katsuyama from when he first notices that the market view on his computer screen is an illusion, his effort to understand the mechanisms that rule the market, building a team for the task and ultimately quitting his well paid job in order to create a fair marketplace for the investors. That marketplace is the IEX. I would call the IEX a white pool though.

I like the book for a number reasons: First it is about a good regulator (the cybernetic term). Katsuyama wants to understand something so complicated and complex that no one else really understands. He needs to create a market view that is explainable to investors to the microsecond and according to the book this is done.

The story behind team formation is interesting too. Every member in the team has something in their life worth reading about and they offer value to the team formed. I found lessons in team formation there.

There exists this interesting term called the Regulatorium: a complex system of rules and requirements where each rule is necessary because of another, related rule. This leads to collusion between regulators and those regulated preventing change. And the Flash Boys wanted to change the system.

The moral values of Katsuyama appeal to me. A potential investor asked: “Why does a person take the harder path? It’s a different situation from what you typically see. If it works, he will make money. But he’ll make less” than if he had stayed at RBC.

The technical problems they faced I understood and I loved some of the solutions (“coil the fiber”). I could actually follow this fast paced, well-written chronicle with just a bit of googling for a few financial terms (and I have never dealt with a stock market).

I finished the book with a “damn, I want to work with these guys!”. So Brad, if you ever read this and in need of a remote worker in a different timezone, ping me :)

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One Response to “Flash Boys”

  1. Dimitrios Staikos Says:

    Just bought it on Audible :-) I had heard about it before and since you appreciate much and I happen to work in the financial industry nowadays, it sure is a good investment of my time.
    Some actuals comments now.
    We have financial trainings very often at my job. These are done by actual professionals in the respective fields, not by professional instructors. In one of those a long time trader was explaining to us the simplest of all charts, showing the price of a security during a trading day.
    And he goes: “You might find this funny, but most traders just sit all day staring at this graph and say BUY BUY SELL SELL WAIT SELL SELL WAIT BUY BUY … trying to make money for the firm.”
    Should we call this low-freq trading? The idea is the same. They look at the ‘data’, apply some heuristic algorithm that is in their head which combines experience, knowledge of the market and the actual numbers, and they make spontaneous decisions.
    The good traders are the ones that on the average make more good than bad decisions.
    Do you think this is different in principle than HFT? I don’t.
    But HFT is definitely much more dangerous, like a domino that can get out of control and affect all the markets.
    THIS is the real problem.
    Messing up the world’s markets because someone had a bug in an algorithm, either in the algorithm itself or in the implementation.
    Nobody really cares if a firm loses $400M because of a bug in their HFT algorithms, but when whole markets get affected it’s another class of problem there.
    HFT has lots of benefits. Until someone can solve this market domino issue, I cannot stand ‘for’ HFT.
    Thanks!


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