Back in 2009 a Russian computer programmer, Sergey Aleynikov, was arrested by the FBI for stealing a computer code from Goldman Sachs. This computer code, if got into the wrong hands, would supposedly have had drastic results for the stock market. Apparently, this program was capable of manipulating the markets.
The question, therefore, had to be raised, if it could manipulate the markets, what was Goldman Sachs using the program for? Did they have an unfair advantage?
Wall Street is one of those places that we all hear a lot about but in all honesty very few of us understand much about what goes on behind their glass-fronted office buildings. The idea behind Flash Boys isn’t to shed light on this subject but rather highlight that the world of stocks and shares is far more complicated than we could ever imagine. It seems it is not just those on the outside that don’t understand the modern-day trading systems; those on the inside also seem to lack the knowledge, which in itself is a very worrying thought.
Sergey Aleynikov was a computer programmer, not a trader but was employed by Goldman Sachs to improve the computer systems for what is known as the HFT team (High-Frequency Trading). Basically, when Wall Street decided to stop trading physically opting instead to do their trading online it not only opened up the ability to trade more with the wider world but they could do it at a quicker pace from the comfort of an office chair. Sounds simple enough right?
Instead, brokers began to argue over bandwidth and internet speed leading to an opening for all those computer geeks out there to devise a system that could out-sprint all other systems to the finish line. This development in trading meant that banks and broker firms didn’t just want to shave off a second or two they were looking to lose milliseconds and microseconds: something that the majority of people would not even be aware of.
This of course doesn’t mean that the geeks out there, now working for the big banks that were supposedly too big to fail, knew anything about trading or how to rig the stock market; they were simply employed to work the technology out behind the scenes.
This in itself should be raising a few red flags. The fact that these whizz kids in IT didn’t have a clue led to an opening for these High-Frequency Traders.
While those that designed the system were unaware of the true benefits of their systems, the guys making millions off of trading for investors were not. They quickly found the loopholes and created ways in which they could trade more to benefit their own pockets. This often meant that investors were losing out. They were being forced to pay more and to give more to those who were there to guide them into making better deals.
Anyone else feeling uncomfortable with that?
It seems I am not alone. A group of well-known individuals in the investment world were also uneasy about trading with those that were using microseconds to line their own pockets.
To try to rectify what was happening, Brad Katsuyama, who once worked for the Royal Bank of Canada, knew he had to devise a fairer system. To highlight how serious he was, he left his stable, well-funded job in order to develop a new stock exchange that could go up against the NYSE and Nasdaq, which would lead to a more open platform for investors.
At the same time, Sergey, who had received a job offer elsewhere and decided to leave Goldman Sachs, was being arrested for emailing himself code that the bank deemed to be confidential. Unfortunately, at the time, no-one really understood what Sergey had taken; they had simply seen that he was emailing himself data from a company computer to his own private email days before leaving the company. Those in charge then jumped to conclusions that led to this computer programmer’s ultimate demise.
Flash Boys is a book that uncovers the modern-day issues with Wall Street the struggles the industry face as a whole to regulate the stock market and all those who trade on it.
My Thoughts on Flash Boys
I am always intrigued when new books emerge onto the market surrounding the subject of banking and finance whether they reflect the profession in a positive or negative way.
Michael Lewis appears to have thoroughly researched his subject matter, showing how serious he is about helping to uncover the issues currently faced in certain aspects of the trading world. The subject matter is a difficult one and it is not necessarily always easy to follow, although the technical terminology has been kept to a minimum.
What Michael clearly wants to achieve is to blow the whistle on how insidious and diabolical the traders and financial companies seem to be when trading on other peoples’ money. When people say that the rich always seem to get richer, this may be one way of achieving it – literally on another person’s dime!
What was probably the biggest shock to me was not that those working on the inside were happy to trade in such a way that left their clients out of pocket, but that those in charge of the Big Banks and well- established finance houses had no idea how the trades were placed or how the systems worked. It meant that they too were in a way being played by their own people. Even those that regulated the stock market struggled to see where the line had been crossed and decided that the traders were working within the parameters of their job role.
Are we, therefore, saying that, if the regulators say it is ok, it must be both legally and morally fine?
Flash Boys also highlighted that what we hear about and read about in the newspapers cannot always be taken as gospel and in fact, before jumping to conclusions, we should all research a topic matter for ourselves before passing judgment.
Back when Sergey Aleynikov was arrested it hit the headlines in such a dramatic way that everyone was quick to pass a guilty verdict. Had anyone looked into the facts more at the time, perhaps the outcome would have been drastically different for him. Instead, he lost everything because even those that employed him didn’t understand what they had employed him to do.
This is an eye-opening read for anyone interested in the subject matter. It isn’t the easiest book I have ever read, but that is because I do not have a technical mind. I am sure that others would fly through the pages far more quickly than I did, but in order to understand what Michael Lewis was saying about the industry, I needed to concentrate and also take time to reflect on what I was reading.
The legalised corruption exposed in this book would make most people think again before investing and it made me question why we all place so much trust in those looking after our money. For anyone that has had a negative experience with any aspect of the financial industry, this is a book that will definitely add fuel to the fire.
Have you read Flash Boys or any other books that Michael Lewis has written? Perhaps you have other financial books that you would recommend to others.
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