The Hero Of Michael Lewis' New Book Is A Mysterious Stock Exchange That Goldman Sachs Loves
The book is about high frequency trading, and a firm called IEX that has created a separate exchange where everyone - fast or super fast - is safe to trade. This is a controversial topic on Wall Street as the question of whether or not HFT firms hurt the market or not is still in the air to some.
Those that say it does blame HFT for 2010's terrifying Flash Crash and other stock exchange stumbles. Critics say that firms that trade at high speeds can harm other actors in the market, and even cheat them out profitable trades. The SEC, New York Attorney General Eric Schneiderman, and even Goldman Sachs, agree with that.
Here's what Goldman told the WSJ about IEX:
"We view IEX's core mission as simplifying an overly complex market structure trough a transparent rule set, minimal number of order types, and most significantly, a speed buffer that intentionally slows down trading in their market, relative to other venues," Goldman said in its memo, adding that the firm has "consistently been the most active broker in IEX."
Simplifying such a complicated topic like HFT like requires a careful treatment Lewis has demonstrated throughout his career, and then some.
In 'Flash Boys', Lewis tells his readers right off the bat the stock exchanges they picture in their heads - the people yelling, the ticker tape - is dead. "The U.S. stock market now trades inside black boxes, in heavily guarded in New Jersey and Chicago," he writes in the prologue. "What goes on inside those black boxes is hard to say."
In an excerpt seen by Business Insider, Lewis describes the world that IEX is trying to correct. It's a world built by brilliant Russian programmers "oblivious" of the harm they're doing to regular stock holders - who see their code creations as pieces of themselves.
He specifically recounts the story of Sergey Aleynikov, a Goldman Sachs programmer accused of stealing the companies secrets. Lewis wrote about Aleynikov in Vanity Fair, but in the book weaves his story into the context of the creation of IEX.
IEX was born at the Royal Bank of Canada in large part thanks to Brad Katsuyama, the man who ran the bank's U.S. trading desk. Katsuyama has been outspoken about the problems with HFT before, and it was he who lead the defection from the firm.
The goal, Lewis writes, was to "restore fairness in the U.S. stock market." Katsuyama had watched his clients get nickeled and dimes while trading for them.
"I started to realize that, day in and day out, I was getting screwed," Katsuyama told the New York Times last year.
With this book, it's likely that Katsuyama will get to dole out some payback.