Wall Street traders are used to waking up before dawn. But on Monday, they didn’t rush to read the overnight news from Asia - it was the latest from Michael Lewis.
Rustled out of bed by his toddler, William O’Brien downloaded “Flash Boys,” the new book by Lewis, onto his e-reader - and fumed as he devoured the pages during his morning commute to BATS Global Markets, the stock exchange where he serves as president.
By daybreak, the 274-page book had become the talk of Wall Street. “Flash Boys,” an excerpt from which was published on The New York Times website, threw fuel on the running debate over a controversial field known as high-frequency trading.
Lewis, whose 1989 Wall Street Bildungsroman “Liar’s Poker” influenced a generation of traders, concludes that, overall, practitioners of high-speed, computerized trading are rigging the financial markets at the expense of everyone else.
Already, officials at the FBI’s New York office are investigating whether such firms traded ahead of other players in the market, in what may amount to insider trading or other fraud, according to an agency spokesman. Regulators in Washington and in New York state have opened their own inquiries.
The worries are hardly new. Over the past five years or so, high-speed computers have increasingly taken over Wall Street, and trading has migrated from raucous trading floors in Lower Manhattan to far-flung electronic platforms.
But along the way experts have wondered whether technology was getting out of control - whether those with the sharpest computer algorithms would come to dominate American finance at others’ expense.
In March, Virtu Financial stunned Wall Street with news that it had pulled off the finance equivalent of a perfect game of baseball. The trading firm, hardly a Goldman Sachs or a Morgan Stanley, somehow made money in the stock markets on 1,277 out of 1,278 days. It lost money just one day in nearly five years.
Now, coming nearly four years after the “flash crash” in the stock market rattled Wall Street, Lewis’ book - rolled out on “60 Minutes” Sunday night - punctuated the moment.
Few on Wall Street wanted to miss out on the conversation. Mark Cuban, the billionaire investor and owner of the Dallas Mavericks, called up his broker to gossip about the book. He found himself far from alone.
“He said he’s getting a ton of calls,” Cuban said of his broker, who works at Credit Suisse. “He named some of my friends, who said, ‘What the (expletive) is going on here? Should I be afraid of this?’”
Critics argue that Lewis broke no new ground. And a number of executives at the firms mentioned in the book said Lewis did not double-check the facts.
“Michael Lewis clearly has a blind side, as we’ve just discovered,” said O’Brien of BATS, cheekily referring to a previous work by the journalist.
Others found the book nothing less than a betrayal.
“When I came to Wall Street back in 1992, his book ‘Liar’s Poker’ was required
reading. It was one of my favorite books,” said Manoj Narang, chief executive of high-frequency trading firm Tradeworx. Of the new book he said: “It’s very disappointing.”
The FIA Principal Traders Group, one of the high-frequency trading industry’s chief groups, offered a lengthy but measured response. “The rapid pace of change in the equity markets and the complexity of modern trading technology have caused considerable confusion and suspicion among investors,” the organisation said in a statement.
High-frequency trading is almost impossible to avoid today. By some estimates, it accounts for half of all shares traded in the United States. Supporters argue that it has made the markets more efficient by creating a cadre of traders willing to buy or sell at any time.
Others are more skeptical. New York Attorney General Eric T. Schneiderman has put high-frequency trading on his list of top priorities. He seized the moment Monday to discuss his yearlong investigation into the practice.
“Look, the problem here is - and I’m a fan of the markets, but I think Michael is right,” Schneiderman told Bloomberg Television. “We’ve lost a lot of credibility. A lot of investors do not have confidence in the markets and it’s up to those of us who believe in them, who enforce the law and regulate them, to restore that confidence.”
Even T. Rowe Price, the staid mutual fund company, weighed in. Clive Williams, the company’s global head of trading, said in an emailed statement that he was “pleased to see Michael Lewis call further attention” to high-frequency trading.
Amid the chatter, one previously obscure company - the IEX Group, whose management plays a starring role in “Flash Boys” - was thrust into the spotlight. So too were some of its backers, including deep-pocketed hedge fund titans who at first blush seem like strange allies to the cause.
One, investment mogul David Einhorn, appeared on “60 Minutes” to defend IEX’s efforts to prevent “predatory” high-speed trading. Another, William A. Ackman, denounced the speedy trading that he said often prevented him from getting stock orders filled at the advertised price.
“I thought someone was tapping our phone lines,” Ackman said in an interview.
Monday’s narrative took a turn for the absurd when John Nunziata, the head of electronic execution at BNP Paribas, claimed in an internal note that Lewis himself owned a stake in IEX. The email, seeming to reveal a major literary scandal, quickly made the rounds on Wall Street.
Except it wasn’t true, Lewis said in a post on Facebook on Monday afternoon. He called out Nunziata by name, asking: “Does his mother know what he does for a living?”
A spokesman for IEX said Lewis was not an investor. A spokeswoman for BNP said the email contained “incorrect information regarding Michael Lewis.”
Narang, the high-frequency trading executive, said he hoped the attention surrounding the book would quickly die down. He said that while he had turned down requests to appear on TV, he couldn’t help speaking out against the book.
“There’s no unfair advantage to using your brain, last time I checked, in a capitalist society,” he said.
New York Times
