Flash trades, flash boys

CHAD TAYLOR
Last updated 05:00 15/06/2014
Michael Lewis
EYE FOR DETAIL: Michael Lewis cuts through the murkiness that surrounds high stakes trading.

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Flash boys opens in late 2008 with technology company Spread Networks laying the straightest possible fibre optic cable between Chicago and New Jersey, in an effort to reduce the trading time between two stock exchanges by five milliseconds.

The connection will earn Spread $2.8 billion in rentals from traders who will use its advantage of five thousandths of a second to execute "flash" trades: to buy and sell shares in the time it takes traders on slower networks to press a key.

The numbers are dazzling but the principle is rock simple: if a trader is faster, he can beat others in the queue. As computers and software have improved in speed, the physical distance between exchanges has become the last mile.

Flash trades rely on dedicated software (often adapted from open source) and hardware like Spread Networks' "Gold Route" to close the gap. It also helps that the majority of flash trades are made in exotically named "dark pools" - exchanges where the transactions remain secret.

Whether high-speed trading is fair or not is part of a larger argument, especially if you employ Wall Street's tortured, relativistic language. But does the notion of secret exchanges give anyone pause? Isn't secrecy the weapon of capitalism's modern villain? The Enron? The terrible Madoff?

Michael Lewis's most remarkable feat is to cut through the obfuscation and euphemism surrounding his subject and emerge firmly on the fence. While a lay-reader might call angry bullshit on the whole enterprise Lewis sees the debate as an opportunity to examine the market along capitalist principles.

He uses the tools of fiction to describe lead "characters" (real people both named and anonymous) who believe a line can be drawn, not between but across the exchanges: a boundary that will regulate trading speed and ensure fair play.

An honest working trader who cannot understand why his trades are blocked. A Russian programmer with an exceptional talent for designing financial software while himself having no interest in money. A financier who decides to set up a new stock exchange that blocks high speed trading. His youthful heroes come straight from the good-guy deck.

Their fair-play solution? In part, coiling a length of fibre optic into a box to slow the signal down.

Many of the individuals' stories in Flash Boys turn on the attack on the World Trade Center on September 11, 2001. Is the author testifying to their patriotism or implying that, having survived one disaster, America is headed for another?

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Lewis's blindingly intelligent and well-written expose ends with him contemplating the microwave technology that might outpace the Gold Route, but he stays mum about where it's taking us. Only the markets can decide.

FLASH BOYS Michael Lewis Allen Lane $50

- Sunday Star Times

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