The U.S. stock market is rigged. The U.S. stock market is rigged. That’s the central message of Michael Lewis’s latest book, Flash Boys: A Wall Street Revolt, the tale of Brad Katsuyama and an unlikely group of heroes as they discover that high frequency traders, exchanges and big banks are conspiring to rip off billions of dollars in retirement savings from mom-and-pop investors. A master story-teller, Lewis recounts in lively detail how Katsuyama, the former head of electronic trading at RBC Capital Markets in New York, and his fellow crusaders piece together the clues — meeting with exchange representatives, large institutional investors, regulators and hedge fund managers — and then leave their Wall Street jobs to start their own exchange, IEX Group, “to restore fairness to the U.S. stock market.”
The author of Liar’s Poker and Moneyball paints a fascinating portrait of the world of electronic trading. The only problem is that many of his facts are either wrong or misleading — as are many of his conclusions. Lewis says that banks and high frequency trading firms have an unfair speed advantage in part because they house their computer servers near the matching engines of U.S. exchanges, but for as little as $1,000 a month any asset manager or hedge fund can put its servers in the very same colocation facilities. He also writes that HFT firms generated $10 billion to $22 billion in annual revenue in U.S. equity markets. The Tabb Group estimates that HFT revenue has declined from $7.2 billion in 2009 to an expected $1.4 billion this year — so much for the billions of dollars being taken from unsuspecting investors.
Even before the Flash Boys hype, the IEX had gotten off to a pretty good start since its October launch. In April, it averaged 29 million shares a day, nearly double the 14.7 million shares it did in February. Still, Lewis’s crusaders aren’t likely to change the world anytime soon. IEX’s April volume represented just 0.4 percent of the average 6.6 billion shares traded daily on U.S equity markets that month.
