Book Cover

People think pushing a button is as simple as pushing a button. It’s not. All these things have to happen. There’s a ton of stuff happening. The data we got from them about what was happening at first just seemed random. But we knew the answer was out there. It was just a question of how to find it.

# Review

Michael Lewis alleges a widespread financial "cancer" in modern markets perpetrated by high-frequency trading (HFT) firms; he compares the actions of said firms to "parasites" who siphon money from the financial system but offer very little in return. The main idea is that HFT firms detect trades being placed and, using superior technology inaccessible to the masses, "front-run" said trades; for instance, Lewis alleges that an HFT algorithm can detect when a buy order is being placed, then using faster technology, said algorithm will buy up the shares at the venues first, then sell the shares it just bought up to the original buy order at a mark-up, thus making the spread between the original ask price and the marked-up price. Lewis details many anecdotes surrounding this conspiracy, including the extreme lengths HFT firms will go to be milliseconds faster, the criminal charges brought up against a programmer who worked for Goldman Sachs, as well as the founding of IEX, a trading venue which tries to curb the actions of HFT firms.

This was the first Michael Lewis book I've read and there were some things I liked but many things I didn't.

Starting with the positives; this book was immensely entertaining. Lewis is clearly an excellent writer and his charactures and story-telling were both very captivating; there were many genuinely funny moments in the book. I also liked how the book was targeted towards a mass audience, which is very rare for more technical financial topics such as market microstructure.

Unfortunately that is the extent of praise I can give for this book. Quite frankly, this book peddles a conspiracy theory that is not supported by reality. I took a microstructures course in university but even before I took the course, it was clear that the book was not as truthful as Lewis makes it out to be. For one, he did not interview a single high-frequency trader in a book about high-frequency trading. This immediately set off red flags for me. This was followed by some ridiculous anecdotes which Lewis cites as evidence of HFT manipulation in the market, such as the price moving away from Brad Katsuyama when he submitted an order numbering 100,000 shares to the exchanges (I would be more surprised if the price did not move after such a large order being executed). He also cites a portfolio manager, who upon only entering his order without sending it, saw prices away from him. If this portfolio manager just typing the trade into his terminal without executing caused prices to move, then said PM most likely has a cybersecurity problem, not a market structure problem.

In the microstructures course I took, we actually discussed this book in detail, breaking down several of the large misconceptions and mistakes Lewis made. For instance, the term "front-running" actually refers to an instance where a broker or an agent knows about a client's orders, and jumps ahead of said client to transact for the agent's own account, making profit when the client's orders impact the market price. Front-running is strictly illegal; what Lewis describes (when HFT firms sniff out trades to profit from) is probably more akin to back-running. We also learned about the importance of market-making HFT firms who provide liquidity to trading venues by taking the opposite side of trade orders; these firms move the price away from large trades to account for adverse selection risk (when the party on the opposite side of the trade knows more than you do) and inventory risk (when the price moves against you when you're holding a large position). Even when Lewis tries to show his research, it's very sloppy; for instance he cites a paper stating that SIP NBBO (price available to the public) differed from the actual NBBO (price calculated synthetically) for AAPL 55,000 times in one day and he uses this statistic as proof of how ample arbirage opportunities are for HFT firms. If Lewis had read just a couple more pages, he would have seen that AAPL is a clear anomally with "three times more dislocations than the next highest security" and "their [the dislocations'] impact on infrequent trading investors can be quite small" (ie. non-HFT traders will probably not be affected).

Despite all of the flaws of this book, Lewis did get some things right. For one, the modern financial markets are as complex as ever, with things like esoteric trade orders and maker-taker fees. There are bad agents and massive agency problems within the financial system, but broad-stroke black and white generalizations will not deepen people's understanding of the (numerous) issues.

If anything I'm glad Lewis did spark some mainstream interest and attention on the niche but important topic of market microstructure; I just wished he would've presented the reality of the situation instead of concocting an elaborate conspiracy theory to fit a more exciting narrative.

# Conclusion

A well-written book peddling an unproven conspiracy theory.

# Overall rating: 6.4

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