With his new book, Flash Boys, Michael Lewis has made a story that very few people in America had known, or cared, anything about—the rise of high-frequency trading on Wall Street—into the object of national outrage. More than one reviewer wrote that Lewis’s book would make readers’ “blood boil.” Democrats in Congress cited it in renewing their call for a tax on financial transactions. The FBI publicly disclosed, the day Flash Boys was published, that it was investigating high-speed traders. Virtu Financial, a high-frequency trading firm that had been scheduled to go public in late April, delayed its IPO because of the negative publicity generated by the book. And so influential was Lewis’s claim that the US stock market was now being manipulated by high-frequency traders that SEC Chair Mary Jo White felt obliged to declare, in testimony before Congress: “The markets are not rigged.”
Flash Boys has also been the subject of a strong backlash from Wall Street in general, and high-frequency traders in particular, with Lewis’s critics dismissing the book as a simple-minded and ill-informed (if well-told) fairy tale that completely ignores the actual benefits that high-frequency trading brings to investors. As one critic put it simply, the “analysis is wrong. What he is missing could fill another book.”
That Wall Street responded in force to Lewis’s attacks was unsurprising. Though high-frequency trading is dominated by firms that most Americans have never heard of, like Getco and Citadel, it plays an integral part in the way today’s stock market works. As their name suggests, high-frequency traders buy and sell in large volumes and at an extraordinarily fast pace, trading thousands of times a second. Their trading is entirely automated—humans may come up with the algorithms that the computers use, but machines do all the trading. In 2009, a report from the Tabb Group estimated that high-frequency trading accounted for an estimated 70 percent of all the trading in US stocks. And while these firms are less active currently (in part because markets are calmer), they still account for roughly half the trading volume in the US. Indeed, much of what happens in the stock market these days consists simply of computers trying to outsmart each other.
The idea that every day, investing decisions worth many billions of dollars are being made entirely by machines is, even to some on Wall Street, disconcerting. But Lewis is arguing in Flash Boys that high-frequency trading is more than just risky. Instead, it’s a form of legalized theft. The market, Lewis contends, is now effectively designed to allow…
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