Flash In the Pan: On ‘Flash Boys,’ Michael Lewis’s Baffling New Book

Michael Lewis.

Michael Lewis.

Strange things happen when Wall Street outsources its bargaining and brokering functions to computers. When the big banks created a database in the 90s to phase out the 3,144 county clerks offices responsible for recording American real estate transactions, a large number of transactions stopped getting recorded altogether. This set the stage for all-out anarchy a decade later in roughly 3,144 courtrooms when it emerged that hundreds of thousands of mortgages had been sold to two or three different institutions, none of which seemed to have held on to paperwork to substantiate their claims.

After the same big banks introduced the consortium of supercomputers that made bond trading “paperless” in the 70s, at least five of them forgot to chuck their stockpiles of obsolete certificates for more than a decade. When cancelled bonds began flooding into European banks toward the end of the Cold War, collateralizing everything from cocaine deals to Serbian warlord arsenals to whole banks in the former Soviet Union, Citibank was forced to admit that it alone had contracted the disposal of some $110 billion of “worthless” bonds to a suspected Mafia front run by a guy who had died of natural causes shortly after trucking them away.

And when complex algorithms began to replace the beefy guys who once made the markets for IBM and Caterpillar on the floor of the New York Stock Exchange… well, it’s not even remotely so interesting a story, but that’s the stock market for you. As Michael Lewis observed in The Big Short, his 2010 bestseller about the financial crisis, “An investor who went from the stock market to the bond market was like a small, furry creature raised on an island without predators removed to a pit full of pythons.”

Mr. Lewis’s new book, Flash Boys: A Wall Street Revolt, is the story of small furry creatures. Some of them are Canadian; one is vegetarian. They make high six to modest seven figure bonuses and choke back tears when asked about September 11. Invited to a decadent “old school Wall Street” lobster and Kobe beef feast at an undisclosed lower Manhattan location, they sit “staring at the piles of food like a conquering army of eunuchs who had stumbled onto the harem of their enemy.”

But the enemy is elusive. “There used to be this guy called Vinny who worked on the floor of the stock exchange,” an anonymous “big investor” tells Mr. Lewis. “After the markets closed Vinny would get into his Cadillac and drive out to his big house in Long Island. Now there is the guy called Vladimir who gets into his jet and flies to his estate in Aspen for the weekend.” Elsewhere, Vladimir is described less apocryphally, as a guy who “ping-ponged from prop shop to big bank and back to prop shop,” mocking Americans for their infelicity with math along the way. Mr. Lewis never bothers to track down Vladimir, although he exerts the most strenuous efforts of Flash Boys’ underdeveloped narrative attempting to explain how such shadowy figures deploy inscrutable computer programs across high-speed telecom networks to make near-riskless profits in the stock market, skimming Main Street retirement funds and E-Trade accounts to the tune of…

…somewhere between two and twenty billion dollars each year. This part Mr. Lewis glosses over, perhaps because the number has reportedly been shrinking. “A billion here, a billion there…it adds up!” the author quipped on the obligatory 60 Minutes segment on the eve of the book’s release.

Last year, the credit rating agency Moody’s released a report assessing the “Too Big To Fail” banks’ creditworthiness in an alternate universe in which they were not implicitly entitled to unlimited bailouts. Three professors went to work calculating how much they would have earned paying interest rates in that alternate universe before and after the crisis. In such a universe, Citigroup would have gotten the same $45 billion in TARP funds and $306 billion in asset price guarantees and $200 billion Federal Reserve/Federal Home Loan Bank emergency credit lines that it actually did in pre-recession 2008; its credit rating would simply have gotten junked afterwards. But in the alternate universe the TBTF banks would have made $100 billion less in 2009 alone, the top six offenders would have forfeited $82 billion in profits between 2009 and 2011, TARP would seem a lot less like a distant memory because a huge number of banks would still be in the program, and “a billion here, a billion there” might sound a little more like real money.

But in the context of, inter alia, the book from which I gleaned those figures, Bloomberg reporter Bob Ivry’s The Seven Sins of Wall Street, high frequency trading seems almost suspiciously irrelevant. Let loose within a predatory banking system, all that easy money doubles down on its surest shot predations, and the real cost of our central bankers’ unpredictable, so-called “QEternal” money policies metastasizes. The price of virtually everything we spend money on has reached some sort of record high in the years since the financial crisis, and the vast preponderance of the profits reaped off this state of affairs currently sit compounding in tax shelters of Big Finance. If speed-skimming the stock market were anywhere near as lucrative or destructive a practice as Flash Boys makes it out to be it would be bigger and have more lobbyists.

But there are no lobbyists in Flash Boys. A band of good guys with seed funding from a dozen well-established hedge funds figures out a private sector solution: a new stock exchange that vows to make all its transactions transparent, yet somehow impervious to the parasitic scalp-ulus of Vlad and his ilk. The exchange is a roaring success, once Goldman Sachs decides to use it. Goldman’s heroic role is especially “surprising” (which is to say, milked clumsily for maximum dramatic irony) given the Solzhenitsynian saga Mr. Lewis cites in his introduction as the book’s inspiration: Russian born computer programmer Sergey Aleynikov is sentenced to eight years in prison, then acquitted by an appeals court and released, then several months later arrested and charged again by state prosecutors—all this for having copied a negligible amount of mostly open source code to his cloud before leaving a midlevel job at Goldman in 2009 to join a startup, an act constituting felony corporate espionage in the modern American justice system.
In one of the book’s more inane tangents, Mr. Lewis blames ignorance and confusion on the part of Mr. Aleynikov’s “high school graduate” jurors for his perverse fate—as opposed to, say, greed/paranoia/barbarism on the part of Goldman and the prosecution it clearly controlled. Mr. Lewis elects to convene what he repeatedly calls a “re-trial” of Mr. Aleynikov, before a “jury” of his intellectual peers, at the aforementioned decadent restaurant. “What was really needed, it seemed to me,” he writes, “was for Serge Aleynikov to be forced to explain what he had done, and why, to people able to understand the explanation and judge it.” Wait, isn’t that called “self-regulation”?

Tellingly, Mr. Lewis has never seemed so ill-equipped to explain or judge a situation and its players as he does in Flash Boys. This is especially weird given the dearth of new material he has uncovered. Wall Street Journal reporter Scott Patterson told this entire story more coherently in his 2012 book Dark Pools, which conveys a sense of urgency and clarity that is absent from Flash Boys no doubt in part because its news peg, the Flash Crash of 2010, was still relatively fresh — and more certifiably “news”–than whatever possessed Mr. Lewis to publish this particular book at this particular time. Presuming the author of Flash Boys is indeed Mr. Lewis, and not some sophisticated Michael Lewis algorithm.