Flash Boys: Not So Fast: An Insider's Perspective on High-Frequency Trading

Flash Boys: Not So Fast: An Insider's Perspective on High-Frequency Trading by Peter Kovac

Peter Kovac eviscerates Michael Lewis in this response to Flash Boys. He goes chapter by chapter, pointing out the problems in Michael Lewis's arguments. He points out that some of the "bad behavior" Lewis complains about is impossible - it violates exchange rules, laws or even physics. Some of the examples given in Lewis' book are just wrong. (Kovac is kind enough to chalk it up to sloppiness, rather than outright fabrication.) Other examples are correct, but have the wrong attribution. A trader that tries to sell some stock may see the market price change simply due to economics - more demand tends to increase price. Similarly, the price of Chinese ETF may change even when the Chinese market is closed due to demand from those in other markets.

Kovac spins the tables on the HFT story by portraying the traders as Davids against the Goliaths of the big firms. The big brokerage houses have highly paid employees that earn much more than those in the HFT house. They have capitalized on market inefficiencies to make millions and billions of dollars. The High Frequency Traders have helped make the markets more efficient, reducing the opportunities for the "old bot" network. Retail investors now have better trades with improved pricing. The traders that have been significantly impacted are the big hedge funds. Their easy "rent seeking" has been reduced.

Kovac does point to areas where Lewis has got things right, such as with trading types and other issues. Somewhat surprisingly, Kovac, like Lewis before him, does not provide a clear definition of what a High Frequency Trader is. (Though to be fair, he does provide more details than Lewis.) In the end, he admits that Lewis is a writer who wrote an interesting story that is a little loose with the facts. Lewis may have let his trading background color his view of the traders. Flip-flop wearing techies are not the same as Alpha-male techies.

Going Infinite: The Rise and Fall of a New Tycoon

This book traces the rice and fall of FTX and Sam Bankman-Fried. After reading it, I came to the conclusion that Bankman-Fried is pretty weird and probably came upon his wealth more by luck and effective altruism connections than by business acumen. By corollary, the fall felt like it was more due to sloppiness than intentional misdeeds. The bankruptcy attorneys seem to be the real villains. 

Bankman-Fried comes across as autistic utilitarian who loved seeing things as probabilities. He enjoyed playing games and treated business and trading as just another game. FTX spent heavily in promotion and offered better efficiency than competitors. However, there was still a big black box with crypto. It is a system that is decentralized and built on "lack of trust". Yet exchanges come in that require you to trust them. Have we just recreated the same old problems?

Swing Your Sword: Leading the Charge in Football and Life

Mike Leach's story seems almost too normal for the "Pirate". He does tell the story of how he got his nickname by animating his team. There is a long discussion of the time his Texas Tech team was able to beat Texas. (And he did bring up the important part of not looking down on competition.)

He was born in California, but raised mostly in rural Wyoming. He had some sports experiences, then went to BYU where he was on the rebellious side. After graduating from law school at Pepperdine, he decided he wanted to try coaching. He made a number of sacrifices to work at small schools, then eventually rose up the College Football ranks.

He spends the end of the book excoriating the Texas Tech administration. There was plenty of incompetency and dysfunctionality to go around. Some people wanted him out, and managed to do it under a number of false pretensions.  Leach's side of the argument is very compelling. The biggest concern was that of Tech hiding behind sovereign immunity and refuses to even let Leach litigate his side of the story. 

The Premonition: A Pandemic Story

The end of The Premonition drives home the big problem with our current public health system. In the mid-1970s the US public health authorities anticipated a deadly swine flu outbreak. They chose to institute a max vaccination campaign. Unfortunately, the local health infrastructure was not up to the task and was only able to vaccinate a fraction of the population. Some of those vaccinated died. Even though many of the deaths were not related to the vaccine, the presence of deaths together with the no-show of the deadly outbreak lead to a piloring of the health officials. Today, public health policy tends to be led in a cautious manner. People are concerned more about protecting their image. Government appointments are often made with regard to "optics" rather than expertise. Altogether, this leads to slow and inadequate reactions. Actions that avoid a deadly epidemic will be judged harshly if a few people had died. Meanwhile, positive improvement after a deadly epidemic are more likely to be praised.

The book traces the experience of a few key "behind-the-scenes" people that are doing the work to protect us. One person had worked as an administrator for the veterans administration. His hospital suffered greatly in the realm of public opinion because some of the patients had died. He later helped drive planning for pandemic response. Another key player worked as a public health official in Santa Barbara County, California. There she welded great power with limited resources. Then she accepted a state position where she was stuck behind bureaucracy when the covid pandemic played out. The third prong of the story focuses on research labs that have done work to identify and trace disease. They offered free, fast covid testing - yet bureaucracy slowed the uptake. (There were a variety of reasons - some places had relations with other vendors or could not bill $0). The lab also had the ability to rapidly identify different contagions. They even used this to identify drugs that could help cure things. Alas, these skills were often used. The government would even recommend a non-working treatment rather than the one that worked.

We do have great skill for responding to public health crises. We just can't necessarily take advantage of it.

Flash Boys: A Wall Street Revolt

High frequency stock traders will pay enormous amounts to shave small fractions of a seconds off of electronic communication time. Some of this could be beneficial for computer technology if they were willing to contribute back to open source projects. Alas, they like to keep their work very secret. After all, speed helps them to make make money. By being crazy fast they can perform time-base arbitrage, acting on changes in prices in one location before they have changed in another. They even brag about the benefits of ultra-fast speed, even when it does not benefit them. High frequency traders can use the speed to "get in between" a buyer and seller, making near riskless profits.
Flashboys covers a few somewhat related stories. In one, Sergey Aleynikov was arrested by the FBI and tried for "stealing" valuable source code from Goldman Sachs. This was portrayed as an incompetent witch hunt. He had uploaded code to a public SVN repo, with little attempt to hide his activity. (He could have easily walked away with all the code on a USB thumb drive.) The code he had was a mixture of open source code with the code written at the company. There was very little of the "secret sauce" from the company. He had been somewhat disgruntled that he had been unable to contribute back to the open source community. There were multiple attempts to make him an "Example". However, it seemed that there was no real damage done. (Lewis likens his activity to keeping a notebook of meetings at a job.)
The other story is about high frequency trading. There is the story of a cable from Chicago to New York built at great cost to be straighter to save a few fractions of a second off the time it takes a signal to travel. There are a few other stories about people that worked to help colocate near exchanges to be super fast.
The bulk of the story focuses on Brad Katsuyama, his experience at RBC and the people he brought together to create IEX. He gradually "uncovered" some of the oddities of high frequency trading. He got together a bunch of idealists to help create an exchange that would be immune to some HFT trading abuses. He identified some issues, such as high frequency traders taking advantage of the time it takes an order to reach different exchanges. IEX tried to prevent this by adding delays. They identified many of other bits of challenges. One thing they identified was the constant regulation/loophole loop. It seems that abuses in the financial system are enabled by previous regulation. The previous regulation was created to eliminate a previous abuse. And the path keeps going back.
The book does not go into great detail explaining high frequency trading. It does mention the great sums of money they are willing to pay for programmers and for speeds. Some have bragged about not ever losing money in a day's trading. The assumption is that they can make a few fractions of a cent in a few fractions of a second and just multiple that into real money without other noticing they have lost.

Boomerang: Travels in the New Third World

In boomerang, Michael Lewis explores some of the sovereign players in the financial markets meltdown of 2009. He plays up the country stereotypes. Iceland is populated by men that do not listen to their wive.s After conquering the fishing industry, they figure they must be naturally gifted at investment banking also. Greek are loners who think everyone else is cheating, so must cheat themselves. The Irish had always suffered, yet they had a rapid economic turnaround. They guaranteed all banks, leaving each long-suffering Irishman with a huge share of debt.
One of the final discussions deal with California and local governments. Arnold Schwarzenegger thought he had a mandate to fix things. However, he discovered that people and politicians simply wanted a lot of services and don't want to pay for them. Thus there is a lot of future debt and a willingness to shift things to local governments. These governments end up spending hugs amounts paying for their current and former employees. Thus cities like San Jose can't afford to staff new community centers. Vallejo couldn't afford anything and ended up bankrupt.
Alas governments are just behaving like individuals who go into debt to pay for things later.

Next: The Future Just Happened

Next details some of the drastic societal changes caused by the internet. It was written 18 years ago, and thus provides an interesting insight into where we thought things were going. Amazon would continue on its path to dominate retail. Ebay is still around, but it was Craigslist that played a bigger role in sucking the gas out of local newspapers. The financial markets recovered from the dot com bubble, only to hit the housing bubble and now are on their way to the next bubble. Many old school careers have died away. However, there is almost a greater clinging to "credentialism". Lawyers are still needed to perform legal activities, even if most of it can be done by a computer or somebody in India. Doctors still need to prescribe medicine, even if the diagnoses can be found on the internet. However, people are taking much more of this into their own hands.
Privacy is one area where Lewis's trajectory was way off. He saw people willing to give up their privacy for their own benefit or even to be heard. Today, however, things have flipped to an almost polar opposite. People are paranoid about exposing too much, and laws are made to give a great deal more privacy rights.
He did catch on to the corporations co-opting the rebels. Social Media like Facebook, Twitter, Instagram and SnapChat were nowhere to be found when he wrote this book. However, they are now behemoths in their own right. And they are now heavily utilized by companies as part of their social media strategy. Google had barely been founded when this book was written. Now they are staring down the eyes of regulators. Tech has gone from "upstart" to regulated utility.
The story of media did not follow the expected path, but has actually managed to gain more control, while at the same time losing it. File sharing has faded as people can new just stream music and video. Network, Cable and Satellite television watching has become archaic. There were cord cutters. And now there are just "never had a cord" households. The book details the launch of the DVR with TiVo and ReplayTV. Tivo is still around. However, the set-top box has been adopted by most cable providers. They did help get people accustomed to TV on demand. However, most people took it a step further and just subscribed to Netflix. Today, however, most studios are launching their own streaming services. This fragmentation seems a last-ditch effort that could lead us back to the bad-old days of piracy. Music streaming is fairly available with services like Spotify. Bands don't see much revenue from it. But they rarely did earlier. The book talks about Marillion's direct relationship with their fans. Today, bands need the direct communication to survive.
The book talks about a few "whiz kids" that had run ins with adult society. A teenager made money promoting stocks. Another gave free legal advice. Another helped write computer programs. These still exist. However, they don't make news. Society has almost brushed aside the kids and filled the internet with so much "garbage" that it is hard to find reliable advice outside official channels. Democratization has sewed its own fall.

Coach: Lessons on the Game of Life

Coach is Michael Lewis's tribute to a Louisiana Sports coach. The coach was tough on his players. He wanted to help them become great men, rather than simply help them simply check a box off for their college application. Today, parents are most likely to fight against these tough lessons. They pay a lot for the education, and just expect their kids to sail through without having to work hard. ALas, this deprives them of some of the most important life lessons they can learn from a tough coach.

The Undoing Project

Amos Tversky and Daniel Kahneman were both born in Israel and later studied psychology there. Beyond that, they seemed to have little in common. Kahneman lived in France during World War II and had experiences running from Nazis. He tended to be more to himself, while Tversky seemed to know everything and be more social. Once they met, they found they had a great meeting of the minds and were able to achieve more together. They wrote a number of influential papers in their time together. They gradually drifted apart as Tversky received more public recognition. However, he died of cancer, and it was Kahneman that later received the Nobel prize.
Michael Lewis starts The Undoing Project by providing anecdotes of showing the fallacy of human judgement. In sports, picking the right players can have a serious impact on the success of a franchise. However, scouts are prone to use their gut, often missing out on great players. Using data can help avoid some of the human fallacies - but even the data requires some human judgement. The narrative then dives in to the biography of the psychologists.
Both Kahneman and Tversky had a rebellious streak. They didn't fully trust common theories - especially full rationality. People are prone to many biases that allow them to be fooled. When discussing a past event, people often engage in hindsight bias, exaggerating their perceived odds that the event would have occurred. When choosing among multiple items, it is not uncommon for people to prefer A to B, B to C and C to A, seemingly contradicting basic logic. Due to endowment and sunk costs, people are more likely to hold on to something they already have - even though they would never purchase it. The fear of loss is more powerful than the desire for gain. Even if two outcomes are the same, most people would much rather avoid the outcome with loss rather than one with a gain.
The title comes from one of their final works together. What does it take to mentally "undo" something. People experience much more grief if they appear close to gaining something than if they were nowhere near. Missing a winning lottery number by one digit would be traumatic, while missing it by 5 would barely be noticed. However, both cases have the identical outcome of no win. In one, it was just easier to visualize moving over. When undoing events, we often look at the most proximate, easy to visualize causes, even if they are not the most probable.
Knowledge of inbuilt human biases can be used to help improve decision making. However, these same biases can also be used to manipulate people.

The Fifth Risk

Michael Lewis is not exactly a fan of the Trump administration. The Fifth Risk attacks the general incompetence of the Trump government. Trump threw away most of the planning that was done for transition to presidency. His people didn't even bother to visit the agencies they would be running until weeks after Trump won the presidencies. They also disregarded much of the hand over information that was prepared. Many of the people lacked the basic skills or competencies needed for their positions. It would be common for them to come in and only care about attempting to remove anyone that has an interest in Climate Change. Lewis' theorizes that Trump simply does not want to know what is going on in the government so that he can escape culpability for anything bad that happens. Since it is a democratic administration that is being replaced, he does tend to put a much more favorable spin on Democrats. They had been working hard to make the government more accessible and run better, only to have Trump come in with incompetence. Even the Bush administration was presented in a positive light. The Trump people, however, are often there just for their own personal gain, and had little clue as to what they were controlling.
The later part of the book focuses on weather prediction. While weather forecasting had previously been primarily guesswork, it has not become much more accurate. This is due to the large amounts of data that are collected as well as the many different models that can be run to produce the forecasts. The federal government sits on a vast treasure trove of data. Many private companies use this data in their commercial enterprises. Case in point is Accuweather, which uses National Weather Service Data as the primary input for its weather forecasting. The company does not want the government to make free forecasts easily available. It also fought against another comapny's bid to make the weather observation data more easily accessible. The boss of Accuweather was one of the people Trump nominated to help "run" the government.
The book ends with the story of a tornado that touched down in a rural town. Due in part to the Weather Service warning and key actions by the local emergency chief, most people survived. However, one widow lamented that the house destroyed both the barn and her house. She had hoped it wold just destroy the barn (due to the bad memories there.) Alas, the Trump administration's attempt to remove some of the "waste" in the government may have similar unintended consequences.

Has Anyone Seen the President?

In "Has Anyone Seen the President?" Michael Lewis details some experiences with the Trump administration. Trump holds grudges, and will not listen to anybody that has "wronged" him, even if they later apologize. (An example was given of a reporter that criticized Trump for removing the statue of a civil rights leader, only to apologize when he learned the statue was simply moved. Trump also does not care about the Democrats. In speaking, he attempts to solidify his base and win over the conservative media. In spite of his wealth and education, Trump speaks like a poor laborer. This helps him to relate to the lower classes, which helped him win the presidency. His presidency has defied many of the conventions of politics, which has continued to motivate his supporters, even as the world reacts in horror.

The Big Short: Inside the Doomsday Machine

Out of the ashes of the dot-com crash rose the housing bubble. Low interest rates and relaxed underwriting standards allowed anyone to buy a home. Loans were available for anybody, reagardless of their ability to pay. (In some cases, borrowers were encouraged to lie outright.) Lenders offered low teaser rates with options to limit payments further. They would gather fees when the loan was made and then securitized the loans to sell them to others. Borrowers would be expected to refinance or sell their property after the teaser rates expired. This system would work as long as home values are rising. However, once the prices start to fall (or even increase at slower rates), the house of cards would start to fall as teaser rates expired.

In the early 2000s, bankers had convinced themselves that sub-prime was where the money was. They created complex finance instruments to package them together in a seemingly "safe" manner. The highest rated securities would keep all their values if defaults continued at their "normal rates". Wall street thought they had eliminated most work. Even this risk could be eliminated by purchasing credit default instruments that would pay out if the bond payers failed. These additional layers helped to mask the true risk exposure.

While most people saw safety, a few people could see the house of cards falling. "The Big Short" focuses on these people. They saw the subprime situation as a super-complex ponzi scheme that was destined to fail. However, it was difficult to take a short position in "subprime". They would invest in Credit Default Swaps as well as short stocks of banks with heavy subprime exposure. Alas, the market for swaps were controlled by the banks that had exposure to subprime. They would continue to keep the value nearly constant, disregarding the possible exposure. Despite mounting subprime problems, the positions failed to show an increase in value until the bottom fell out of the market. However, once the bottom fell out, there was a risk that the counter parties would be able to fulfill the default swaps. Due to the complexity and massive exposure, there was a risk that the entire financial system would fail. However, the government jumped in and "saved" the financial system, allowing many to continue business as usual and continue to collect their big bonuses in spite of the fact that they nearly brought down the entire economy.

The subprime crisis hurt a lot of people. Supposedly safe mutual funds had their value greatly reduced due to exposure to "AAA" subprime instruments. Many people lost their houses and many others saw the value of their houses plummet in value. Many jobs were lost. Retirement savings were wiped out. Ironically, many of the people that caused the mess continued to do fine. They had already collected their big bonuses and had little "skin" in the game. Fund manager Michael Burry, who had correctly predicted the fall, left investing for a while after the fall. Despite predicting the crisis and making a ton of money for his investors, he was viewed as somebody "outside" and not given much credit.

With the abundant availability of information, there is little "low hanging" fruit for traders and bankers to justify their huge bonuses. Thus we end up with complex derivatives to help juice yields. We saw a near collapse of the system during the subprime collapse. Is this only a preview of the full collapse to come? At one time, gold was use to help exchange goods. The coinage had an intrinsic value. Then paper money replaced the coinage. It was valued for what it stood for. (At one time it represented a gold value. Now it is just a "Faith") Today, paper money is largely out of the picture, with most transactions merely involving numbers moving from one account to another. On top of this, there are numerous complex instruments. How stable is this system?

Liar's Poker

Before Michael Lewis was a popular non-fiction writer, he worked on wall street. Liar's Poker is the story of wall street of the 80s and his experience there. The language and the characters involved are all of the salty, unsavory types. These are not the people you would want to meet your family. They were a frat in all the bad ways. Yet somehow they managed to make tons of money. (However, they could just as easily lose a lot or see the great money-making scheme whisked away from them.) Some traders manage to be in the ideal middleman position where they can make money with minimal risk.

Lewis manage to get the job through personal connections. The procedure could be cut-throat, with the littlest thing disqualifying you for the job. His description of the interview process sounded more like a hazing. You had to rise up the ranks through force of will. You just don't want to get banished to Dallas.

Part of the the book then goes on to describe bond trading and mortgage backed securities. Solomon Brothers happened to be at the right place and the right time, ready to lead off the boom in mortgages. By bunching them together, they could get people the investment that they wanted. (Of course, a couple decades later, the whole thing would come crashing to the ground.)

After reading, I'm left thinking that "we are letting these guys manage our financial systems?" scary.

Boomerang

People of the world have transformed into gluttons. They are getting fatter and finding themselves more and more in debt. (Part of this may be due to centuries of "scarcity" that have left man hard-wired to accumulate everything he can.) This seems like an individual problem, right?

Well, in Boomerang, Michael Lewis shows that the same problems appear in government. He rights in a fast paced anecdotal narrative style that helps bring home the issue he "accidentally" discovered. Governments themselves are over-leveraging themselves. They are using debt to provide an increasing numbers of services This leaves them susceptible to massive failures.

The book presents case studies of some of the biggest government economic collapses. They seem to have occurred for a number of different reasons, though all seem to come back to the "money for nothing."

The graft bubble: Greece collapsed under a huge volume of debt. It has a huge public sector that is significantly overpaid. People in the private sector (and in general for that matter) feel it is their civic duty to cheat on taxes. Thus income is low, while expenses are ridiculously high. The public sector tends to be very inefficient. (An anecdote is that it would be cheaper to just pay for everybody's taxi fare than to run the Greek railroad.) Workers can also retire early. Is it a wonder this system lasted as long as it did?

The banking bubble: Iceland had a different type of failure. The country was for the most part well run. However, the Icelandic people discovered investment banking. The banking sector sprouted overnight and led to a run up of the currency. People discovered that they could borrow foreign currency and thus get things for cheap as the Icelandic crown appreciated against the foreign currency. Alas, the run up was built on a large number of not-well-researched investments in the banking sector. When the banks collapsed, they brought down the currency with it.

The property bubble: Ireland also had a banking collapse. However, there banks were primarily investing in development of Irish real estate. The loans were given out liberally. Real Estate prices were skyrocketing upwards. Jobs were plentiful and people felt rich. Then they realized that supply outstripped demand. Everything dried up at once. The government stepped in to bailout the banks. And the country continued to inch along.

He also provides cases in the United States. Vallejo California declared bankruptcy. The salaries of police and fireman overwhelmed the budget. (While the workers probably appreciated the generous pay, they also felt disillusioned with the union for taking things to extreme. They would almost rather see a stable city with more officers at slightly less pay.)

Vellejo's problems are symptomatic of California and the United States. Arnold Schwarzenegger was voted in as governor with a mandate to fix California's mess. However, his proposals floundered in the legislature. When he put them directly to the people, they were voted down again. People love getting as many services as possible, but don't want to pay for them. Thus, they have an income tax that depends heavily on high taxes on the very rich. (If the hollywood movie stars and silicon valley billionaires decide to take a hike, the state is pretty much dead.) Employee pensions consume a huge amount of the budget. Generous welfare policies are in place. The state has even been required to spend huge amounts of money to improve the condition of the prisons. (The same prisons where prison guards can make an easy fortune.)

The strange budgeting leaves cities like San Jose with brand new libraries - but no money for books or staff.

The United States itself seems to be living on borrowed time. The government is dysfunctional and debt is piling up. New benefits are being added, but the revenue to support them are lagging. Should the government collapse, a lot of the world economy will go down with it. Could we be in the stage before the new dark ages?

The Blind Side: Evolution of a Game

Lawrence Taylor willed himself to destroy the quarterback via the blind side. This lead to a changing of the way football was played. Unfortunately, there was a limit to Taylor's willpower, and he wasn't able to will himself out of an addiction to drugs.

Michael Oher similarly exhibited strong willpower. He grew up in a broken "family" in the projects of Memphis. He was in and out of school, and bounced around from place to place, trying to avoid being taken away by child protective services. His goal was to become the next Michael Jordan. He continued to work at it, even as his body grew to enormous proportions.

Through a series of fortunate events and coincidences, he was able to attend a private, predominantly white, Christian school on the "good" side of Memphis. There he was adopted by wealthy white family who helped train him on how to navigate the wealthy, "white" world. He was also discovered by the football coach. Oher's size and speed allowed him to become the centerpiece of the team's offense. Would he have had these opportunities if he were not a great athlete? Almost certainly not. However, even if he were a great athlete, if he didn't have the support network, he would never have succeeded in sports, and would probably still be on the streets.

He was recruited by many schools, and interrogated by the NCAA for rules violations. (The dark underbelly of college athletics is well exposed.) He had to a cram in many last-minute correspondence classes to get his GPA high enough to play college football.

For many inner-city kids, sports seem to be the only way out of the projects. Yet they are caught in a catch-22 where success in sports requires you to first get "out of the projects" and perform well enough in school to play for your high school and make it to college before you can finally make it to the pros and get a paycheck. There are so many chances to fail in the process, with the best "consolation prize" often being work as a gang bouncer. Does glorification of the athlete really benefit the community as a whole?

This book does present a nice uplifting story, told primarily from the point of view of Oher's supporters. (Oher is remarkably silent in this book, though he has since written his own book.) It is clear that he was strong willpower and character, but needed some guidance and opportunity to channel it. He knew he would succeed and he did.

Panic: The Story of Modern Financial Insanity

This is a compilation, primarily of "journalist" articles before, during and after major financial crises of the past few decades. Some of the articles included are well written and insightful, while others border on garbage. The intention of the book is good. However, it doesn't quite seem to carry out the goal. Since the essays differ significantly in tone and source, it is difficult to get a coherent picture of the true nature of the events and the opinion surrounding them.