42 pages • 1 hour read
Michael LewisFlash Boys: A Wall Street Revolt
Nonfiction | Book | Adult | Published in 2014A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.
Index of Terms
Dark Pools
Dark pools are private exchanges, often run by large Wall Street firms, that allow those firms to match the buyers and sellers of stocks outside of public view, although they report all transactions after the fact as required by law. One of the many problems with dark pools is that they follow a predictable sequence, first completing a partial order within the pool and then completing it on a public exchange. The extremely brief moment between those two sequences allows high frequency traders to swoop in and poach orders at favorable prices before reselling them. Dark pools embody The Culture of the Stock Market by existing in the liminal space between legal technicality and moral ambiguity and by their dual role as an exploitative measure themselves and a potential weakness to be exploited.
High Frequency Trading
High Frequency Trading is a general term for a type of stock trading that uses computers to execute more orders at a volume and speed far beyond what was possible under the classic system of human-to-human trading. High frequency trading often exploits loopholes in algorithm-based price updates within the milliseconds that it takes signals to travel from one exchange database to another. Complex computer algorithms give high frequency traders a competitive advantage over other traders, which they utilized to gain a dominant role on Wall Street by the early 2010s. Lewis focuses on HFT as the nexus of corruption within the financial sector, technological advancement, ethics, and human ambition.
Investors’ Exchange (IEX)
IEX is a stock exchange founded by Brad Katsuyama in 2012 and launched in 2013. The project was a response to the growing trend of high-frequency traders interposing themselves between different exchanges to manipulate prices in their favor, all in mere fractions of a second. IEX builds in an artificial delay for all transactions, making it far more difficult to glean an informational advantage. The Securities and Exchange Commission (SEC) gave official approval to IEX in 2016, and it has since expanded its operations to cloud storage and data protection for consumers. IEX embodies the concept of Reform Versus Revolution within the financial sector by attempting to directly address a phenomenon that enabled inequitable access to profits.
Regulation National Market System (Reg NMS)
Reg NMS refers to a regulation passed by the Securities and Exchange Commission in 2005 to establish fair competition within stock exchanges. Prior to Reg NMS, brokers had enormous discretion in how to carry out their customers’ wishes, leaving ample room for unethical and illicit practices. Reg NMS established a standard of “best price” which forced brokers to get the most shares of the desired stock at the best available price. This forced brokers to search across multiple exchanges to find the best price, and this exposed a vulnerability whereby high frequency traders could detect activity in one exchange to anticipate activity in another, whereupon they would swoop in and “front-end” the original seller. Legal regulations like Reg NMS have created a degree of predictability that those with sufficient speed could exploit with ease.
Slow Market Arbitrage
Slow Market Arbitrage refers to the most typical and effective tactic used by high frequency traders to game the markets in their favor. There are now dozens of stock exchanges, and at any given moment it is possible for stocks of the same company to have different values in different exchanges, if only by a small margin and for a very brief period. HFT algorithms can compare across the different exchanges instantaneously, swoop up stocks at the lower price and then sell them at the higher price. The margins are typically small, but with countless opportunities to make such transactions and a practical guarantee that HFTs will always win the race to grab them, these firms have used this strategy to accrue billions of dollars. The practice of exploiting this delay and “arbitrating” prices between different exchanges is Slow Market Arbitrage.
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