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What Is A Dark Pool?


Flash Boys and Investors

Lengthy but interesting.

I have thus far resisted writing anything about Michael Lewis’s book “Flash Boys”, in part because I typically don’t want to waste time on timely issues (instead focusing on topics that are of long-term interest), although it has been a real exercise in self-constraint because there have been few books published in my lifetime that have been as troubling to me (Piketty’s recent “Capital in the Twenty-First Century” is another recent example of flawed economic thinking).
I heard well before “Flash Boys” was published that Lewis was working on a book about high-frequency trading (HFT), and I was very excited; I loved all his other books. Then, a month or so before it became available, I saw something that made my jaw drop: the book was about IEX. This surprised me not because IEX is bad, but it is tiny and insignificant. There were many other exciting things to discuss on the topic of HFT: why would Lewis focus on IEX?

A few general observations about the book:
• It is not an objective account of reality. Lewis began writing the book having already decided in his mind that the markets are rigged. There is very little evidence that he made an effort to research for the book, short of talking to the IEX people.
• The book itself and subsequent promotion has been an exercise in sensationalism. When Lewis, Brad Katsuyama, and Bill O’Brien (President of BATS) squared off on CNBC, O’Brien started the conversation by declaring “shame on both of you for falsely accusing literally thousands of people and possibly scaring millions of investors in an effort to promote a business model.” There is an immense amount of truth in this sentiment. I am sure that both Lewis and Katsuyama believe what they’re saying to be true and they are looking to improve the markets, but there is no doubt that using the “rigged” word and emphasizing how the little guy is getting hurt has been unconscionable.
• For the most part, the “news” around Flash Boys is that Michael Lewis wrote a book. In other words, he has written an engaging story, although in this case, he has not uncovered anything that has not already been discussed at length by financial journalists such as Scott Patterson.
• One of my favorite parts of the book, which really highlights how little the author and the IEX protagonists understand market structure, was towards the end when IEX is reviewing the first trades that were executed in their dark pool. They were surprised to see very tiny orders coming through, which they concluded might be part of a conspiracy to make them look bad by competitors. This hypothesis, of course, completely ignores the fact that algorithmic trading uses small trade units in order to reduce market impact following Almgren and Chriss “Optimal Execution of Portfolio Transactions” and all common sense which dictates that you want to hide your orders.

More here – statalgo

The Lefsetz Letter – Flash Boys Rule

I am fan of and subscriber to the Lefsetz Letter – a music industry commentary by Bob Lefstez who has been around longer than I have . Interestingly, a lot of his commentary is about issues that are wider than music alone. This is to be expected because music is both a social and technological phenomena. It is social because of the way we listen but also it is at the forefront of technological change because because it is simply information for consumption.

His latest  outing looks at Flash Boys by Michael Lewis and can be read here.

I have snipped out the bits that interest me below.


“60 Minutes” did a good job of explaining the story:

Is the U.S. stock market rigged?

But the truth is most people will not read “Flash Boys” because they can’t. Inured to television, they can’t hold multiple concepts in their brains at one time, when the reading gets tough, they give up. “Flash Boys” is even harder to read than “The Big Short,” it’s the hardest book I’ve read in years. But wading through gives you passage into the club, and the truth is all winners want to be in the club, but most just say they’re there, without truly being inside. Success is not only money and status, it’s wisdom and knowledge. You gain that through experience, and hard work, like reading “Flash Boys”


Nobody on Wall Street could explain flash trading, except for those perpetrating it, who were tight-lipped. Imagine a world wherein a label head has no idea how the records are made, how they get on the radio, that’s what’s been going on on Wall Street.


They’re not gonna let Michael Lewis edge in on their turf. As soon as the book came out, insiders pooh-poohed it. They always do. America is a game of who has the biggest dick, and those at the top whip theirs out on a regular basis and the little people succumb to this intimidation. You get ahead not by kissing butt, but by standing up to power, that’s what a great artist does. Michael Lewis is a great artist. Nobody on the “Billboard” chart is.


In other words, they’ve got no time for you until they do, after you prove yourself. Brad Katsuyama worked at the also-ran Royal Bank of Canada, the big boys laughed at him, but when he enlightened them and proved he could make them money… You want access? In business it’s all about money. Doors open when you can make people a profit.

And my favourite –


The fiber optic cable laid from Chicago to New York is being superseded by microwave transmission. A great record is forever, nobody wants yesterday’s flip phone.


Michael Lewis – Flash Boys


Is The U.S. Stock Market Rigged?


The transcript of the entire interview can be found on the 60 Minutes site. However, I had trouble getting their embedded videos to play in Chrome.

Collective Motion Of Stocks With And Without HFT

I came across these two videos by Austin Gerig of the Said Business School at Oxford. One of his specialities is the impact of HFT upon markets and the videos below represent the price movements of 40 large-cap US stocks in 1-minute interval without HFT and with HFT. You notice that with HFT there is a clustering or schooling of prices around a central point. Without, HFT prices seem to much more dispersed.


High Speed Traders Trade Faster Than Low Speed Traders

The title is somewhat obvious but it hides a deeper point – there is an arms race going on the trading world and generally you are not part of it. I have had numerous discussions about the impact of HFT with various people, some of whom insist naively that the benefits and technology of HFT will eventually flow down to the average investor. The flawed argument they use is that safety features of formula one cars have directly filtered down to standard road cars. This in itself is debatable. However, it ignores the fact that HFT requires specialised technology and infrastructure that is beyond the reach of the standard investor. the standard investor will never achieve the latencies that HFT traders because retail investors will never had direct lines to the exchanges.

The thing is, speed traders have numerous edges over you, and all of those edges are “speed.” There is nothing new or surprising or scandalous about the fact that high-speed traders trade at higher speeds than low-speed traders. It’s right there in the name. If your trading isn’t automated using computer algorithms, you have no ability to profit from the 90-millisecond trading advantage that you get from a direct Business Wire feed. The computers are faster than you because they are computers! The direct feed makes them 90 milliseconds faster than other computers! Who cares?

More at Bloomberg

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