A few weeks ago, I was inside the offices of one of the most successful hedge funds in London. The premises were huge, with acres of space between each desk. The walls were bare white, the atmosphere was hushed.
Everyone was either hunched over their computer terminals or talking to each other in murmured tones. The only eye-catching pieces of movement were the flickering lights of the share prices on their screens. The top executives had their own offices. On the outside of one, was a door plate: “Senior Scientist”.
A friend of mine worked for another fund. When I told him I’d just seen inside a laboratory that doubled up as a manager of people’s cash, he laughed. The textbooks that guided him through his career, he said, weren’t stock-market manuals but tracts devoted to advanced chemistry and mathematical equations from his days as a star science undergraduate at Oxford.
We have a quaint image of share trading as comprising a group of young men with slicked-back hair, brightly coloured blazers and shiny shoes all shouting at each other in pits at stock exchanges around the world. But those days are long gone. Hardly any market engages in open-floor dealing any more. It’s old hat, went out with the ark.
Why? Because it was inefficient and too slow. No person could replicate the speed of a computer with a fibre-optic cable; more remote was the possibility that a human being could match a programme tailor-made to spot an opportunity and trade in microseconds.
It’s this world that Michael Lewis explores in his new book, Flash Boys: Cracking the Money Code. Presumably to drop the local flavour, they changed the title from the US version, Flash Boys: A Wall Street Revolt. Both are apt. The Brit name is more general, clearly something mysterious about computers and money; the US one hints at some sort of institutional disapproval and possibly a fight-back.
For anyone familiar with Lewis’s work, his method here is a favourite one of stumbling across unlikely characters that could have stepped straight out of Central Casting and then prising from them tales that shine a light on a hitherto closed world. His writing is sharp, acutely observational and, at times, brilliantly funny. His skill, which he has been honing ever since his classic Liar’s Poker in 1989, is to make a complex, dry-as-dust subject colourful, ever so readable and shocking.
Back then, Lewis wrote Liar’s Poker because he was appalled by what he experienced as a bond trader at Salomon Brothers. The group portrait he painted was one of ruthless, avaricious, testosterone-fuelled men who revelled in being called “Big Swinging Dicks”, who would literally speculate on anything, and cared little for humanity or anything else that might get in the way of their relentless progress. It was meant to be a warning cry about Wall Street and City excess. Instead, rather like the movie Wall Street, which came out in the same era, it served as a magnet for every wannabe Gordon “greed is good” Gekko out there.
Roll forward a quarter of a century and Lewis continues to expose mind-numbing, awful behaviour. His anger is just as marked as it ever was.
“If it wasn’t complicated, it wouldn’t be allowed to happen,” Lewis said on CBS’s 60 Minutes news programme on Sunday night. “The complexity disguises what is happening.” He added: “The stock market is rigged.”
That is the crucial difference between now and then – that the gambling element has vanished. For this we have to thank computers, and in particular HFT platforms. HFT stands for high-frequency trading. For those among us who like to hark back to traders who stand and point and holler, his message is simple: wise up.
“Financial markets have changed too rapidly for our mental picture of them to remain true to life,” he writes.
Forget gentlemanly handshakes and the tradition of “my word is my bond”. What Lewis introduces here is a harder, terrifying side; an industry peppered with phrases like dark pools – effectively private stock exchanges run by the biggest brokers – and algorithms, front-running, trading speed and liquidity.
To give some idea of what he is talking about, take this one episode: a character called Rich Gates manages a $2bn (£1.1bn) mutual fund belonging to 35,000 small investors. He grows suspicious of Wall Street brokers announcing they would like to protect him. Protect him from what?
That, plus the repeated references to dark pools and speed, cause him to devise a test. He does it over and over again, and each time the outcome is the same: he places a buy or sell order in a dark pool, a third party gets wind of what he is doing and quickly, in a split second, nips in and moves ahead of him. The result is that he has to pay slightly more for the stock he is buying and gets less for the shares he is selling.
Not much, but enough, given that his trade is one of many thousands posted daily, to make him realise that fortunes are being amassed. Late in the day, the authorities have woken up – “Insider Trading 2.0” is New York attorney-general Eric Schneiderman’s phrase for it. But not just the regulators. The Wall Street Revolt in the title of the US edition is not only a reference to them but to a band of crusaders behind IEX, a trading hub that aims to take on the unscrupulous giants and beat them at their own game.
Lewis’s hero is Sergey Aleynikov, who is accused of stealing Goldman Sachs’s proprietary code and is imprisoned before being acquitted (it was the authorities’ panicky response, including the involvement of the FBI, and the jitters of Goldman, to the copying of the computer code that first alerted Lewis to its significance).
This is a disturbing work, and yet again, despite Schneiderman’s awakening, the authorities emerge as too slow, unable to keep pace with the financial sophisticates.
I’ve looked him up: Lewis is 53, and presumably has another good 25 years of exposing and narrating left in him. It does not bear thinking about what he will be describing in 2039, some 50 years after he first alerted us in Liar’s Poker.