Who knew high-frequency trading was such a sexy subject?
Certainly not Michael Lewis, who says he didn’t anticipate the level of blowback to Flash Boys. The bestselling author has been on a whirlwind publicity campaign, including the occasional showdown with those angered by his new book. Bloomberg Businessweek’s Matthew Philips took a closer look at some of the claims the book makes about speed traders. We caught up with Lewis between TV stints today. Here are lightly edited excerpts from the conversation:
Are you surprised by the media reaction?
Absolutely. I’ve never had a book get this big a reaction so quickly. This is loud and personal. In some ways, it’s similar to what I saw with Moneyball. The guys who covered baseball felt they had to get out there and stake a position, to show their expertise. The difference now is that it happens more quickly. You had Andrew Ross Sorkin’s column, which was an idiotic piece of journalism. Felix Salmon starting with the fact that he’s only half way through the book. I thought, “My God. Everyone feels they need to establish an opinion on this right away, before they’ve even read the book.” The number of thoughtless responses is amazing to me.
Are they just reacting to your claim that markets are rigged?
The markets are rigged. Computerized trading and computerized scalping are two different things. These firms make their money by front-running trades. They’re using their speed advantage to buy shares first and then selling them back at a higher price. The result is higher prices for investors in those shares. That’s rigged.
When did you start to sense the blowback?
I flew to New York on Monday, and by the time I got off the plane, my phone exploded with messages. All these people were mouthing off about the book, attacking these guys and defending high-frequency trading.
You didn’t find that with The Big Short?
There wasn’t the same clamoring for space on the subject. Everyone had their place in the journalist social order. They’d established a view on the issues. There wasn’t the same rush of claims.
Let’s look at some. One is that it’s wrong to say these speed traders are predators who hurt mom-and-pop investors.
Most people don’t sit and trade stocks. They invest in mutual funds, so they pay more. High-frequency trading accounts for half the volume of the market. If one set of predators dominates the hunt for antelopes, that means less antelope for each person.
These high-frequency trading firms are less profitable.
The issue isn’t profits but revenues. When you’re skimming off trades, investors still end up paying more. The reason they may be less profitable is that the banks and exchanges have gotten better at milking them when it comes to price and order flow.
There’s an FBI investigation. Have any officials reached out to you?
Sure. The New York Attorney General’s office called the publisher last week to try to get a galley. What I know is in the book.
What about traders, such as BATS Global Markets President Bill O’Brien, who say you never contacted them to get a response?
That’s simply not true. I went to BATS. … The person who could have commented on what happened was [BATS founder] David Cummings. He refused to talk to me. O’Brien wasn’t there. I talked to a lot of high-frequency traders. I had others who refused to talk to me and then, once the book was done, came back.
Is it really all that different from the 1980s, when you wrote about Salomon Brothers in Liar’s Poker? At least now there’s not some guy who can just refuse to take your call when the market’s crashing.
What’s different is the degree, the kind of market meddling. We’ve had the Libor scandal, other attempts to manipulate the market. High-frequency trading is so much bigger. A rising stock market probably masked a lot of it. There hasn’t been much incentive to care about the problem. Maybe there’s to be a public numbness to bad behavior on Wall Street. This book isn’t just about some system that’s rigged. It’s about the effort to build one that isn’t.
