San José State University
Thayer Watkins
Silicon Valley
& Tornado Alley

A Recommendation for
Michael Lewis' book Flash Boys

Flash Boys is a recent book by Michael Lewis which describes how a new group of predators has developed since the financial turmoil of 2009 and how these predators are milking the stock market for billions of dollars per year. They are labeled high frequency traders but a better descriptive label would be flash traders. Lewis' book describes how one man, Bradley Katsuyama, a Japanese Canadian, discovered their predations and set about putting together a team to stop their exploitations.

Katsuyams worked for the Royal Bank of Canada in Toronto and was sent by his employer to open an operation in New York to serve the stock market. When Katsuyama started making purchases and sales of large blocs of stock he noticed a perplexing phenomena. When he had a large order to execute he divided it up among the various stock exchanges and sent the orders off electronically. He found that the market immediately moved against him. That is to say, if he was trying to buy a stock the price immediately went up on most of the exchanges. This occurred in situations in which prior to his order the price had been static. If some traders knew he was going to purchase a large bloc they would immediately try to order that stock ahead of him and drive up the price. This is called front running. The front runners would then sell to the original orderer at a profit.

At first Katsuyama could not figure out how the traders were getting the information about his order. Working with an expert on the technology of the electronic transmission lines Katsuyama found that his orders were arriving at the exchanges at slightly different times. The arrival the order at the first exchange to receive it triggered a computer program to immediately send out front-running orders to all of the other exchanges. The flash traders relied on having the fastest transmission lines to make their profits.

The day traders who try to out-guess the other market participants serve a social purpose. They provide liquidity to the market and made it function more efficiently. They thus serve a social purpose. The flash traders are an entirely different matter. They serve no social purpose yet rake in billions of dollars per year.

Katsuyama's team developed a program that made sure that the separate orders to the diferent exchanges all arrived at the same time. That led them to leave the Royal Bank of Canada and set up their own stock exchange.

The story of their efforts makes entertaining and informative reading.