Michael Lewis inhabits a rare place in American culture: Although Lewis doesn’t set agendas, people who read his books can, and do, make things happen. “Flash Boys,” Lewis’s most recent book, is a fiery exploration of the immense manipulative power of high-frequency trading on Wall Street.
Within a week of the book’s publication, the Justice Department, FBI, and State of New York initiated investigations into the practice, all direct responses to the outrage generated by the book.
This is, obviously, remarkable, but the outrage comes easily. As “Flash Boys” amply shows, the purpose of such trading, referred to as HFT, has been to “hardwire into the [stock] exchange’s brain the interests of high-frequency traders — at the expense of everyone who wasn’t a high-frequency trader.”
According to Lewis, HFT crews distort the market to their benefit by “front-running” — the classic, and often illegal, practice of executing stock orders after obtaining early information about other brokers’ order plans. When you front-run the market you buy a stock before your competitor does and then sell it to him or her for more than it would’ve cost if you hadn’t scooped them.
As Lewis writes, “Over the past decade, the financial markets have changed too rapidly for our mental picture of them to remain true to life.” Rather that a bunch of guys on the floor barking orders, the market now operates through boxes of fiber optic cables.
As one of the brokers Lewis writes about says, “People are getting screwed because they can’t imagine a microsecond,” the amount of time it takes to front-run the market if you’re savvy. Yes, it’s microseconds and pennies, but it amounts to billions of dollars in cumulative profits.
Lewis is a smart, inexhaustibly dogged reporter who writes lucid, crystalline prose, often about mind-bogglingly complex topics. Over the course of his career, Lewis has written 15 books, covering topics that include the NFL and baseball statistics. But it’s as a financial reporter that he’s best known, and “Flash Boys” fits firmly in the Lewis-as-financial-demystifier mode.
In Lewis’s telling the explanation and criticism of HFT seem precise. This is Lewis’s cardinal virtue: his ability to take something cripplingly complex and create a distillation, in narrative form, of how complexity tends to shroud and serves something basic. Sins and virtues don’t change. As complex as our world has become, everything serves the same simple goals, such as victory and greed. People don’t evolve at the speed of their tools.
So why has “Flash Boys” become such a flash point? What is it about this book that so threatens to upend the financial world despite years of similar malfeasance? Lewis readily concedes that his book contains little that’s new. Lewis himself writes the “entire history of Wall Street was the story of scandals . . . linked together tail to trunk like circus elephants.”
The book asserts a morality in shades of black and white: Lewis sketches heroes and villains, and many of the folks who take umbrage at his portrayal of the market cry foul, claiming that the same dubious practices exist beyond the realm of HFT.
On one hand, this is laudable. When it comes to something as economically powerful as Wall Street, it seems that any time a story prompts long-delayed government oversight, the author is doing something right.
But this fact merely makes the bluster attached to the book that much more interesting. In the dim light of the recent past, can anyone maintain that their anger comes served with a garnish of surprise?
There’s a common assumption that even if you don’t have money, your life in many elemental senses still depends on the stock market. And Lewis’s book is making an impact because a well-told tale about rich people fleecing other, often, richer people speaks to everyone who believes in market essentialism, not merely those who benefit.
The root of the uproar caused by “Flash Boys” is nested in Lewis’s statement that the HFT tactics reveal that the “US stock market [is] now a class system, rooted in speed, of haves and have nots.” In our delusionally “classless” society, this development irritates everyone. Moreover, the outrage over “Flash Boys’’ has triggered action in direct proportion to its vivisection of market perversions that affect the people who matter most in America — the wealthy.
Compare “Flash Boys” with the other big economics-related book of the spring, Thomas Piketty’s “Capital in the 21st Century.” Direct comparison is unfair, of course; Piketty is to Lewis as a lion is to a house cat, at least when it comes to depth of ambition. Piketty, whose previous work we are indebted to for providing statistical verification that the top 1 percent of the population possesses a outsize percentage of wealth, has written a magisterial book about the ever-increasing inequality.
A comprehensive overview of “Capital’s” abundance of historical and analytical data would be impossible here. (Here’s a microreview of Piketty: Read it). In short, Piketty convincingly argues that the world is poised at the threshold of a new gilded age in which the vast majority of wealth is transferred via inheritance. This feels either intuitively right or intuitively wrong, depending on your political predisposition.
Piketty’s genius lies in proving that inequality is growing and potentially threatens widespread political instability. (I should note that my office recently hosted a public event with Piketty). This “has nothing to do with any market imperfection,” Piketty writes. In effect, when the return on capital rises faster than the rate of economic growth, the greater the inequality. This just happens to be what capitalism does.
“Capital” is broad and expansive where “Flash Boys” is laser like and polemical. But that’s not the biggest difference in these books, nor are these reasons why a book like “Flash Boys” ultimately exerts more power over American economic culture. The outrage of “Flash Boys,” at least for those sitting in positions of privilege, is that their return on capital — their investments — are being hijacked by an electronic sleight of hand.
Given that most Americans remain seduced by the market, regulatory reform seems the only option. “Flash Boys” feels like virtue, but it fails to inspect the underlying assumptions and potential, damaging implications of our continued blind reliance on the fiction of “fairness” in any financial and economic system, let alone on Wall Street.
In other words, Piketty has written a trenchant critique of our current economic system while Lewis has written a book about gaming the system. “Flash Boys” is a symptom of the wealth disparity, and the denial of the disparity, that Piketty skewers.
So there are two ways to look at the “Flash Boys” chatter. As an indictment of Wall Street, it’s highly effective, even great. It’s inspiring that a book like this can catalyze a broad reaction in our culture. But it’s still a book of its time, a time where the vast majority of Americans can’t even get robbed by the people Lewis indicts.
CAPITAL IN THE 21ST CENTURY
By Thomas Piketty
Translated, from the French, by Arthur Goldhammer
Belknap, 696 pp., $39.95