42 pages • 1 hour read
Flash Boys: A Wall Street Revolt
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Themes
The Culture of the Stock Market
Lewis has made his career chronicling the culture of Wall Street and its consequences for society. In 1989’s Liars Poker, he describes a macho culture that elevates confidence over analysis where bond traders were gambled with peoples’ savings while seeking to outdo one another for their own machismo and reputations. 2010’s The Big Short shows bankers desperate to sustain the conditions of a booming housing market preying upon their most vulnerable clients with false promises and incomprehensible financial tools that ultimately unraveled the entire global economy. Unlike these two books, Flash Boys does not end in a financial crisis that proves the folly of certain attitudes. The lack of a comeuppance for HFTs in Flash Boys argues that Wall Street is rotten to its core. So long as it does not generate yet another catastrophe, Wall Street is happy to go from one day to the next committing a host of misdeeds on a smaller scale and ruining the lives of individuals like Aleynikov.
Lewis presents the problem as not one of mean-spirited predators, but an issue with the structure of Wall Street, which incentivizes predatory behavior. Long-term planning is strongly discouraged, since every firm is legally required to increase their shareholders’ profits whenever possible. An unethical action that might cause trouble later is nonetheless appealing if it promises an immediate benefit. Brokers and investors do not have to break the law, although they sometimes do, since reforms are often piecemeal and create loopholes for violations-in-spirit that are still compatible with the letter of the law. Even for a firm predisposed to integrity, the likelihood of their rivals engaging in predatory practices pressures them to follow suit, as there is uncertain benefit and certain harm in acting honestly. The cumulative result is a culture of cynicism and people who might privately harbor regrets but see no reason to behave morally.
High frequency trading represents a technological development thrown into this cynical culture by the rapidly progressing digital age. High frequency trading’s status as a dazzling new digital technology meant its dominance was taken for granted and so firms integrated HFT rather than fight for a fairer system. When Katsuyama was making his pitch for THOR and then IEX, he had to feign a greed he did not really feel, or else investors would not take him seriously. They spread malicious rumors about his company, either because they wanted to undermine it or they simply could not believe that anyone could earnestly want transparency and equity from the inside. It was hard for Katsuyama to shake the fear that “the stock market at bottom was rigged. The icon of global capitalism was a fraud” (232). Katsuyama’s fear led him to challenge the dominant culture rather than leave it in the exclusive hands of the malicious and cynical. Lewis’s Epilogue reveals that he is uncertain about the lasting impacts that IEX’s advent has had on the greedy and cynical culture of Wall Street.
The Desire for a Purposeful Life
Many members of the IEX team, including Brad Katsuyama, have some rough similarities in their background. They are all highly capable and ambitious people who won positions with prestigious Wall Street firms. Some had made a great deal of money, and others were poised to do so if they continued along a morally ambiguous track. They had families or other people who relied on them for support, and so they had perfectly good reasons to operate within the system and a reasonable expectation to succeed. Yet each of them threw away certainty to challenge Wall Street powers. Some did so because the work was tedious or stressful, others because their conscience forbade them from participating, even indirectly, in activities they knew to be wrong, but all of them wanted to find greater meaning in their lives than wealth or status alone could provide.
For many of the founding members of IEX, the search for a more meaningful life took shape around the events of September 11, 2001. John Schwall experienced survivor’s guilt, certain that he would have helped if he had been closer to the towers and not stuck on a bus. Zoran Perkov discovered an unknown strength within himself, a coolness under pressure that he wanted to feel all the time. Josh Blackburn left college to join the Air Force, where he had used his skills in pattern recognition to save American lives. Even for those who were not present for or directly affected by the attacks, their experiences on Wall Street were alienating. Brad Katsuyama is a mild-mannered and honest Canadian who found himself surrounded by flippant brokers with flimsy ethical standards. Ronan Ryan was pigeonholed as a technology troubleshooter whose knowledge had no value on the business end. Serge Aleynikov seemed to be living the American dream but craved the opportunity to build something on his own rather than plug leaks in someone else’s machine. Prison robbed Aleynikov of the chance to his live dream, but for Katsuyama and his team, IEX was as much a mission as a business venture. The dominant culture of Wall Street counseled going with the flow and gaming its system of loopholes and traps to one’s own advantage. The members of IEX wanted to show that a different approach was possible, not only in terms of making a fairer and more transparent stock exchange, but in building a team based on a shared mission that inspires each person to bring out their unique talents. The quest for a purposeful life that brings together IEX suggests that the cynical profit and status seeking activity of traditional Wall Street are no longer considered meaningful.
Reform Versus Revolution
Katsuyama and his team experienced a great deal of difficulty explaining what exactly they were trying to accomplish. In the early chapters, this is because they had not quite identified the exact nature and scope of the problem they are trying to solve. They had a general sense that something was wrong, and ample evidence to support their unease, but only a limited notion of the necessary response. Even after THOR helped to diagnose the problem and prescribe an initial solution, Katsuyama faced a dilemma. He and his team could market the program to protect ordinary investors against predatory HFTs, but it was at most a technical reform of one aspect of Wall Street. If Katsuyama was going to recruit people, a relatively minor reform effort was not going to inspire anyone. Yet if Katsuyama called for a more radical challenge, he could have compromised his reputation as an even-handed honest broker capable of working with all sides. He did not have the disposition of a revolutionary, but his mission was going to have to take on revolutionary aspects if it was going to have its desired impact.
IEX allowed Katsuyama and his team to walk the tightrope between reform and revolution. A new exchange was not by itself a shocking development, as they had proliferated in proceeding years. The remarkable aspect was its explicit dedication to transparency and negating the speed advantages that every other firm had been pursuing to game the market with HFT. Existing rules limited the direct impact of IEX, as they could not call out firms that tried to sabotage them or ensure that other firms would honor their investors’ requests to route orders through IEX. By offering a clear alternative, they gave investors a reason to support them and punish brokers who failed to honor their wishes. In practical terms, IEX could not possibly offer more than a template for possible reform, with relatively small market share in the best-case scenario, and little ability to shape the behavior of the big banks who would likely continue to throw in their lot with HFT. Even so, by proposing an alternative, IEX was symbolically revolutionary. IEX’s success is a powerful indication that the way things had been did not have to determine how they would always be.
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