Michael Lewis on Exposing Wall Street’s Biggest High-Tech Swindle
Flash Boys explores the world of high-frequency trading, a scheme in which traders use ultra-fast network connections to sniff out the intentions of other, slower traders, thereby acting before others can respond. Critics of the practice-Lewis chief among them-argue that high-frequency trading creates something akin to insider trading: a predatory environment for less advantaged investors. WIRED spoke with Lewis at an event organized by Live Talks in downtown Los Angeles.
WIRED: The central character in your book, Brad Katsuyama, calls today’s stock trading system “a Pandora’s box of ridiculousness.” What does he mean?
Lewis: Right now there’s vast amounts of financial intermediation that doesn’t need to happen. You have technology innovation being dreamed up to create misunderstanding, to create an advantage for insiders. What’s going on in the stock market is a reprisal of the madness that preceded the credit crisis, where you had people dreaming up instruments, like collateralized debt obligations, not to make the risks in our financial system more transparent, but to obscure them.
The characters in this story are different from Wall Street characters I’ve had before. You can almost argue that all three books that are about Wall Street—Liar’s Poker, The Big Short, and Flash Boys-are about a character trying to figure out how Wall Street works. In the first book, it’s me, working at Salomon Brothers, and in The Big Short it’s these guys who figure out that the subprime mortgage market is a fraud. In this case, it’s a guy, Brad Katsuyama, who thinks of himself, rightly, as a professional in the stock market. He runs the institutional stock market trading department of the Royal Bank of Canada, yet he realizes he does not understand how the stock market works. It requires an investigation of years for him to assemble a picture of the market.