It’s extremely rare that a book can unsettle Wall Street.
But later today the newest book from major US writer, Michael Lewis, will be published. It’s already available on pre-order on Amazon (analogue print and ebook download).
You can bet the orders have been busy because the pre-publicity for the book has been the heaviest I have seen for any book on the markets for decades.
Limited reports about Lewis’ new book – called "Flash Boys: A Wall Street Revolt" rattled through Wall Street on Friday night, our time – capping a week or so of rumours.
Lewis is perhaps the best current writer on markets (and pretty good on sport).
His best known books are Liar’s Poker (about his time as a trader at the old Salomon Brothers investment bank), The Blindside (about NFL Football), Moneyball, (about baseball and which revolutionised the thinking and management of America’s national game, and other major sports such as soccer) and The Big Short – about the US subprime boom, crunch and the GFC.
He was interviewed in a story that appears on the US version of 60 Minutes around 10 am today, Sydney time on the US East Coast.
You can bet thousands of bankers, brokers and others, especially in the high frequency trading business, will be glued to CBS’s 60 Minutes program to watch what the story reveals and what Lewis says.
In a short promotional release from CBS, it quoted Lewis as saying that the US stock market is rigged to hurt the average investor and benefit high frequency traders, stock exchanges and large Wall Street banks.
"This computer-based high-speed trading is considered sophisticated and uses complex algorithms to move in and out of positions in fractions of a second. These HTFs give the big guys an edge, that the little guys cannot compete with," says Lewis.
"High frequency traders have found ways to use their speed to gain an advantage that few understand," says Lewis in the interview.
"They’re able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price," says Lewis. "The speed advantage that the faster traders have is milliseconds….fractions of milliseconds."
The Financial Times, the Wall Street Journal and a host of other major media outlets have jumped on the story this weekend, reporting on what he is quoted as saying on 60 Minutes, and how nervous Wall Street is – that’s unique.
For example, the FT reported on Saturday on its website and in its print editions "The release of Flash Boys: A Wall Street Revolt on Monday comes after years of public debate over the lightning fast trading systems which have grown to dominate a fractured terrain where multiple exchanges and bank-run trading platforms compete for orders."
And it has certainly rattled of the mightiest of all the big beasts on Wall Street, Goldman Sachs.
Finding out what’s in the book and why its making many on the Street jumpy, has been tough.
According to the FT report "In the two weeks before publication of Mr Lewis’s book, Goldman Sachs has suddenly thrown its weight behind market reform after years of investment in HFT and taken the highly unusual step of telling staff to publicise its support for a competing trading platform.
"Some market executives have even discussed with Virtu Financial, an HFT outfit preparing the first initial public offering of a global proprietary trading firm, postponing its share sale amid heightened scrutiny of its core business. Virtu declined to comment, but its roadshow is expected to kick off next week.
"Regulators are also showing renewed interest. New York attorney-general Eric Schneiderman last week revived long-running and vociferous arguments against HFT by targeting the relationship between stock exchanges and trading firms in the latest part of an investigation into what he calls “Insider Trading 2.0”.
"Mr Lewis has built a reputation as a skilled storyteller, able to tease villains and heroes from the most esoteric financial topics. In Flash Boys, he zeroes in on Sergey Aleynikov, a former Goldman programmer, and the men behind IEX, an upstart trading hub that uses “speed bumps” to level the playing field."
According to CBS, Lewis says in the book that a former trader at the Royal Bank of Canada in New York, Brad Katsuyama, started IEX after he consistently failed to have his entire order filled at the price he wanted.
"Katsuyama, who speaks to Kroft, put together a team of experts to figure out how to defeat the problem and started a new exchange, IEX, that he believes will level the playing field. Katsuyama launched IEX in October and investors, large and small, can route their trades through IEX without fear of predators lurking."
IEX has accomplished this by creating a unique speed bump. "They slowed down high-frequency traders’ ability to trade on their market," says Lewis.
"While many on Wall Street are trying to starve IEX because it has upset the status quo, large institutional investors are onboard. Hedge fund manager David Einhorn of Greenlight Capital, has invested in the new exchange and tells Kroft that he believes IEX is "going to succeed in a very big way," CBS said in its release.
And the FT points out that the politically acute management of Goldman Sachs two weeks ago threw its support behind IEX and started asking staff to speak out in support of the new exchange. That was a telling move.
William Cohan, who has written three books on Wall Street (incouding one on Goldman Sachs and another on the collapse of Bear Stearns and is due to publish a fourth volume next month, was quoted by the FT as saying: “Maybe the wiser strategy was to get out ahead of [the Michael Lewis book].”
According to the FT, “This book coming out is the final nail in the coffin in proving high-frequency trading is an issue,” said Eric Hunsader, founder of market research firm Nanex.
“Goldman wants to be part of the changing process but you can’t look like one of the winners so you must look like one of the victims. That’s pretty much what Goldman is doing. I was shocked.”
Note: This story in New York Magazine gives us a good idea about the importance of the book and Michael Lewis.
"It wasn’t listed in publisher W.W. Norton’s catalogue, and though it’ll appear this Sunday on 60 Minutes", today’s Amazon description still reads, blankly.
“Michael Lewis returns to the financial world with a new book that gives readers a ringside seat as the biggest story in years prepares to hit Wall Street.”
A lot of secrecy, and there’s more in that story.
