Flash Boys: A Few Lessons

In the past couple weeks, I was able to get my hands on and read (finally!) Flash Boys by Michael Lewis. It tells the story of a few honest guys that try to stir up the way business is done on Wall Street, with the main protagonist being Brad Katsuyama, a former employee at the Royal Bank of Canada. There are some startling revelations in this book, some of which are relevant to physicists that go onto work on Wall Street, and some that apply more generally.

During my time in graduate school, I saw a fair share of theoretically-trained physicists (that tended to be quite computationally proficient) go onto work at high-frequency trading (HFT) and investment banking firms. I don’t see this as necessarily a negative trend (especially for those that are working in investment banks rather than HFT firms), but this largely depends on the roles the physicists are hired to fill. In speaking to the physicists who have gone onto work on Wall Street, many of them have been attracted by the interesting puzzles/problems they are given to solve.

One of the main themes of the book is that the physicists, mathematicians and other STEM PhDs that work on Wall Street are often prevented from understanding their own roles within their companies. What I mean by this is that upper management in many Wall Street companies actively try to impede people with a more technical leaning from gaining a broad overview of the firm’s intentions and its role in the economy as a whole. The PhDs are hired to solve puzzles, not to understand the meaning of the puzzles they are solving. Indeed, many STEM PhDs are not even interested in knowing the consequences of the problems they are solving. This is just one of the parts of the book that I found to be particularly disturbing.

For those STEM PhDs that are thinking of going to work on Wall Street, Flash Boys is one of the most insightful and accessible reads one is likely to find. In stark contrast to the management at many of these firms, the book seeks to provide one with an overview of what has occurred on Wall Street since 2007. In it, Lewis describes the reasons behind the rise of dark pools and other public stock exchanges (i.e. the fragmentation of trading sites), why optical fibers that connect, e.g. Chicago exchanges to New York exchanges, are of immense value to HFT firms, how HFT firms essentially provide an unwanted tax to investors in the American stock market, and how investment banks’ (e.g. Goldman Sachs’) incentives don’t always align with those of their clients.

Since the writing of the book, things have started to change somewhat on Wall Street. Brad Katsuyama and his team have opened up the IEX (Investors Exchange), which seeks to prevent high-frequency traders from teasing out information about investment strategies employed by mutual funds, hedge funds, and individuals who invest from home. (This information can be used by HFT firms to front-run.) Even as things change, the book is without a doubt still very relevant today and is highly recommended, especially for those seeking a job on Wall Street.

On a more general level, one of the lessons I took from the book was about the need for introspection. It is sometimes necessary to ask oneself questions such as:

  1. What are the broader consequences of my work?
  2. What are the possible unintended consequences?
  3. What are the societal impacts?
  4. Are these consequences long or short term?

Even though we choose to pursue the seemingly singular goal of scientific knowledge and understanding, we do have a role to play in the broader society as well.

One response to “Flash Boys: A Few Lessons

  1. Pingback: Flash Boys: A Few Lessons | Le Sel de la Terre

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