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Originally published April 7, 2014 at 3:03 AM | Page modified April 8, 2014 at 7:55 PM

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‘Flash Boys’: skimming fortunes on a rigged Wall Street

Michael Lewis’ thrilling new nonfiction book, “Flash Boys,” investigates high-speed stock market skimming. There are even some heroes. Lewis appears Monday, April 7, at Town Hall Seattle.


Special to The Seattle Times

Author appearance

Michael Lewis

The author of “Flash Boys” will appear at 7:30 p.m. Monday, April 7, at Town Hall Seattle. Tickets are $27.63; ticket includes a copy of the book and admits two people to the event. For tickets and more information go to townhallseattle.org or call 206-652-4255.

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If you heard about Michael Lewis’ new book, “Flash Boys,” on “60 Minutes” or read about it and thought: Big deal, everybody knows the stock market is rigged — hold on.

You don’t really know “Flash Boys” (Norton, 274 pp., $27.95), a tour de force that will grab and hold your attention like the best of thrillers. The book’s grifters, oddballs, protagonists and Tom Clancy-esque tech backdrop are capably and invitingly handled by the author of “Moneyball” and “The Big Short.”

Lewis shows how the market of popular memory is gone, replaced by computers in some 60 exchanges. Within the little-known world of high-frequency trading, speed is everything and insiders are skimming tiny amounts off stock trades. These insiders use peculiarities of the electronic exchanges to gain a micro-millisecond’s head start on other traders, essentially “scalping” tiny amounts off every stock transaction. It adds up in a market where the average daily volume is $225 billion.

But this is more than a story of outrage. It tells of unlikely heroes who set out to find out what’s gone wrong and lead a revolt to fix the market.

Lewis will appear tonight, April 7, at Town Hall Seattle. I spoke with him last week.

Q: You’re from New Orleans, the son of a lawyer, and yet you went to the London School of Economics and ended up on Wall Street working for Salomon Brothers. And you were there when the stock market crashed in 1987.

A: Yes. I had been working in London, but weirdly I was in New York the day that happened (Oct. 19, 1987). Not only that, I was in Salomon’s stock trading department. I watched it happen. I ran around seeing everyone’s reaction. That’s when I knew I wanted to be a writer.

Q: High-frequency trading skims money from traders and investors. It distorts stock prices. What are other consequences?

A: It’s corrupted all the participants. The incentives are not aligned with serving customers honestly. Instead of serving the economy, the (high-frequency trading) market is now serving itself.

Q : How does this affect small shareholders?

A: A scalp is going on in the market. It doesn’t affect the individual all that much but there’s an insidious, small tax on every transaction. Collectively, it’s a huge deal.

The bigger deal is that in order to scalp people, the system has had to get so complicated. The design itself is for speed. So it’s much less stable than it should be. For example, the fear at Goldman Sachs is the whole thing is going to collapse. Nobody knows how it all goes together. We’ve already had flash crashes.

This reduces trust in the markets. It also makes it more expensive for productive companies to raise capital.

What eats at me is the idea that society’s elites are making their living finding ways to rip off middle-class people.

Q: What should investors do?

A: Take control of their stock-market orders. Whether you deal with a broker, an investment adviser or place your trades through an online brokerage, insist that they route them for the best execution of the trade. Find out how they route their trades.

I created a website about this (www.iamaninvestor.org). Join the movement and change the system.

Q: What’s the worst that can happen from this very risky system?

A: Some kind of real meltdown or a technological collapse. The market just stops.

The side story the book doesn’t deal with is that no one knows how much leverage (money borrowed “on margin” with the securities as collateral) high-frequency traders are taking on in the middle of the day.

Regulators measure this hourly to avoid a cascading default (from too much leverage and “margin calls”). But I’m told it’s very easy to game the system. If they’re taking big, reckless positions and go down, you could have a 1929 situation. People who know a lot more than me fear it.

Even without that, the long-term consequence is a loss of trust in the market. I wasn’t surprising people about the market being rigged, only telling them how it was happening. The question is whether it’s drip, drip, drip or a calamity in the making.

Q: Wall Street caused the worst financial panic since the eve of the Great Depression and nobody in power went to prison. Will they get away with the high-speed trading scam, too?

A: I really hate to make predictions but this time does feel a little different. The New York Attorney General and the FBI are investigating, and there’s lots of evidence about how people acted. If we’re sitting here five years from now and the situation is the same, I’ll be shocked. The big players are getting on board, too. Schwab called it a cancer.

Subprime was a very arcane market. Here we’re talking about the American stock market, where virtually every voter has a stake. I don’t believe Americans will put up with not understanding their own stock market.

Jon Talton is the economics columnist of The Seattle Times.



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