Monday, May 23, 2016

Book Review: Flash Boys

Flash Boys is the amazing true story about High Frequency Trading (HFT) which came about when stock trading switched from an activity done between people to an activity done between computers. What most people think about when you mention Wall Street stock trading are guys in a pit wearing colored jackets yelling at one another as they trade stock. That is fiction. The reality is it is all automated, and this has created a new class of players who can take advantage of the system by being very fast and very smart.

Michael Lewis weaves together a very readable story reminiscent of his great storytelling in books like Moneyball, Liar’s Poker, and The New New Thing which are all books I've enjoyed and recommend. Truth can be stranger than fiction, and Lewis is a master craftsman in telling stories about how what we believe to be true isn’t the whole truth and maybe not even the truth at all. 

Reality is not what you think it is. I learned this as a physics student back in the late 1980s. I thought I was smart, but it all came crashing down when trying to wrap my mind around Einstein’s General Theory of Relativity and Quantum Mechanics. I’ll never forget the day it happened. Kip Matthews and I were meeting with Dr. Wolfgang Rindler on a field trip to University of Texas at Dallas. Our physics professor from Austin College had set up the meeting because we were using Rindler’s text for our senior level class. It was an “advanced topics” class, and it was a chance to meet the guy who wrote our text book. 

On that day with Dr. Rindler, it became very clear to me that there were people in the room who really understood what we were talking about, but I was not among them. Reality was far more complex and weird than I ever expected, and my prideful desire to “know it all” had reached its end. I did not understand, and I wasn’t going to. My brain had reached its upper bound. Kip went on to graduate studies at University of Chicago in Medical Physics, and he is quite possibly one of the smartest guys I’ve ever met. I realized my dream of pursuing theoretical or high energy PhD level physics was a pipe dream. 

I ended up pursuing a career in software technology, and reading Flash Boys once again taught me I’m not as smart as I think I am. There are computer technologists out there who are far smarter (and faster!) than I am even though I’ve spent 25 years in the computer software industry and have a basic grasp of high speed networking including the underlying physics. Flash Boys showed me yet again that reality is not what I think it is. 

If you invest in the stock market, and particularly if you’re a professional money manager, I’d suggest this is a must read book. If you think you are smarter and faster and can consistently beat the market, you’re fooling yourself. Reality is not what you think it is either, and you’d be wise to consider carefully the risks and hidden tax from HFT and the Flash Boys.