Narratives and Numbers: Michael Lewis, Flash Boys, and the HFT debate


It’s fair to say that Flash Boys, the latest tome from Michael Lewis – the pre-eminent chronicler of the woes of post-Reagan capitalism – has made something of a splash. Having established a niche for himself as a writer favoured on both Wall Street and “Main Street” when it comes to issues of high finance; Flash Boys, a coruscating condemnation of high frequency trading (HFT) practises, is no different. The public reception has been highly favourable. To the bulls (and bears) of financial services it has, as intended, proven a red rag.

Lewis has been criticised in the past for favouring storytelling over facts.  The intricacies of deal-making and price setting between competing, profit-seeking enterprises are transformed into parables featuring heroes and villains, jousting across Bloomberg Terminals with rolled up copies of Forbes. In this case, however, while acknowledging that those who break the rules should be punished, the financial services industry has, unusually, been largely united in its defence of HFT.

“HFT provides significant liquidity to securities trading and also keeps pricing accurate through realising arbitrage,” explains Hector McNeil, Co-CEO of Wisdom Tree Europe. His views are echoed by Christian Katz, CEO of Six Swiss Exchange, who describes “so called” high frequency traders as mainly “a market maker and arbitrage community”. Across the pond, Cliff Asness and Michael Mendelson of AQR Capital Management go further, arguing in the Wall Street Journal that the “unambiguous winner” from the cost savings resulting from rise of HFT are in fact “the retail investors who trade for themselves. Their small orders are a perfect match for today’s narrow bid-offer spread, small average-trade-size market.”

Public opinion, however, is not yet swayed. The debate continues to flicker across CNBC and rage in the financial press, and it is an argument of real consequence. The New York Attorney General’s office recently sent subpoenas to six HFT firms.

To the outside observer it may appear strange that a dispute on the value of HFT has transformed into a conflict between competing, contradictory storylines, each attempting to prove its validity in an arena designed to promote speculation and sensationalism. Had the debate been confined to dusty academic journals and regulators’ spreadsheets, arguably it may have been resolved rather more easily.

Yet, this is simply not realisable in the current climate. As developed economies attempt to rebuild, public interest in topics once thought too dry or technical for popular consumption shows no signs of abating –  in itself, no bad thing. It does mean, however, that financial services companies who wish their side of the story to be known will have to continue telling it; the debate will rumble on, with or without their involvement. In an age of austerity there will be no shortage of opinions.