Wall Street bull.

So I'm reading Michael Lewis' book, “Flash Boys: A Wall Street Revolt,” about high-frequency trading on Wall Street and what it means. Much recommend, by the way.

Lewis is good at this kind of thing. Not just describing the complexities of Wall Street to financial doofuses like me; he good at telling the stories of people who figure out what the system is doing and/or missing, its market inefficiences, and what these people then do as a result. So Billy Beane exploited the truer, Jamesian numbers of Major League Baseball that other, old school GMs discounted. So Steve Eisman saw the disaster securitized subprime mortgages would become for Wall Street, and shorted them. So here, Brad Katsuyama, the most Canadian of Canadians, the polite, Royal Bank of Canada rep on Wall Street, figured out, with a crack team he assembled like in the best Hollywood heist movies (or in the first season of “The Wire”), how Wall Street, around 2007, became rigged because of high frequency trading. 

Essentially Wall Street firms are using computers and fiber optic cable to do what would be illegal if human beings did it. They front-run trades. It would be as if you wanted to buy something, X, and, as you were buying it, someone came between you and X, bought it, and then immediately sold it to you at a higher price. When you got your credit card receipt back, the price had jumped, and you didn't know why, and you never saw who came between you and the thing you wanted.

It should be illegal. It's not. But it's definitely shitty.

And which of the Wall Street banks rushed to engage in shitty behavior?

To Spread this seemed an obvious restriction: The [fiber-optic cable] line was more valuable the fewer people that had access to it. The whole point of the line was to create inside the public markets a private space, accessible only to those willing to pay the tens of millions of dollars in entry fees.

“Credit Suisse was outraged,” says a Spread employee who negotiated with the big Wall Street banks. “They said, ‘You’re enabling people to screw their customers.'" The employee tried to argue that this was not true—that it was more complicated than that—but in the end Credit Suisse refused to sign the contract. Morgan Stanley, on the other hand, came back to Spread and said, We need you to change the language. “We say, ‘But you’re okay with the restrictions?’ And they say, ‘Absolutely, this is totally about optics.’ We had to wordsmith it so they had plausible deniability.” Morgan Stanley wanted to be able to trade for itself in a way it could not trade for its customers; it just didn’t want to seem as if it wanted to.

Of all the big Wall Street banks, Goldman Sachs was the easiest to deal with. “Goldman had no problem signing it,” the Spread employee said.

Wall Street and financial folks are howling about the book, apparently. Here, Lewis answers back.

More soon.