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Interesting. I know Lewis' book about the industry I work in was, uh, an incomplete picture of things, so I'm not shocked if Flash Boys was a bit shaded too. Is

by cwyers 12y ago

Interesting. I know Lewis' book about the industry I work in was, uh, an incomplete picture of things, so I'm not shocked if Flash Boys was a bit shaded too. Is there a shorter version of the objections to Flash Boys I can skim through to see if I curious enough to go further with this?

tptacek 12y ago
It's more than shaded in this case; it's literally incoherent. I think I can do a thematic tl;dr: For the major commercial brokerages (at big investment banks, like RBC), it is literally their whole job to move large blocks of tradable instruments without moving the market in the process. Shopping large blocks is supposed to be difficult, because things are priced by the law of supply and demand. If you're trying to sell (in RBC's case, for a client) 1000 lots of XYZ, you have an extremely important piece of insider information about XYZ: there are about to be 100,000 new XYZ shares on the market. Your attempt to sell all 100,000 is going to reduce the price of XYZ. Naturally, you want to capture the highest possible price for XYZ, so, naturally, you want to conceal your intent to sell 100,000 shares all at once. Meanwhile, the market wants to do the best job possible of capturing all available information about XYZ and building into the current market price. Anything you do to tip your hand about your giant order will be analyzed by some market participant and used to execute a profitable trade (in this case, profiting by placing trades based on the [accurate] prediction that the price is going to fall). The whole of _Flash Boys_ considers this trade a form of frontrunning, despite the fact that the traders doing it have no fiduciary responsibility either to RBC or to RBC's clients, and despite the fact that RBC's desire to sell at high prices involves RBC themselves exploiting an information asymmetry. In Lewis' world, the market is supposed to sit back and transact 1000 lots of XYZ without adjusting the price until after the giant corporations making that trade are done. It follows logically from Lewis' argument that market-making is itself somehow unethical. This seems like minutiae, but (at least for the portions of the book about "level playing fields" and electronic markets) the theme running through the book is that markets should behave themselves and continue working in a way that matches the expectations of the equities desk at RBC. That's silly, but fine, until Lewis extrapolates from that the idea that these broken expectations harm Main Street investors. They don't, except to the extent that those investors predicate their returns on the largesse of big companies like RBC. The Chief Investment Officer at (unassailably awesome) Vanguard is on the record repeatedly about how electronic trading and HFT have improved returns for value investors and passively-managed funds.

by cwyers 12y ago

tptacek 12y ago

It's more than shaded in this case; it's literally incoherent. I think I can do a thematic tl;dr: For the major commercial brokerages (at big investment banks, like RBC), it is literally their whole job to move large blocks of tradable instruments without moving the market in the process. Shopping large blocks is supposed to be difficult, because things are priced by the law of supply and demand. If you're trying to sell (in RBC's case, for a client) 1000 lots of XYZ, you have an extremely important piece of insider information about XYZ: there are about to be 100,000 new XYZ shares on the market. Your attempt to sell all 100,000 is going to reduce the price of XYZ. Naturally, you want to capture the highest possible price for XYZ, so, naturally, you want to conceal your intent to sell 100,000 shares all at once. Meanwhile, the market wants to do the best job possible of capturing all available information about XYZ and building into the current market price. Anything you do to tip your hand about your giant order will be analyzed by some market participant and used to execute a profitable trade (in this case, profiting by placing trades based on the [accurate] prediction that the price is going to fall). The whole of _Flash Boys_ considers this trade a form of frontrunning, despite the fact that the traders doing it have no fiduciary responsibility either to RBC or to RBC's clients, and despite the fact that RBC's desire to sell at high prices involves RBC themselves exploiting an information asymmetry. In Lewis' world, the market is supposed to sit back and transact 1000 lots of XYZ without adjusting the price until after the giant corporations making that trade are done. It follows logically from Lewis' argument that market-making is itself somehow unethical. This seems like minutiae, but (at least for the portions of the book about "level playing fields" and electronic markets) the theme running through the book is that markets should behave themselves and continue working in a way that matches the expectations of the equities desk at RBC. That's silly, but fine, until Lewis extrapolates from that the idea that these broken expectations harm Main Street investors. They don't, except to the extent that those investors predicate their returns on the largesse of big companies like RBC. The Chief Investment Officer at (unassailably awesome) Vanguard is on the record repeatedly about how electronic trading and HFT have improved returns for value investors and passively-managed funds.