When best-selling author Michael Lewis went on 60 Minutes this spring and claimed, “the stock market is rigged,” it struck a nerve. Many people already suspected the Wall Street deck was stacked against them, and now an expert, with his book Flash Boys, had confirmed their worst fears.
Lewis, known for his groundbreaking coverage of sports (most notably Moneyball) not only managed to blindside Wall Street with the allegations of improper trading, but also smashed his already impressive book sales records. Defenders of the common man were outraged, traders accused him of sensationalism, and at least three law enforcement agencies, including the FBI, launched investigations. So as books continue to fly off the shelves, Congress mulls hearings, and G-men face off against the Hermès-tie set, what does all this mean for you?
First, Flash Boys: The title refers to trading strategies in which lightning- fast computers can see other stock orders before they’re filled. Lewis says that the computers are programmed to jump in front of those orders, buying the shares and then selling them at a tiny premium. Over time, this and other speed-enabled strategies reap billions in profits. (In fact, when human brokers jump in front of others’ stock orders, it’s a crime called “front running.”)
While the allegations are serious, they’re nothing new. Financial pros have always exploited an information advantage to make money. In the 1790s, wily New York financiers learned that the secretary of the Treasury, Alexander Hamilton, was hatching a plan to pay off our young nation’s debts in full. According to Stephen Mihm, a history professor at the University of Georgia, the flash boys of that era scrambled to buy up government bonds on the cheap from clueless country folk who figured the certificates of debt were practically worthless. When the government paid off its loans, the bankers made out like bandits. “In the succeeding years, speculators continued to act on the principle that if they could see price discrepancies before anyone else, they could make a profit,” Mihm wrote.