03.30.2015
By Terry Flanagan

OPINION: ‘Flash Boys’ One Year Later

On March 30, 2014, 60 Minutes aired the infamous “Rigged” story, which told of Michael Lewis’s Flash Boys book and all he had purported to uncover about the U.S. stock market and its nefarious workings.

Even before getting into the debate about the specifics presented in the broadcast, my gut reaction upon watching was a negative one.

Why? Because 60 Minutes is a mainstream news program, watched by dentists in Des Moines, little old ladies in Pasadena. and moms and pops in Anytown, U.S.A. When this audience is told the stock market is rigged, they interpret that as they shouldn’t be in the market, and subsequently they get — or stay — out of the market.

This means they’ll miss out on the long-term annual returns of 4-6% that history shows the stock market can reasonably be expected to provide. Instead, they’ll invest their money in a CD or a savings account that earns 0.2% interest, or the mattress fund, or perhaps their brother-in-law’s latest get-rich-quick scheme.

So even if Lewis was spot-on about the parasitic nature of high-frequency traders and their skimming — for simplicity’s sake, let’s say they take  retail investors for 0.1% per year — that means he and 60 Minutes effectively scared people out of annual returns of 3.9% to 5.9%, and into negligible, and negative real, returns. Nice job, guys.

Aside from that broad observation, what is there to say about the whole brouhaha, 365 days later? I’ll refrain from wading back into the weeds regarding the original debate, as that has been well played out by a multitude of observers on both sides of the argument over the past year. Rather, I’ll review his recent piece published in Vanity Fair magazine.

Some of Lewis’ assertions in VF are disconnected with reality, which undermines his whole argument.

-“In the past 11 months, the U.S. stock market has been as chaotic as a Cambodian construction site.”

That’s a clever simile, and it’s plenty scary to the aforementioned mom and pops. But, in the 11 months after Lewis appeared on 60 Minutes, the S&P 500 increased about 12%, there were no issues or breakdowns at all meaningful to mom-and-pop investors. Any day-to-day noise was just that — noise.

-Brad Katsuyama and the folks at IEX Group “still seem to be on their way to changing the world.”

First off, Lewis’s wording here — in the penultimate sentence of the concluding paragraph, no less — is awful. Changing the world is such a massive and tectonic tagline. But tagging that with the namby-pamby, squishy still seem is an insult to world-changers everywhere.

Secondly, one year later, IEX’s daily market share is only around 0.9% to 1%. Brad and the IEX gang are smart people and may well be building a sustainable long-term business, but it’s very much an optimistic read on the situation to say they seem like they’re on their way to changing the world. I guess Lewis has to stick to the script.

-“…some minority on Wall Street is getting rich by exploiting a screwed-up financial system…”

KCG, one of the heavies in electronic trading and market making, is reportedly losing money in its high-frequency trading business. And again with the scare tactics — calling the U.S. stock market a “screwed-up financial system” stands to help plump up the stuffing of mattress funds everywhere.

Lewis isn’t all wrong. He’s right when he says financial intermediaries have gained more clout than they should have, vis-a-vis the corporations and investors that make up the core of the market. But intermediaries wouldn’t exist without those corporations and intermediaries, so it’s fair to say there’s a self-correcting mechanism to this pendulum.

Overall, Lewis’s one-year-later VF dispatch struck me as oddly detached. He essentially restated some of his core points and recounted some happenings that transpired after Flash Boys was published. He stands behind his work, but only kind of, and from a distance.

But it was a good story…

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