As an investigative journalist, Michael Lewis is a Mozart to Gladwell’s Salieri, a distinction Malcolm, to his credit, most graciously acknowledges. Lewis has a remarkable talent for crafting entertaining and powerful narratives, usually centred around quirky and unlikely heroes, that make the idiosyncrasies of finance, business and professional sport come alive. But for me, Michael’s greatest quality is his mastery of comic prose, particularly his use of metaphors and imagery that makes one laugh out loud. In this he rivals PG Wodehouse, the greatest compliment I could bestow on any writer. An equity investor who gravitates to the bond market is like a small, furry creature raised on an island without predators removed to a pit full of pythons. A group of techno geeks at a Wall Street dinner sit around at the table staring at the piles of food like a conquering army of eunuchs who had stumbled onto the harem of their enemy. And who can ever forget the Human Piranha, the grand master of Fuckspeak, whose world was filled with copulating inanimate objects and people getting their faces ripped off.
Michael is every bit as entertaining in person as he is in print. Last night, I attended a delightful “fireside chat” featuring Michael in conversation with British journalist Dominic Lawson, who (almost!) matched Lewis in repartee. Michael of course is in the midst of promoting his latest work Flash Boys, already #1 on the charts and his best selling work to date. I personally enjoyed Flash Boys and found it an easy read, but then again I have the advantage of a Wall Street background and more than a passing familiarity with the economics of data transmission networks. Nevertheless, the success of a book on the arcane subject of high frequency trading (HFT), with its protagonist Brad Katsuyama a geeky Canadian-Asian bro’, is baffling, and presumably driven by a public that cannot get enough of the “Wall Street stealing money from Joe Blow” cliché.
The facts, at least in my humble opinion, do not support the seemingly outrageous yet much touted thesis that the US stock market is “rigged”. What the intrepid Katsuyama and his band of brothers discover, following their frustration at the inability to consummate trades at prices indicated on their screens, is that the variable speed at which trading and pricing information travels down fibre-optic cables to the exchanges was being exploited by high-frequency traders to jump the queue, buy the stocks in question and sell them back at a higher price to the person who expressed the original interest. While this sounds like and effectively is front-running, albeit completely legal, this “arbitrage” exists almost exclusively in the US market due to relatively recent SEC rules (the now infamous Reg NMS) which require brokers to “go out” into the marketplace and seek the best possible execution price, thereby disseminating to a bunch of “techno scalpers” market information that allows them to make a minuscule profit. Does this make me believe that the US stock market, arguably the most efficient in the world, is somehow “rigged” against me? Not really. From my perspective, all it means is every time I go out and trade an individual stock, which in my case is not very often, there is a real possibility that an extra 0.05% is tagged on to my cost of getting in or out. Does this bother me? Of course it does, particularly since it is undisclosed, but I’d be inclined to dismiss it as yet another case of the unintended consequences of misguided regulation. While the matter will no doubt be investigated to death – indeed the New York Attorney General has already labelled HFT as “insider trading 2.0” – the reality is Katsuyama’s own newly launched IEX, supported by the ubiquitous Goldman Sachs, effectively provides a market solution to the problem.
One could take the extreme cynical view, as indeed some already have, that this is all about Katsuyama promoting his new business model and Michael scaremongering to sell books. I for one have too much respect for Lewis to buy into that story. But Michael’s evangelical outrage bears further examination, and to really understand where he is coming from, one has to rewind to his masterful 1989 cult classic, Liar’s Poker. When he wrote his book, Michael believed that sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance. I hope that college students trying to figure out what to do with their lives will read it and decide that it’s silly to phony it up and abandon their passions to become financiers. Speaking in 2008, he says In the two decades since then, I had been waiting for the end of Wall Street. At some point, I gave up waiting for the end. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?
Clearly, Michael was befuddled and perhaps even frustrated by the reaction to Liar’s Poker. A book intended to be a scathing indictment of Wall Street’s trading floor culture instead spawned a generation of twenty-something alpha males who aspired to be that most revered of species – a Big Swinging Dick. In Michael’s view, Wall Street sees only the legal dimension when it looks at an opportunity like high frequency trading: there is absolutely no consideration of the moral aspect, and therein lies the rub. For him, and this comes through loud and clear in person – one can almost hear Marvin Gaye’s What’s Going On playing in the background – there is something inherently wrong about exploiting an information or regulatory arbitrage for profit, the legality notwithstanding. And much of Michael’s work since Liar’s Poker – The Big Short and now Flash Boys – is intended to expose what he sees as the moral turpitude of Wall Street. Michael’s other pet peeve with Wall Street is OTM – Other People’s Money. He saw the transformation from private partnership to public corporation, and the implications for accountability and risk appetite, as the death knell for Wall Street, and of course he was almost right. For the record, he believes Goldman Sachs and Morgan Stanley should have been allowed to sink alongside Lehman, that Dodd-Frank (specifically, the Volcker Rule and the restrictions on proprietary trading) does not go nearly far enough, and finds it a complete travesty that the only Goldman Sachs employee who has gone to jail since the financial crisis is the one person Goldman actually wanted to put behind bars (renegade programmer Sergey Aleynekov).
My own views on the subject? As an industry veteran, it is difficult not to be cynical about morality on Wall Street. While in all my years I never saw anything even remotely approaching the “pump and dump” bucket shop mentality so hilariously parodied in The Wolf of Wall Street, it is tough to argue with that other great sage, Gordon Gekko, when he says if you need a friend on Wall Street, get a dog. In my brief sojourn on the trading floor, “ripping off” a naive analyst at a Fortune 100 corporation, with a clever derivative trade that camouflaged a tidy profit for “the Co”, was considered fair game. Likewise, constructing an off-market currency swap to help a European sovereign “manage” its liabilities, or selling an esoteric equity-linked bond to a Japanese insurance company to manipulate its income…all par for the course! To be clear, none of this remotely approached the wrong side of legality, its just that there was never any consideration of “rightness” or “wrongness”, it was all done with the detachment of a plumber fixing a hole. To this extent, Michael certainly does have a point. Even so, I don’t necessarily share his outrage at savvy traders exploiting a (legal) penny arbitrage opportunity because they are alert enough to identify a loophole and find a technology solution to exploit the situation, particularly since the biggest “losers” in this case happened to be the hedge funds.
On a lighter note, I do think Michael has started to take himself too seriously. As I listened to him speak last night, I yearned for the autobiographical authenticity and sheer outrageousness of Liar’s Poker. Amazingly, over 20 years on from reading the book, I still remember these lines which for me capture the essence of Michael Lewis at his satirical and supremely ironic best. Michael has just completed a trade where he effectively “stuffs” a French hedge fund client with one of Salomon’s toxic proprietary positions, and here’s what the Human Piranha says to him when he calls to congratulate:
That is fuckin’ awesome. I mean fuckin’ awesome. I fuckin’ mean fucking awesome. You are one Big Swinging Dick, and don’t ever let anybody tell you different.
It brought tears to my eyes to hear it, to be called a Big Swinging Dick by the man who, years ago, had given birth to the distinction, and in my mind had the greatest right to confer it upon me.
Watch out Wall Street, the Big Dick is Swinging, and its coming at you.