Michael Lewis has written a gripping and penetrating book about high frequency trading and the current state of U.S. equity markets. Lewis, of course, knows how to tell a good tale, so the book is fun to read. But the big payoff is insight. The book is astonishingly good at crystallizing what’s going on and why.
Flash boys is all about stock markets, where the accidents of history happened to have spawned a particularly freakish evolution of automated trading. Derivatives markets have only a cameo role through the geographic placement of stock futures in Chicago. In the news frenzy following the book’s release, securities regulators have put out obligatory releases meant to tamp down public anxiety. According to Silla Brush at Bloomberg, the CFTC’s Acting Chairman Mark Wetjen was among them:
“I don’t have the impression at the moment that futures markets are rigged.” The CFTC and its enforcement division are reviewing trading practices in the futures market to ensure they aren’t manipulative, Wetjen said. The agency is also reviewing relationships between exchanges and trading firms, he said.
Hopefully, the reviews Chairman Wetjen is referring to are substantive. Insiders know that the issues at hand in Flash Boys are all too pertinent to derivatives markets. The precipitating event underlying the story is technological change. The drama is in how social forces negotiate that change. Nothing distinguishes derivatives markets from equity markets in the grand scheme of things. But, more accidents of history did initially immuniz derivatives markets from some of the ugliest practices detailed in Lewis’ book. But derivatives markets are undergoing a major restructuring in the wake of the 2008 financial crisis, and that restructuring undermines some of that immunity. So it is vitally important that the CFTC take full advantage of the breathing room it has in order to harness technology in the service of vibrant markets serving the productive economy. Otherwise, the confluence of these two streams—derivatives reform and technological change in trading—could prove treacherous.