Sunday, April 03, 2016

Dark pools of flash disaster

In Feb Barclays and Credit Suisse settled with the SEC which uncovered their nefarious high frequency manipulations in their dark trading pools. What’s with that? To go figure a good place is Flash Boys. But it is not an easy read.

Flash Boys delves into the netherworld of Wall St trading in the 2000s – where the devil is in the latency, and professional ethics is shit out of luck. Writer Michael Lewis paints a picture of an obsessively complex world of finance that attracts the underside of human aspiration. That echoes The Big Short, his earlier piece and a quite successful film in 2015.

But here the technological complexity that serves the finance engine rather gets the better of the story - ultimately Flash Boys pales a bit in comparison to The Big Short, as a result. We have a worthy hero at the center of the tale in Brad Katsuyama of Royal Bank of Canada, but the story can be stumbly as it tries to convey his efforts to uncover the culprits in the dark pools of high frequency trading – that would be the people that have the wherewithal to eavesdrop on the market,  spoof your intention, and buy stock in mass quantities at prices slightly lower than what you will pay to buy it from them. Brad could be the Cisco Kid that heads them off at the pass – if the road to get there weren’t so durn rocky.

 I’d suggest that many of the wonders of big data today resemble the wonders of stock market technology that front runs it. Publish and subscribe middleware and fantastically tuned algorithms are common to both phenomena.  Network latency can be the boogie man in both cases. Yes, while nearly no one was looking, online big data made a high frequency trading market out of advertising. The complexity is such that few can truthfully claim to understand it. And that lack of understanding is an opening for a con, as it was in The Big Short and the Flash Boys.

 The people who will most find Flash Boys a worthy read are probably those that enjoy opening the hood on things, to see what makes them tick. It may not be a fast paced western serial but they can read it for fun. At the same time, anyone who owns equities would benefit from reading it… but I don’t think the read would fall into the category of fun.

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