Excerpt From Critique of Michael Lewis’ Flash Boys

Pete Kovac, a friend who worked for a quantitative trading firm, got in touch with me soon after Michael Lewis’s Flash Boys came out last Spring to let me know he thought the book had serious errors.

My friend became so alarmed at the Michael Lewis version of quant trading – which appears to have been quickly adopted by regulators and politicians – that he set out to write a response and correction to the flawed Lewis narrative.

high frequency trading volume

What’s so interesting about Kovac’s response is that quant traders have generally shunned describing publically how they make money. As a result, they are at a huge disadvantage in telling the quantitative trading version of things when competing with a writer like Lewis. Yet, one of the weaknesses of Lewis’ book is that he appears to have had very little access to quant traders themselves. So how does a quant get his version of the truth out?

Kovac releases his book this week, and I’ve included an excerpt below.

To set up the excerpt – and for those who haven’t read Flash Boys yet – here’s a quick primer.

The premise of Flash Boys (reviewed here) is that a new set of quantitative (or algorithmic) firms emerged in the past decade that engage in an unfair technology race that allows them to front-run other investors. According to Lewis, the quant firms use a combination of:

  1. Paying exchanges for trading order flow to gain information milliseconds before other traders.
  2. Locating trading machines physically closer to central exchanges to get millisecond information advantages over other traders.
  3. Engaging in untraceable trading activity within a broker-sponsored ‘dark pool’ exchange to front-run slower traders.
  4. Sending rapid-fire trade inquiries and cancellations to exchanges or dark pools to manipulate market liquidity.

In addition, Lewis describes a plunky band of misfits led by Brad Katsuyama who cobble together an alternative stock exchange – The IEX – using old newspapers, string, and wadded up chewing gum to launch a better, fairer, slower exchange to keep out the quant trading baddies.

Kovac wrote his critique – excerpted below – to correct what he sees as the biggest errors of Lewis’ book.


Excerpt of Kovac’s Flash Boys Critique


I’ll link to the full book, available on Amazon, as soon as it gets posted.


Please see related book reviews:

Inside the Black Box, by Rishi Narang


Flash Boys, by Michael Lewis

Please also see related posts:

The Rise of The Machines

The Katsuyama Revolution Continues


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Political Markets: Democrats’ Chances Of Holding The Senate Just Doubled

I generally trust markets when it comes to political forecasting, which is why I dabbled in trading contracts on the Iowa Political Markets in both 2008 and 2012.

iowa political marketsI’d rather trust in people’s actual money-on-the-line to indicate an aggregated belief in who will win an election, rather than your average poll – or worse – a political commentator. Markets are great at collecting and reflecting back prices that reflect expectations of future results. Markets can be wrong, and markets can be irrational, but generally and in the long run they tend to be right.

This is a sort of restatement of the efficient market hypothesis, which you can read more about either from Nate Silver or Burton Malkiel in A Random Walk Down Wall Street.

At the very least, you should know what the markets say about the future before you go leaping in a different direction.

Anyway…I checked back in the Iowa Political Markets Senate race today, and its totally different today – than it has been any time in the last few months.

Conventional wisdom, and the Iowa political markets, had only given Dems a 20% chance or less of holding the Senate after next week’s election.

Suddenly, today, the ‘market’ has jumped to a 40% chance of Democrats retaining the Senate, on the Iowa Political Markets.

The interesting, quirky, thing about the Iowa Political Markets is that they operate on tiny amounts of money in the system – by design – as individuals may only seed their account with a maximum of $500 total. In addition, the markets don’t see much volume much of the time, except in the hottest moments of a Presidential race, which we’re not in now. That has always meant that the Iowa markets could be temporarily manipulated – presumably for political reasons – without a tremendous amount of effort.

And yet…I don’t know.

Nate Silver’s 538.com says that the probability of Republicans taking over the Senate has stayed consistently around 63% for the past month, presumably leaving Dems with a 37% chance of retaining control.

iowa political market senate race
The “DS.hold14” (The price of a “Democrats hold the Senate” contract) price doubled since yesterday

Yet the Iowa market ‘price’ (roughly, the chance of Democrats retaining control) has bounced around well below 20% for the past month. Until today…now it’s at 40%.

Why did the Democrats’ chance of retaining the Senate just double from yesterday to today?


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