Book Review: Red Notice, by Bill Browder


Red_NoticeIt’s All Fun and Games Until….

The first half of Red Notice reads not unlike a 1990s emerging market version of Michael Lewis’ Liar’s Poker:1 Browder the investment ingenue learns about the quirky world of Eastern European finance in the early 1990s. He describes hilariously and ruefully the characters he meets and the insights he gets into early opportunities following the fall of the Berlin Wall. The consulting gig failure in rural Poland. The terrible job working for soon-to-indicted Robert Maxwell. Valuing an aging ship fleet above the Arctic Circle for Salomon Brothers, and finding tremendous value in what others thought was a scrap heap.

Browder writes breezily, humorously, humbly, even about the years in which he gained financial experience and stature – just as Lewis did. His novelistic details of quoted conversations, what people wore, and what they ate over meals – these experiences cannot be literally true based on memories from 20 years ago – they have the ring of truth and the flow of narrative. It’s a great read. Super fun.

Then Browder creates his big breakthrough – as maybe the only American to figure out how to profit from the vouchers that privatized Russian national wealth and created the Oligarchs – as a Salomon Brothers Vice President. His greatest success, becoming the largest foreign investor in Russia by 2005 with Hermitage Fund, also begins the dark chapters of his life, and of the book.

The Second Part of the Book

The fun turns to concern, then fear, and then horror. Browder handles the narrative mood changes well. The central problem is that he became a thorn in the side of Russian businessmen by attempting a version of “corporate good governance” campaigns within Russia. While this made him and his funds money in the beginning, eventually his methods bumped up against the corrupt mafia of the Russian state, the Oligarchs, and their Capo, Vladimir Putin. The Russian state fought back.

Putin_TrumpUnlike what most investors would do – either leave Russia completely or just participate in the corruption – Browder doubles down on his tactics.

From here, Browder’s narrative gets very, very dark.

Browder attempted to embarrass corrupt members of the business elite, including eventually Putin, through exposure. Nearly every in-country business associate of Browder’s received threats from the Russian state and quasi-state mafia. His lawyer Sergei Magnitsky2 was arrested, imprisoned, tortured, and killed. A central, unforgettable, message of Browder’s book is just how dangerous and immoral Putin’s government is.

Browder concludes his book with a dramatic statement that despite years of speaking truth to mafia power, he’s not brave, he’s fearful. Says Browder:


I have to assume that there is a very real chance that Putin or members of his regime will have me killed someday. Like anyone else, I can’t mention most of the countermeasures I take, but I will mention one: this book. If I’m killed, you will know who did it. When my enemies read this book, they will know that you know.

Red Notice has garnered a tremendous amount of attention since publication in 2015, but given the ongoing current events, it still feels like 95% of Americans aren’t aware of the true nature of the Russian state under Vladimir Putin.


Please see related posts:

All Bankers Anonymous books in one place!



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  1. And I mean that as the highest form of praise. Lewis has been the reigning G.O.A.T. of finance journalists since the late 80s.
  2. The “Magnitsky Act,” named for Browder’s lawyer, imposed sanctions on Putin’s inner circle for corrupt acts and human rights violations. The Russian Parliament responded by ending US adoptions of Russian children. The supposed cover story for the now-infamous “Trump Tower” meeting involving Donald Trump Jr, Paul Manafort, and Russians in June 2016 offering dirt on Hillary Clinton was a discussion of “Russian adoptions.”

Tax Avoidance – All The Feelings

tax_avoidanceOne thing worse than paying our taxes is the idea that other people avoid paying their fair share of taxes.

On the subject of tax avoidance by other people, I can think of at least three principal feelings. As the kids say, I feel all the feelings.

Outright tax fraud

People everywhere on the political spectrum can get angry about outright tax fraud, whether it’s hiding income in offshore accounts to avoid income taxes or shielding inheritances from estate taxes.

A new book by Gabriel Zucman The Hidden Wealth of Nations estimates the size of offshore wealth at $7.6 trillion worldwide, or 8 percent of global wealth. In the US, Zucman estimates $35 billion in lost tax revenue per year due to hidden assets.  Meanwhile, governments worldwide lose up to $200 billion in annual revenue from hidden tax havens, with a significant burden of this $200 Billion in fraud falling on developing countries’ governments.

Wealthy folks hold financial assets principally in Switzerland, Luxembourg, and known tax havens such as Cyprus or a myriad of islands in the Caribbean.

One exception to my outrage, I suppose, is petty tax fraud such as when my barista fails to report to the IRS each and every dollar she removes from the tip jar at the end of the day. In that sense the minor scale of her tax fraud diminishes my outrage, as well as the fact that the barista isn’t herself wealthy. Also she supplies my drug of choice. Still, fraud is fraud, and it’s never cool.

Clever tax avoidance

My feelings slide from “outrage” over to the milder “envy” when I read about some billionaires’ strategies to legally avoid taxes, such as the strategies explained recently in the New York Times. In an article titled: “For The Wealthiest, A Private Tax System That Saves Them Billions” the authors describe leading hedge fund founders whose investments in Bermuda-based insurance companies reduce their tax bills.


Their ability to guide tax legislation through Congress and to finance presidential campaigns does stick in my craw quite a bit, and should offend those of us who still hold out hope for our democracy. On the other hand, most of the specific clever tax avoidance that the article describes can be described as the benefits of simply owning a business – albeit in their cases, big ones.

Now, of course, you could decide to hate the fat cat hedge fund guys who simultaneously write the rules on creating income tax loopholes and then nimbly leap through those holes to the tune of billions in annual savings. I think generating that outrage is the main point of the New York Times article, and I don’t blame you too much for feeling that way.

Alternatively, you could decide not to hate the player and just to hate the game. By that I mean, understand that a major part of the ‘scandal’ exposed by the article is simply the trick of turning ordinary (high tax-rate) income into long-term (lower-tax rate) capital gains. The other trick – and this is really simple – is to invest in a business that appreciates tremendously in value over a long period of time but that only gets taxed when you sell it. And then don’t ever sell it. Like, to take an example I recently wrote about, buying a stock and holding it for thirty years, or for forever.

Look, I don’t intimately know all their tax tricks, but hedge funders investing in offshore insurance companies mostly just extend this year’s short-term income (a nearly 40 percent tax rate this year) into long-term capital gains (a 20 percent tax rate, eventually). It’s legal. It’s clever. I’m envious, but I’m not particularly angry.

This is basically how Warren Buffett famously pays a lower tax rate than his secretary. When you read about Buffett or Facebook’s Mark Zuckerberg merely claiming the proverbial $1 per year in salary, you really shouldn’t be impressed with their admirable lack of avarice. Rather, you should note their tax savvy. They make their money through (tax-advantaged) business ownership rather than through (tax-disadvantaged) wages.

It’s an open debate – actually it’s not, but maybe should be? – whether labor ought to be taxed at a higher rate than capital, as it is today. But those are the rules. And remember the Golden Rule you learned in Kindergarten, “He who has the gold, rules.” So save your hate for the player and just hate the game.

Imitation: Own a Business

By the way, if you personally want to start to save money on taxes like a baller, you need to own your own business.

I’m not your accountant, and you really shouldn’t take tax advice from some blogger you found online. But you should set up your own business – like today – if you want to reduce your personal tax bill.

Will you use a cellphone and monthly internet service for your business? What about a computer for record-keeping? Or perhaps a car with your business logo on it? If you are in the 25 percent income tax bracket, and those are legitimate business expenses, all of these will cost you 25 percent less, in after-tax terms.

If the business you own happens to pay you annual profits in dividends, you might enjoy favorable income tax treatment, when compared to taxes on ordinary wages.


If you can control the timing of when you actually get paid by the business you own, you may realize considerable income tax savings through timing your income from one year to the next. If your business makes an expensive investment this year that happens to reduce your annual profit, you may end up paying little to no taxes this year, even as your business grows.

So, my journey from outrage, to envy, to imitation can be summed up as:

Workers of the World, Unite! Start up your business today! You have nothing to lose but your chains (And your top tax rates!)

Unfortunately, as Marx and others discovered with the Communist Revolution, this is easier said then done.

Frankly it’s pretty difficult to find money for starting up your small business.


A version of this post ran in the San Antonio Express News.


Please see related posts:

Startup Finance – All The Terrible Ways

Getting Started – Entrepreneurship

Entrepreneurs: Pack Half the Stuff and Twice the Money

Entrepreneurship Part III – The Air, Taxes, Retirement

Entrepreneurs – Are you a touch funny in the head?



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In Defense of John Paulson

a picture of Paulson giving precisely zero fucks

I feel like there are lessons about philanthropy in John Paulson’s $400 million gift to Harvard that I haven’t seen explained yet.

I don’t know John Paulson (maybe that’s already obvious?) but I feel like I know a little bit about how he thinks, having worked with, for, and as a mortgage bond professional, and with, for, and as a hedge fund investor.

John Paulson is most famous for making $4 Billion in 2008 via the The Greatest Trade Ever, shorting sub-prime mortgage bonds through his eponymous hedge fund. Last week he shot back into the public eye for his philanthropy and the subsequent negative reactions to his gift, spearheaded by smart guys like Malcolm Gladwell and other pundits.

In reviewing reactions to his $400 million gift to Harvard’s School of Engineering and Applied Sciences, I’m struck that I haven’t heard an accurate description of Paulson’s reasoning, based on what we know about him. The overwhelming reaction of the smart guys is to complain that Harvard is one of the least deserving ‘charities’ around. Further, the conventional-wisdom smart guys complain, couldn’t he have found a charity to address poverty, or something more worthy, rather than make an already elite institution more elite?


Having worked with guys like Paulson, and understanding a bit about his professional background and track record, I know the following four things:

1. He’s focused on value. He would prefer to die rather than overpay for something.

What I mean by that is that when Paulson pays $400 million to Harvard for naming rights and also to get credit for the largest gift ever to a University, he’s not being careless about the amount. If he could get that kind of value for $375 million, he would have paid $375 million, not $400 million. Whatever the ultimate purpose of the gift (and I don’t pretend to know that, any more than I really know the inner thoughts of Paulson) he didn’t come up with $400 million by accident. And whatever his reasoning, and no matter how large the headline number, he was not overpaying.

2. He wants the #1 best thing. Not tenth best, not seventh best, not second best. Just the number one best thing. This next statement may sound flippant, and it may sound like I’m being Harvard-proud, and I really don’t mean to be. But if Paulson felt like he could have gotten what he wanted by donating to Dartmouth he would have done it. He chose Harvard because it struck him as the best.

Giving to ‘the best,’ obviously, is a different mind-set than giving to the ‘most worthy.’

Paulson’s critics feel he should have found a worthier cause than Harvard. Maybe so. But is that theoretical preferable charity the absolute best in the world at what they do? I suspect that criteria mattered to Paulson, as it does to many people who think like Paulson.

3. Risks matter tremendously. If he’s going to pay good money, the risks should be minimized. I think this point is probably key to why he didn’t give $400 million to a program to combat poverty, or end malaria, or whatever it is that Gladwell would have preferred he do. By giving to Harvard, Paulson can be certain that the institution will continue to thrive and be a steward of his funds 50 years from now. Did Paulson analyze the existing anti-poverty charities and find them too risky? I wouldn’t be shocked if he did.

Short of giving to the Bill and Melinda Gates Foundation 1, I’m not sure how one gives huge sums of money to an anti-poverty charity at that scale while still minimizing one’s risks.

I’m not trying to argue that anti-poverty charities (or whatever Gladwell wants him to give to) are inherently risky. I actually have no idea. What I mean is that Paulson – by trade and by training as a hedge fund guy – has to be incredibly focused on risk management. You can’t succeed the way he has without applying the same eye for risk to one’s philanthropy. The one thing Harvard has over almost any other ‘charity’ is its image as a prudent low-risk investment.

Why would anyone like Paulson give to a ‘charity’ that already has a $36 billion endowment? Its a safe bet, that’s why.

4. The “smart guys” like Gladwell who represent conventional wisdom? Paulson does not give a fuck.

Just to expand for a moment on this fourth point, and to boil it down further with mathematical precision: Paulson gives precisely zero fucks what Malcolm Gladwell writes on Twitter.


Paulson’s “career trade” was made by understanding which way the entire mortgage bond market was positioned in 2008, and then he made the exact opposite bet, at extraordinary risk to himself and to his investors. In hindsight, he was a genius, but that move was incredibly difficult to make at the time, when every other short-seller of the mortgage bond market up until that point had gotten their ass handed to them.

Paulson’s smart enough to understand how the rest of the world thinks, but iconoclastic enough to lay that aside to determine what he alone thinks.

Most of us have a hard time going that strongly against the grain of public thought. Paulson’s entire career success is based on extreme contrarianism.

Lessons of Paulson’s gift

At the risk of trying to tie this all up with a neat bow, I think philanthropies can learn from the lessons of Paulson’s gift.

To appeal to a certain type of giver like Paulson, the point shouldn’t be to try to be the ‘worthiest’ cause in the universe, but rather to offer good value for the money. People who have made a lot of money in their lifetime tend to respond to value arguments – how will their gift have a bigger impact with you, rather than with someone else?

Further, are you the absolute best in your category? Forget neediness or worthiness. I suspect neediness is in fact a major turnoff for big donors. But excellence and being #1? Are you the Harvard of your category? I bet that’s very attractive to Paulson.

Next, are you a low risk? People who manage money for a living and who have a large fortune to steward want to see their money managed wisely, even after it’s given. Especially after it’s given.

Finally, does your donor give in order to be part of the in-crowd? Or to be an iconoclastic contrarian? We know by reputation that Paulson’s going to do whatever he thinks, not what the rest of the people think. That’s probably rare, but in the case of Harvard as a recipient, to their ultimate benefit.

zero fucksI bet most people are social givers, eager to become or remain as a member of a social group, and philanthropic efforts to keep them appreciated as part of an inner circle probably matter a lot. Contrarians are rarer, but in Paulson’s case, can turn out quite nicely too.

[Fake full-disclosure/non-disclosure: I have given precisely zero dollars to my alma mater Harvard in the twenty years since I graduated from there, and I also give precisely zero fucks about Harvard’s philanthropic needs.]


Please see related posts

On Philanthropy Part I – Giving Money Away

On Philanthropy Part II – Asking for Money

My actual preferred philanthropic interest, the Greatest High School In The World

TED Talk on Philanthropy



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  1. Which, frankly, would also have been a good bet as a 50-year steward of Paulson’s funds

Taxes Rant: Carried Interest Edition

Note: A version of this post appeared in the San Antonio Express News.

Dear Money: I miss you so, so much.

I recently mailed off – with deep feelings of loss – two of my biggest checks of the year: one for real estate taxes to the county where I live and the other to the IRS for estimated federal income taxes.

Money: I miss you so, so much
Money: I miss you so, so much

After we said our long sorrowful goodbyes at the US Post Office, money and me, I wiped those tears away, threw my shoulders back, and bravely walked back to my car. No looking back. Please, county and federal government, take good care of my money. I raised it with my own two hands, and I dearly loved it.

Don’t worry, though, this is not going to be an anti-tax rant. I’m not a TEA Party member. [1]

On the contrary, over the years I learned to embrace what my accountant taught me: If you think you pay a lot in taxes, try to remember to be happy, because it means you made what to you is a lot of money that year. Or, in the case of real estate taxes, paying a lot means you own valuable real estate.

Seen that way, complaining about paying high taxes is unattractive in the same way that a guy bemoaning the cost of expensive repairs on his Porsche is unattractive. I mean, seriously, don’t be that guy.

The key is fairness

While I believe everyone should pay a fair share of taxes, the key word here is fair.[2]

Since I just coughed up too much money in federal income taxes and local real estate taxes, I’d like to complain now about an unfair aspect of federal income taxes. Later, in an upcoming post, I’ll rant about unfairness in local real estate taxes.

Federal Income Tax unfairness

I started and ran a hedge fund for a short while. (This was years before I landed this lucrative gig writing financial rants online, for free. But anyway.)

The awesome thing about running a hedge fund or private equity fund is just how unfairly advantaged these business structures are, from a federal income tax perspective.

Fund managers earn fees in two ways, a ‘management’ fee and a ‘performance’ fee, sometimes also known as ‘carried interest.’

The more important of these – the ‘carried interest’ or ‘performance’ fee – in most cases gets taxed at a lower rate than other types of income because of the illusion that the performance fee is somehow like ‘long-term capital gains,’ rather than like regular income. It’s not.
But the tax law says it is, so, big tax advantages if you’re a hedge fund manager!

Carried interest tax loophole
Carried interest tax loophole

If we were talking about the regular scale of incomes for a blue-collar or white-collar job of people you meet in your ordinary life, the difference in these tax rates might not matter much, something on the order of $500, up to maybe $5,000, tops.

But since we’re talking about hedge fund manager-level earnings – which sometimes hit a billion dollars a year, the difference in the tax code for certain individuals can reach the hundreds of millions of dollars per year level. Which, I don’t know, starts to chafe me in my sensitive areas a bit.

Don’t get me wrong, we can all agree that nobody deserves an unfair tax break more than private equity and hedge fund owners, but at a certain point we begin to wonder about the extent of the unfairness of it all, no?


Please see related posts on taxes:

Shhh…Please don’t talk about my tax loophole

Adult conversation about tax policy

529 Accounts and tax fairness


[1] A quick aside to my liberal friends who think the TEA Party is something new. Unhappiness about paying taxes (TEA, as we know, stands for Taxed Enough Already) is as American as Apple Pie, the Star Spangled Banner, and eating greasy food until you nearly burst, on Super Bowl Sunday.

The drunken faux-Indians of the Boston Tea Party Patriots hated paying taxes to the English King. The death-seeking gun-nuts of the Alamo hated paying taxes to Mexico City, and the tyrant Santa Anna. A complete history of the United States could be written using tax-opposition as the prime motive for all major events. I’m not saying TEA party folks aren’t wacky (because many are!) but I am saying at least they have a long list of historical precedents from which to draw political sustenance.

[2] A quick aside on fairness: Fairness, of course, is in the eyes of the beholder.
In my family we retell the story of my super-cute niece, then aged four, who announced one evening: “It would be fair, to me, if I got to take a bubble bath after dinner.” She had learned enough by age four that “being fair” was important to adults, but like many of us, decided to interpret fair according to her own worldview. Since then, I frequently tell my family over dinner that it would be fair, to me, if someone drove out to Dairy Queen and bought me a treat, like, right now. This never works. Anyway, fairness. It’s important in the tax code.

[3] In the tax world, there are always exceptions to everything so I am simplifying greatly and using these hedging words like ‘usually’ and ‘sometimes’ and ‘often.’


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Book Review: Flash Boys: Not So Fast by Pete Kovac

Peter Kovac wrote Flash Boys: Not So Fast, as a point-by-point refutation of the major premises of Michael Lewis’ Flash Boys. At the end of Kovac’s book – well actually, after just the first few pages – you’re left with the strong impression that Lewis wrote a tale built on speculation about a dramatic – but not particularly true – conspiracy theory about high frequency trading (HFT) and the US equity markets.

I’m reminded of a core reason I started Bankers Anonymous

After the 2008 crisis I got tired of reading the journalistic errors and omissions about mortgage bonds and credit default swaps. Having worked in those markets, I know how frustrating it can be to read some overly simple or mostly false journalistic narrative in the New York Times or Wall Street Journal.

I would think: “No! That’s not how it works.”

Then I’d end up shouting at the breakfast table, angrily poking the newspaper,[1] scaring my small daughters and leaving my wife eager to get to work as quickly as possible.

That’s one of the reasons I started Bankers Anonymous. To offer better explanations. The other reason was to maybe learn how to write a book.

Speaking of writing a book. Can I admit to a bit of jealousy?[2]

Kovac is a friend. Until recently he worked for a high frequency trading firm. When he read Michael Lewis’ Flash Boys, the errors and omissions about his industry bugged him so much that he decided to write a response.

A few months and 115 pages later, he has written the definitive take-down of Flash Boys.

Kovac is funny, informed, and he has specific examples and excellent metaphors to make the somewhat opaque world of high frequency trading accessible to us.

Who is Pete Kovac?

Kovac’s biography is a key to understanding his response to Michael Lewis’ book.

He started as a programmer for his HFT firm, named EWT, in 2003 and then rose to Chief Operating Officer, overseeing everything from compliance and working with regulators. I’ve footnoted a fuller description of Kovac’s bio here.[3]

As Kovac himself points out, you could read his biography and immediately think: “Oh, just one of those insiders, defending his own industry.”

Naturally, one of the inherent problems of understanding finance is that the experts tend to have a stake in the system somewhere. Outsiders, with no stake, tend to not be experts. Well, Kovac’s an expert and an insider. That seems relevant when evaluating an outsider’s claim about an industry.

Nevertheless, most importantly, he’s the kind of expert that Lewis didn’t consult in the course of writing Flash Boys.

Lewis’ problem in Flash Boys

Lewis’ key advantage over most other financial journalists has always been his semi-insider status. Meaning, he actually worked as a salesman on the Solomon bond-trading floor for two years, and he actually understands the mindset and motivations of the Street better than most scriveners.

Best-selling author Michael Lewis

And yet, the biggest problem I found with Flash Boys is that he seems to have had no access to actual high frequency traders, making him far more outsider than insider this time. This makes his theories on HFT more speculative than they ought to be. In my earlier review of the book, I felt his lack of specific information or details or access on HFT led him to demonize and simplify their actions.

In his earlier books, the ‘bad guys’ tended to be at least humorous and specifically obnoxious, not facelesslessly manipulative and devious. Unfortunately the HFTs of Flash Boys are more faceless cartoon villains than real villains.

In addition to Kovac, other reviewers of Flash Boys have also pointed out the unusual number of either 1. errors or 2. simplification of equity markets and HFT. Again, Lewis’ lack of access to real live HFTs probably accounts for both.


Are HFT engaged in a vast front-running conspiracy against slower investors?

You kind of have to read Kovac’s full refutation of the vast conspiracy, and also know something about market structures and market orders to follow this, but I trust that – at the very least – Lewis was speculating about how front-running by HFTs might work. But Lewis didn’t really have any idea what would work or not.

Kovac goes point by point to show that Lewis’ speculation is basically impossible and nobody Kovac’s ever worked with in the HFT world could make money that way.

In addition – and this is probably the strongest part of Kovac’s book – Lewis’ description of what might have happened is so rife with errors or impossibilities according to the way the US equity market actually works that Kovac is left stunned.
Reading Kovac’s book I’m reminded of me, poking angrily at the morning paper “NO! It can’t happen that way! I can’t believe you’re claiming this and non-financial readers won’t know how to see through your BS! Argh!”

What about Brad Katsuyama, the hero of Flash Boys?

Kovac is sharp-witted about the incredulousness of Brad Katsuyama, the protagonist of Flash Boys. Katsuyama set out to create a (relatively) slow-trading exchange in order to foil the HFTs.

Brad Katsuyama and the IEX Team

Katsuyama repeatedly appears to believe in HFT actions and schemes that have little basis in the markets Kovac knew and participated in.

Far from a hero to Kovac, Katsuyama represents the legacy model of trading equities – expensive, slow, and self-interested.

When Katsuyama alleges a HFT front-running conspiracy that his new IEX exchange will correct, Katsuyama (in Kovac’s telling) becomes focused on his sales pitch even though his new exchange may be a solution in search of a problem.

Worse, Lewis appears to swallow and then amplify Katsuyama’s sales pitch for IEX, despite data and evidence that refutes their central thesis.

Want to know what else is wrong with Flash Boys?

Kovac’s book is a comprehensive, chapter-by-chapter, point-by-point critique of Lewis’ errors.

Here’s a few more examples that Kovac explains in detail.


Did Reg NMS in 2007 give rise to the machines as Lewis implied?

Nope, HFT was already 20% of the trading volume on US exchanges prior to 2007. As Kovac points out, Lewis himself provides this data that undermines his own argument. In addition, US equity trading is only one small portion of HFT trading strategies. The others, with currencies, commodities, bonds, and futures, are unaffected by Reg NMS.

Did HFTs cause the 2010 Flash Crash?

A comprehensive review by regulators found no evidence of this, but rather a series of compounding triggers from multiples sources in the equity markets. Lewis dismisses the regulators as either dupes or self-interested, but I trust Kovac’s closeness to that trading situation, his professional contact with regulators, as well as his careful reading of the report.

Is trading data impossible to track and assemble for the purposes of uncovering frontrunning or wrongdoing – or “does the data not exist” as Lewis claims?

Kovac reports that every single trade, in addition to every single text, instant message, trading program and order gets tracked and recorded by all the exchanges and regulators. It would be, and is, possible to track bad behavior from HFTs, says Kovac, who has served in the compliance role at his firm.

Lewis makes the claim that tracking this would be impossible.

On a related note, Lewis paints market regulators as generally either compromised or behind the curve when it comes to regulating markets and high frequency traders in particular. Kovac, who worked professionally with many regulators over the years, found the opposite to be true.

Kovac compares them to the Supreme Court. They often passed judgment he disagreed with, but they were always thoughtful. Regulators laid out extensive reasoning for their decisions, and attempted to create fair markets for the general good.

Criticisms of Kovac’s book

Readers unfamiliar with Lewis’ Flash Boys may not follow along with Kovac’s rebuttals, as he takes a chapter-by-chapter approach to critiquing Flash Boys. It’s undoubtedly more interesting to read this if you already know the original work.

In addition, while Kovac is quite clear in his writing, there are moments of technical explanations – I’m thinking of the explanations of market orders as one example – in which I got lost a bit in the weeds. Less financially-savvy readers may suffer somewhat as well.

Finally, at times Kovac is so astonished by Lewis’ one-sidedness with the HFT narrative that he lapses into sarcasm.

When I’m really mad at someone or something I do this too, so I recognize it in Kovac’s writing as well. It doesn’t happen much with Kovac, but I can hear my own internal editor telling me “don’t do that.”

Final Analysis

As a result of Kovac’s book, I’m convinced that Lewis pretty much blew it in covering the HFT story. I’m still left with some questions – for example ‘how do HFTs really make consistent profits?’ and ‘should we be collectively worried about future flash crashes as a result of algorithmic trading, and how do we prevent that?’

But if you really liked and believed in Lewis’ narrative, you owe it to yourself to hear another side, from someone who actually knows the business.


Please see related post: All Bankers Anonymous book reviews in one place!


Please see related posts:

Book Review of Flash Boys by Michael Lewis

Book Review of Inside The Black Box by Rishi Narang


Would You Like to Understand High Frequency Trading?

The Rise of the Machines


[1] Yes, I subscribe to physical newspapers. Yes, kids, I was born when dinosaurs roamed the earth, during the late Mesozoic Era, or Triassic Period. Ha ha ha. Now shut up and keep scrubbing.

[2] File this jealousy under the label “Every time a friend succeeds, a little something in me dies.” I’ve been talking about writing a book for a while now, and he just goes out and does it. And it’s good! Damn him. *Shaking my fist.

[3] In Kovac’s own words: “I am an industry insider, the kind of person who could have saved Lewis from making some really basic mistakes. I started programming trading strategies in 2003. After years in the trenches, I moved into management and ultimately became chief operating officer of my firm, EWT. I handled regulatory compliance, risk management, finance, trading operations, and a portion of the IT and software development teams – and I had to know every aspect of the stock market inside and out. By 2008, our company was one of the largest automated market-making firms in the U.S., trading hundreds of millions of shares of stock daily, and had expanded into many other asset classes domestically and internationally. I left it all three years ago when EWT was sold to Virtu Financial (in which, in the interest of full disclosure, I still retain a small stake).

Those eight years at EWT provided me with a front row seat to all the events described in Flash Boys, and much more. During that time, I shared my experience and perspective in discussions with regulators and lawmakers here and abroad, advocating for the continued improvement of the markets discussed in the book. Many of my comment letters on these topics are publicly available on the SEC website. Even though I no longer work in trading, I can still get answers from a diverse set of close sources when a truly new question arises.”








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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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