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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The Katsuyama Revolution Continues

Katsuyama & Team at IEX
Katsuyama & Team at IEX

The Wall Street Journal carries an update this morning on the main protagonist of Michael Lewis’ recent book Flash Boys, Brad Katsuyama and his newly launched (October 2013) exchange known as the Investor’s Exchange (IEX).

One of my main questions left after reading the book is the viability of this newly launched exchange. Katsuyama & his team seek nothing less than the irrelevance of both dark pool equity trading and high frequency trading on equity exchanges, a mighty set of targets. Because Lewis published Flash Boys just a few months after the exchange’s launch, we’re left wondering whether Katsuyama’s revolution will happen or not.

As of today’s article, Katsuyama carries on, applying to expand the IEX into a full-fledged stock exchange. Most importantly, he has set the rules of the IEX so that traditional broker-dealers (The Goldmans and Morgans of the world) trade for free – to encourage them to bring their trade flow in high volume to the IEX, while outside firms – most pointedly we assume high frequency trading firm – all pay fixed commissions per trade.

This second part is a key feature of IEX, which is built to counteract the conflicted cost and fee structures of other equity exchanges which pay for order flow in a convoluted – but probably investor-unfriendly – way.

The main thesis of Flash Boys is that the combination of dark pools – in which broker-dealers did not disclose who had access to deal flow and in what manner – and the complicated set of fees paid or received in different equity exchange – seems to have benefited high frequency traders at the expense of slower market participants.

From what we can glean from the article, the Katsuyama revolution rolls on.

Please see related book review for Michael Lewis’ Flash Boys

also see related book review for Rishi Narang’s Inside the Black Box


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The Rise of the Machines


SkyNet made its mark on US stocks again this morning at the market open, as about a dozen companies saw their shares jump or plummet wildly in the opening minutes on the New York Stock Exchange, on exactly zero news, most likely due to computer-driven orders, and with no human input.

Outside of the specialized world of stock trading, many retail investors probably do not know that an estimated 80% of US stock trading volume is based on computer-programmed buy and sell orders.  In other words, 4 out of every 5 dollars flowing through stock exchanges has no human decision-maker behind it.  Stocks trade only a programmed response to preset algorithms.  At this point, SkyNet completely dominates stocks.

How did this come about?  High Frequency Trading firms (HFTs) seek to profit from predictable responses of some shares to the movement of other shares and market inputs, but HFT computers need to execute trading orders in fractions of seconds in order to benefit from their ability to see the immediate predictable future.  Since humans cannot act fast enough, the machines have been programmed to trade in their place.

When things in stocks get really screwy, as they did this morning, and as they did most dramatically during the 2010 Flash Crash, we’re reminded that the humans are no longer in charge.

Lobbyists for the HFT firms have already come back from the future and are visiting the offices of our Congressman one by one to eliminate any Sarah or John Conners that seek to regulate HFT’s role in US stock markets.


Please see related book reviews:

Inside the Black Box, by Rishi Narang

Flash Boys by Michael Lewis

Critique of Flash Boys by Pete Kovac


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