Michael Lewis doesn’t show a trace of jetlag as he launches into a lively discussion of his new book. The journalist and non-fiction author has traveled to Frankfurt from Berkeley, California, to accept the award for German Economic Book of the Year. He answers all questions in detail. The one thing he won’t reveal is what he is latest project might be, probably because most of his published work contains plenty of explosive and controversial material. When his book about distortions in high-frequency trading appeared in the United States in March, simultaneously published in Germany by the Campus publishing house, it caused such a stir that the FBI and the Securities and Exchange Commission launched investigations into Wall Street’s latest practices.
Handelsblatt: Mr. Lewis, your book about high-frequency trading is an eye-opener. You describe, for example, the incredible ignorance of people on Wall Street who are responsible for managing large amounts of money. Most of them, all the way from traders to technicians, were focused on their jobs and nothing else. They had no understanding of the big picture.
Lewis: Yes, that’s true. It’s a metaphor of our modern-day existence. It’s unbelievable how many people in this economy work with complex systems that they don’t understand. My protagonist, Brad Katsuyama, needed three to four years and the help of dozens of experts before he really got it. When he went to the offices of investors – people who juggle billions of dollars – he noticed that they had no idea what was really happening. He had to explain the basics of automated trading to them first. The markets have changed a lot in recent years. They’ve become completely computerized. But they’re also a black box for investors. No one really knows what’s happening inside.
But perhaps that was the intention?
You’re right. Precisely those people who could have explained the markets to a broader audience had no interest in doing so. I’ve never seen as much secretiveness as there is in high-frequency trading. These people don’t feel the least bit embarrassed about scalping investors. What interested me about this story wasn’t so much the criminal system on the exchanges but that there was a person out there who had tried to learn everything he could about them – not to make money but to fix the problems. This is a moral lesson. It should encourage others to do the same.
What interested me about this story wasn't so much the criminal system on the exchanges but that there was a person out there who had tried to learn everything he could about them - not to make money but to fix the problems. This is a moral lesson. It should encourage others to do the same.
But what has actually changed on Wall Street? In the past, there were brokers who earned large profits, and today there are high-frequency traders who work with smaller margins but still make their profits by manipulating the markets.
Of course you could say they stole a lot more money back in the day! That’s true. But now we have a new technology, which reduces the amount of money that Wall Street can extract from the markets. I agree that the amounts in question are not the big issue here. The real issue is the fact that manipulation is taking place. And this complexity, which the Goldman Sachs equities division encountered, is a source of incredible instability. Something like a flash crash was inevitable. And yet it didn’t have to be the case, if there hadn’t been a predator in the midst of the trading business, someone who “designs” the business to be so complex that no one understands it. But I’m interested in more than just that.
What exactly are you interested in?
The markets have been placed at the center of capitalism, and it’s truly unfair. It creates an advantage for the rich that’s completely unnecessary. It’s a horrible principle. The markets should always try to act as fairly as possible, and I believe technology has made this a possibility. To maintain that is a very noble objective…
…if it weren’t for the criminal elements. Your book was published in March, and it was accompanied by investigations by the FBI and the Securities and Exchange Commission in the United States. Has anything changed since then?
Things don’t change that quickly. The investigations are still underway. New York’s district attorney is investigating what happened in Barclays Bank’s “dark pool” trading systems. But apart from these investigations, nothing has been done on the subject of regulation. Still, there is movement in the markets. Over the course of the next year, a great deal of capital will be flowing into new, public exchanges, where many companies want to be listed. I believe the market is cleaning itself up. It’s just getting started, and I’m very pleased about it.
Is a cultural shift taking place in people’s minds?
No. I believe a culture war is underway on Wall Street. It’s happening in the sense that, in the wake of the financial crisis here in the United States, there is a perception that the financial system is dysfunctional. The idea of “too big to fail” is unacceptable, and it’s a big problem. The story I tell in “Flash Boys” is a part of this culture war. There are now people on Wall Street who are saying: “We want to solve the problem and reform the business.” And there are others who say: “No, we don’t want that.” I believe that the financial culture, the way it is today, isn’t sustainable. In other words, a cultural shift is needed on Wall Street. But I don’t exactly know how this is going to happen.
All major banks deal with making trades within seconds on the market, at least for their customers’ accounts. There doesn’t seem to be much difference between them and high-frequency traders.
The big players promote high-frequency trading. And at least five of them are engaged in proprietary trading in their own dark pools. Goldman was the first one to wake up, back in 2007. The bank was very concerned that there would be a new flash crash, and that it would embarrass itself. It was also worried about the legal risk. They saw how slippery the markets had become. At least things began to change with respect to the dark pools.
Should there be an international effort to take action against these manipulations, against these criminal elements? What do you think?
Yes, it’s a hot topic at the moment. Regulatory agencies should become more globalized and not work in such fragmented ways. Unfortunately, that isn’t working. We all learned from the crisis just how little regulators can achieve in the financial sector. The big hope is that the financial sector develops its own entrepreneurial spirit to better manage itself.
But there is no real pressure on the market to change its ways and get out of this high-speed race. It’s just going to get faster.
That’s true. Banks will have to keep up, and the race will continue. But if everyone used “clean” trading platforms like IEX, which I write about in the book, and if there were no longer any “predatory activities” but we still had high-frequency trading, then the competition would be between trading centers. By consolidating the market, we would eliminate a large part of the high-speed race.
Regulatory agencies should become more globalized and not work in such fragmented ways.
How did you come up with the idea for the book, and then how did you gain access to the information?
I had no plans to write a book about high-frequency trading. I stumbled upon the topic when I was researching the story of Sergey Aleynikov for an article in Vanity Fair. Aleynikov is a programmer from Russia who was sent to prison for stealing computer code from Goldman Sachs. It aroused my curiosity. I was surprised to learn that someone could go to prison for this. And then I thought: What is high-frequency trading? No one had ever heard of it before.
When was that? And what happened next?
It was 2009. I followed the case for about a year and a half, and then I realized I had to write a book about it. But to do that, first I had to understand what high-frequency trading was. I asked investors in New York to tell me who could best explain it to me, and everyone mentioned Brad Katsuyama. He was the inspiration for the book, because Brad didn’t just want to understand the story; he was on a mission to reform exchange trading. It was a great story.
You’ve been compared to Bob Woodward, the journalist who uncovered the Watergate scandal. Do you like that?
No, not at all. It’s a poor comparison. He’s an investigative, political journalist. I see myself as an author of nonfiction books written in a narrative style. I’m a storyteller. And what interested me about this story wasn’t the fact that predatory activities on Wall Street are still going on, but that there are idealists and people with morals who are addressing the problem. That’s the story: Good guys on Wall Street. Because that’s the unexpected aspect. Woodward wanted the scoop; I want the story. And because my protagonists knew so much, I also got the scoop!
I asked investors in New York to tell me who could best explain it to me, and everyone mentioned Brad Katsuyama. He was the inspiration for the book, because Brad didn't just want to understand the story; he was on a mission to reform exchange trading.
Your book “Big Short,” which was about the subprime mortgage crisis, is now being made into a movie. What about “Flash Boys?” Are you already negotiating the rights?
I won’t comment on that. First we’ll have “Big Short.”
And who could play Brad Katsuyama in “Flash Boys?”
Good question! I really hope they find a completely unknown, young Asian actor, the good kid among the sharks, so to speak. But Ronan and Sergey could be played by famous actors.
Has it become more difficult for you to work as a journalist and find sources, now that you’re so well known?
On the one hand, it’s much easier now. People want to talk to me when I call them. On the other hand, they’re much more self-conscious, and so it takes a lot longer until they open up.