The prospect of a new book by the former bond trader turned chief scrutiniser, taking a hard look at the predatory world of high-frequency trading, is spurring industry participants to change their approach to a business that has revolutionised stock markets.
The release of Flash Boys: A Wall Street Revolt comes after years of public debate over the lightning-fast trading systems which have grown to dominate a fractured terrain where multiple exchanges and bank-run trading platforms compete for orders.
In the two weeks before publication of Mr Lewis's book, Goldman Sachs has suddenly thrown its weight behind market reform after years of investment in HFT and has also taken the highly unusual step of telling staff to publicise its support for a competing trading platform.
Some market executives have even discussed with Virtu Financial, an HFT outfit preparing the first IPO of a global proprietary trading firm, postponing its share sale amid heightened scrutiny of its core business. Virtu declined to comment, but its roadshow is expected to kick off next week.
Regulators are also showing interest. Eric Schneiderman, New York attorney-general, last week revived long-running and vociferous arguments against HFT by targeting the relationship between stock exchanges and trading companies in the latest part of an investigation into what he calls "Insider Trading 2.0".
Mr Lewis has built a reputation as a skilled storyteller, able to tease villains and heroes from the most esoteric financial topics. In Flash Boys, he zeroes in on Sergey Aleynikov, a former Goldman Sachs programmer, and the men behind IEX, an upstart trading hub that uses “speed bumps” to level the playing field.
Over the last two decades, HFT companies have employed fibre optics, microwaves and drones to shave microseconds off the time it takes to execute a trade. The technology race has raised questions about market fairness and the costs of keeping up, and has been criticised for its role in the May 2010 “flash crash”.
“Financial markets have changed too rapidly for our mental picture of them to remain true to life,” Mr Lewis writes, according to an excerpt from the book briefly distributed on his publisher’s website.
HFT gained widespread attention in 2009 after the arrest of Mr Aleynikov, who was accused of stealing Goldman's proprietary code and imprisoned before being acquitted.
In recent months, Goldman has become the biggest broker on IEX. Gary Cohn, the bank's chief operating officer, publicly voiced its support for market reform in a Wall Street Journal op-ed article last week, which coincided with a memo urging staff to publicise Goldman's backing of the competing platform.
“We believe that it would be best for the overall market if IEX achieved critical mass, even if that results in reduced volumes in our US dark pool, Sigma X,” the bank told staff.
William Cohan, who is due to publish his fourth book on Wall Street next month, said: "Maybe the wiser strategy was to get out ahead of [the Michael Lewis book]." When asked if he could recall a time when Goldman had encouraged employees to promote its activities, let alone those of a rival, Mr Cohan said: "Are you kidding? Never."
Goldman began talks with IEX in the second half of last year amid internal angst about declining HFT profitability and a loss of equities trading market share to Morgan Stanley, according to people familiar with the matter. Goldman declined to comment.
Instead of pouring further resources into keeping up with the search for speed, Goldman decided to diversify and linked up with IEX.
Brad Katsuyama, IEX co-founder, told the Financial Times he had met several banks, including Goldman, since last summer. "Banks are just large, complicated organisations . . . I'd be guessing if I had to tell you what's happening at each individual one," he said.
Goldman’s new public position has perplexed rival bankers in part because it is the lead adviser to Virtu’s IPO. IEX noted that Virtu also trades on its platform. Meanwhile, critics of modern market structure are taking encouragement from the highly public moment for an otherwise secretive business.
"This book coming out is the final nail in the coffin in proving high-frequency trading is an issue," said Eric Hunsader, founder of market research firm Nanex. "Goldman wants to be part of the changing process but you can't look like one of the winners so you must look like one of the victims. That's pretty much what Goldman is doing. I was shocked."
Copyright The Financial Times
