The depressing truth behind Michael Lewis’ Flash Boys: Even the world’s top investors don’t understand today’s markets

April 15, 2014 Leave a comment

The depressing truth behind Michael Lewis’ Flash Boys: Even the world’s top investors don’t understand today’s markets

By Matt Phillips @MatthewPhillips March 31, 2014

The ideas aren’t new. Unsavory elements of high-speed computerized trading have been a concern since at least May 2010, when the so-called “flash crash” struck US exchanges. (Die-hard market geeks were concerned long before that.)  But Michael Lewis’s new book Flash Boys, on the perils of high-speed computerized markets, could still be important if only because it cuts through the dense webbing of jargon and complexity that has proven dangerous to the US financial system and the economy as a whole.

Lewis said it best in the CBS 60 Minutes interview on March 30 that set off the publicity push for his new opus. The book attempts to lay out how high-frequency trading firms effectively skim pennies off millions of stock trades each day. “If it wasn’t complicated, it wouldn’t be allowed to happen,” he says. ”The complexity disguises what is happening. If it’s so complicated you can’t understand it, then you can’t question it.”

This problem goes beyond stock markets: The US financial system is awash in unnecessary complexity. And the reasons are simple: Complexity is profitable and it keeps regulators at bay. ”The jargon of bankers and banking experts is deliberately impenetrable,” wrote economists Anat Admati and Martin Hellwig in their indispensible The Bankers’ New Clothes. “This impenetrability helps them confuse policy makers and the public.”

What’s fascinating about Lewis’s reporting is that it reveals that it’s not just the general public that doesn’t understand how things work. It’s the biggest names in finance themselves. In an excerpt from the book published in the New York Times, Lewis writes about what happened when a small team—the “Flash Boys” of his title—from Canadian bank RBC, which had been investigating how high-frequency trading worked, started explaining it to Wall Street’s biggest money managers:

The most sophisticated investors didn’t know what was going on in their own market. Not the big mutual funds, Fidelity and Vanguard. Not the big money-management firms like T. Rowe Price and Capital Group. Not even the most sophisticated hedge funds. The legendary investor David Einhorn, for instance, was shocked; so was Dan Loeb, another prominent hedge-fund manager.

Regulators and politicians should take these revelations and run with them. Too often they defer to market experts on issues of financial regulation for fear of looking like they don’t understand how things work. Thanks to Michael Lewis, we now know that pretty much nobody does.

 

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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