Michael Lewis sits down for lunch at the Claremont Hotel in Oakland, Calif., looking like a man who is well-satisfied with the state of his current affairs. It's easy to understand why. Lewis has an impressive publishing history, dating back to "Liar's Poker" in 1989 and including "Moneyball," "The Blind Side" and "The Big Short." But right off the bat he tells me that that in its very first week, his new book, "Flash Boys," has already sold more than 130,000 copies. That's more than twice the sales, he says, of his previous high mark, "The Big Short."
It's the "biggest week in the history of my publishing firm," he boasts.
Oh, and during that same week the FBI, the New York state attorney general's office and the U.S. Department of Justice all coincidentally announced investigations into the potential improprieties and fraud associated with the topic of Lewis' book, "high-frequency trading." When Michael Lewis appears on "60 Minutes" and declares that the U.S. stock market "is rigged," people pay attention.
Sure, there's been a lot of "noise" around "Flash Boys," a lot of chatter out there on the Internet both from name-brand journalists and people you've never heard of, picking nits and ankle-biting. Lewis has been accused of acting as a shill for big investors, of sensationalism, of getting his facts wrong.
"There's been a lot of people mouthing off without actually thinking about the book," says Lewis. Yes, he may have gotten a few facts wrong: "It's impossible to write 100,000 words, and not make mistakes." Anything substantive will be corrected for the next edition, but none of it, he says -- and for a moment his bonhomie becomes icy -- "will have any effect on the truth of the overall story, at all."
You get the sense that as far as Lewis is concerned, the blowback is merely a positive indicator that he has successfully hit a nerve. Lewis went through a similar experience, he says, after the publication of "Moneyball," a book that seriously upset the sports establishment with its embrace of analytics over old-school scouting.
"Billy Beane" -- the general manager of the Oakland A's and the protagonist of "Moneyball" -- "has been laughing on the phone with me about it," says Lewis. "The journalists are all lining up against 'Flash Boys' the way you'd expect given their position in the industry. People in the industry are lining up the way you expect. The level of hostility is very similar with what happened with 'Moneyball,' but the noise is 10 times greater, because it's about Wall Street instead of professional sports."
Michael Lewis has gone after Wall Street before, of course. "Liar's Poker" was a delirious romp through the farcical world of Wall Street's bond traders. "The Big Short" delivered an exquisite postmortem on the subprime mortgage fiasco. But this is different, he says.
"Previously I feel like I punched Wall Street in places where the nerves were insensitive. This time I punched Wall Street in the balls," he says, grinning. "And then the beast reared up, and the beast went—" and then Lewis makes a sound that sounds vaguely like the squeal of a Tyrannosaurus Rex after having been impaled by a redwood tree.
The bottom line, says Lewis, is that the story he tells in "Flash Boys" threatens to materially impact how Wall Street does business, by constraining the activities of high-frequency traders.
As he explains it, high-frequency traders are taking advantage of superior technology -- faster telecommunications infrastructure, smarter computer trading algorithms, physical proximity to the computers that operate stock market exchanges -- to insert themselves between buyers and sellers on the market and skim off a piece of the action for themselves. The HFT guys serve no necessary economic function, argues Lewis. They're parasites who are profiting from a self-administered tax on stock market transactions.
In any given trade, the slice pocketed by HFT might be a penny or less, but taken together, it adds up to billions and billions of dollars. No one knows exactly how much -- and, in fact, some defenders of HFT say overall revenues are in actual decline, an argument that provokes some major eye rolling from Lewis. If the industry is in decline, he asks, then why are HFT firms continuing to staff up, planning IPOs, and poaching talent from each other at astronomical rates. One trader, says Lewis, recently left a company because he felt his $80 million salary wasn't enough compensation. And his colleagues agreed he was probably right!
"What is true," says Lewis, "is that the sums of money involved -- if you spread it across the market -- are trivial, it’s a penny a trade. But it's offensive as hell that rich people are stealing from middle-class people -- even if it's just a penny. There's also the issue of what HFT does to the stability of the marketplace as a whole. And then there's the question of the whole screwed-up model it creates for success in life, when the guys who get rich do so by skimming on the market, so all of a sudden the young people at the best schools want to go skimming in the market -- like that's a noble career path."
But what makes "Flash Boys" interesting -- and threatening -- is that it isn't just a tract explaining what high-frequency trading is and decrying it as evil. That kind of book would be boring, says Lewis. So boring that he wouldn't even have been able to muster enough interest to write a "magazine piece" about it.
(Lewis says "magazine piece" in a way that makes you feel like he considers cover stories in the Sunday New York Time Magazine the same way the rest of us feel about blog posts.)
Lewis got excited about HFT because he found a story to tell that he thinks brings a measure of hope to the more-or-less permanent morass of greed and double dealing that is Wall Street. "Flash Boys" is the tale of a group of Wall Street veterans, led by Canadian "boy scout" Brad Katsuyama, who become personally outraged at how HFT operators were screwing with the system. The government can't or won't deal with the problem, so they decide to solve it themselves, by putting together their own stock market exchange, IEX. IEX is explicitly designed to defeat HFT strategies and give investors a fair shake. Only Wall Street, it seems, can cure Wall Street's ills.
"Another reason why 'Flash Boys' is like 'Moneyball,'" says Lewis, "is that it is a story about a disruptive entrepreneur. In both cases, the entrepreneur is holding up a mirror to his industry and it is not a flattering picture. I think Katsuyama is going to change the industry. He is going to have a big effect. He is going to suck billions of dollars out of Wall Street. I think that's part of what is going on and why it is so loud. A lot of money is involved. Stocks are falling. Investigations are being launched."
Critics have accused Lewis of basically writing a big advertisement for Katsuyama and IEX. He's also been charged with hypocrisy, because IEX is backed by some of the biggest investors in the United States. As far as the first criticism, Lewis could not care less. He actively wants IEX to succeed, because he personally believes in the integrity of Katsuyama's team. If his ability to tell a story that gets media and law enforcement attention helps IEX get traction, well, hell, that's exactly the point.
Want to know why there is so much noise, and the HFT guys are so hopping mad? It's because Lewis is a player in this game, not an ankle-biter. His books move markets.
I asked him if IEX, which is not even a year old, and has to this point been effectively blacklisted by some of Wall Street's biggest banks, had seen an uptick in business over the last nine days.
"I can tell you what I've heard. I think they've gotten 1,000 résumés from people who want to work with them. They've gotten inundated with whistle-blowers from exchanges and banks who they've directed to the FBI or the attorney general's office, dozens of people from inside of the HFT industry. In terms of trading volume, I think before the book came out they were averaging around 35-, 40 million shares a day, and yesterday they did almost 70."
As for the accusation that he's serving the interests of the big investors, which is often accompanied by the argument that the "little guy" isn't getting hurt by HFT -- he or she can go make a trade at any time and won't ever notice a negative impact -- Lewis furrows his brow.
"I don't understand that argument. The little guy is the big guy. The little guy is not the day trader on eTrade; it's all the money packed up in pension funds and college endowment funds and mutual funds. The savings of the country is in big institutions."
And it's those big institutions that are paying an unnecessary tax to high-frequency traders who have figured out how to game the system. The money they are extracting belongs to all of us.
As I read "Flash Boys" I found myself thinking that it was Lewis' angriest book. There was something really outrageous about the fact that even as the rest of the country was picking itself up from the wreckage of the mortgage crisis, a massive economic disruption inflicted by Wall Street greed on the rest of the world, Wall Street has already moved on to a new scam, without taking a breath. I sensed a seething irritation behind every line.
But in person, Lewis is brimming with glee, and not just because of his sales number. The positive reaction he has gotten, he says, is "10 times, 20 times, 100 times" the negative. "The hostility is overwhelmed by the love notes." The fact that there were "these guys at IEX willing to take personal risks and sacrifice their short-term interests is incredibly hopeful.
"I feel like they are the little rock at the top of the hill that creates the avalanche. I can see how what they are doing can ripple right through the system. And I can see the forces that might line up behind them and force real change.
"So I think it’s a happy book."