Just as Wall Street league tables rank firms by the size of their deals, author Michael Lewis provides his own hierarchy in the way his latest book describes banks’ stock-trading divisions.
In Lewis’s telling, Goldman Sachs Group Inc. reformed and is treating customers more fairly, especially after a management change last year at its electronic-trading unit. By contrast, Lewis describes an executive of IEX Group Inc. who says he found evidence that he thinks shows Credit Suisse Group AG’s trading platform gives an advantage to high-speed traders.
The book’s hero, IEX Chief Executive Officer Brad Katsuyama, at one point says there are only 10 brokers doing the right thing in a U.S. stock market that Lewis says is rigged by Wall Street brokerages, exchanges and high-frequency traders. Lewis lists only five of those firms -- which Katsuyama labels “good brokers” -- by name: Morgan Stanley, JPMorgan Chase & Co., Goldman Sachs, AllianceBernstein LP’s Sanford C. Bernstein and Royal Bank of Canada, Katsuyama’s former employer.
In “Flash Boys,” released on March 31, Lewis says dark pools owned by brokerages act as a key intersection between high-frequency traders and brokerages’ investor clients. The banks, Lewis says, charge HFT firms for the right to trade against orders placed by their brokerage customers.
“Why would anyone pay for access to the customers’ orders inside a Wall Street bank’s dark pool?” Lewis writes. “The straight answer was that a customer’s stock market order, inside a dark pool, was fat and juicy prey.”
The book is fanning a debate on Wall Street over whether rapid-fire trading benefits markets by adding liquidity or leaves some investors at an unfair disadvantage. Former Securities and Exchange Commission Chairman Arthur Levitt said April 1 that while Lewis is hastening the examination, some claims in the book are “hyperbolic.” Patrick O’Shaughnessy, an exchange analyst at Raymond James & Associates Inc., expressed doubts about Lewis’s assertions.
“We find it extremely implausible that high-frequency trading as a whole is stealing tens of billions of dollars from investors,” O’Shaughnessy wrote in a note to clients. “The implication that the U.S. stock market is rigged against the average investor is highly irresponsible.”
Lewis is a columnist for Bloomberg View, and Levitt is a Bloomberg LP director.
Credit Suisse receives some of the toughest criticism in “Flash Boys,” with the author writing that the firm “went to the most trouble to sell itself as safe to investors.” Lewis says that John Schwall, the chief operating officer of IEX, found “references and allusions” in articles about the bank’s Crossfinder dark pool that “made sense only if Credit Suisse had planned, right from the start, to be deeply involved with high-frequency trading firms.”
Nicole Sharp, a spokeswoman for Zurich-based Credit Suisse, declined to comment on the assertions.
IEX runs a five-month-old stock-trading platform that’s pitched as a fix for structural flaws that Lewis says let speed traders exploit the $23 trillion U.S. equity market. That firm’s success hinges on investors persuading their Wall Street intermediaries -- brokerages such as New York-based Goldman Sachs and Morgan Stanley -- to send their stock orders to IEX.
Lewis cites an anecdote in which he says UBS AG’s brokerage unit failed to comply with those desires.
Six weeks after IEX opened in October, “UBS, the big Swiss bank, inadvertently disclosed to one big investor that it hadn’t routed a single order onto IEX -- despite explicit instructions from the investor to do so,” Lewis writes, without identifying the investor.
Megan Stinson, a spokeswoman for Zurich-based UBS, declined to comment.
Goldman Sachs endorsed IEX in a memo to employees last month and is the biggest broker on the platform.
The bank appears on the first page of “Flash Boys,” with Lewis saying: “I suppose this book started when I first heard the story of Sergey Aleynikov, the Russian computer programmer who had worked for Goldman Sachs and then, in the summer of 2009, after he’d quit his job, was arrested by the FBI and charged by the United States government with stealing Goldman Sachs’s computer code.”
Lewis later describes how Rich Gates, a co-portfolio manager at TFS Capital LLC, ran tests on trading venues in 2010, leading him to conclude he was “ripped off a bit more than half the time” when sending orders to the Goldman Sachs dark pool, Sigma X.
Gates raised the issue with his broker at the firm, and when he ran the tests again months later, Goldman Sachs was the only firm where he didn’t encounter problems.
Lewis says the tide continued to turn at Goldman Sachs: “We’re in a transition here. That’s what the Goldman Sachs people said when you asked them, in so many words, how they could have gone from bringing the wrath of U.S. prosecutors down upon Serge Aleynikov for e-mailing their high-frequency trading computer code to himself, to helping Brad Katsuyama change the U.S. stock market in ways that would render Goldman’s high-frequency trading computer code worthless.”
Aleynikov was convicted in federal court in New York of stealing confidential source code from the company and later had the conviction overturned. He was later charged in New York state court and pleaded not guilty.
Tiffany Galvin, a spokeswoman for Goldman Sachs, declined to comment on Lewis’s book.
In interviews with Bloomberg News and Television, Lewis said he was surprised by the “noise level” as Wall Street discusses his book. On its revelations about market trading, he said, “I don’t think you can put it down and think it’s not rigged.”