Michael Lewis Feels No Shame as Book Curdles TempersManuela Hoelterhoff
Somewhere in New Jersey near the now famous one-and-a-half-inch black plastic tube running in a stressfully straight line to a data center outside Chicago, a broke Sergey Aleynikov wonders if he’s going back to jail for supposedly stealing a bit of mysterious high-frequency-trading computer code from Goldman Sachs.
His surreal plight got Michael Lewis asking questions that turned into “Flash Boys,” the book that’s making a lot of folks really mad.
High-frequency traders like to think their speed and smarts benefit everyone in the investment game. Lewis says the game is rigged.
I spoke to Lewis, 53, on April 2, at Bloomberg world headquarters in New York, the day after Bill O’Brien, the president of the BATS Global Markets, fumed at him and the white hat of his tale, Brad Katsuyama, in an entertaining confrontation on CNBC.
Katsuyama, president and chief executive officer of IEX (Investors Exchange), is the main “flash boy.”
Hoelterhoff: This book is creating a lot of noise. Are you surprised?
Lewis: Yes, I’m surprised by the noise level. It’s not like nobody ever noticed this problem, right?
I mean you go on websites and find people talking about this five or six years ago.
I think what’s happened is that Brad, as a vessel for delivering the news, has changed the reception.
Hoelterhoff: What kind of regulations would you welcome?
Lewis: So there are a couple of big problems. One is the incentives that people on Wall Street have, and the other is the inability of investors to get information, to have control over their stock market orders.
So anything that increased the transparency to investors of what was happening to their stock-market orders and gave them control would be good. And in terms of regulating Wall Street, I think things like: Why allow brokers to own stock exchanges at this point?
You know, they don’t need to own stock exchanges. You create a stock exchange -- a market that’s owned entirely by intermediaries -- it just ends up being a market for the intermediaries. The technology has made it possible to get rid of them.
And that’s basically what IEX is doing. And that’s what will happen naturally if there’s more transparency, I think.
Hoelterhoff: In the meantime, are you feeling any shame? Bill O’Brien thinks you should.
Lewis: I was embarrassed for him. I mean I just thought the person was an embarrassing human being.
His behavior sort of mimicked high-frequency trading, but in conversation -- front-running everything everybody else said.
I mean, he wouldn’t let anybody finish a sentence.
It was astounding to me that someone like that actually runs a company. I just didn’t know what to say about it.
Hoelterhoff: “Money Ball” also disrupted an industry because someone had a better idea of running things.
Lewis: And made everybody who was running it the old way look a little dumb. I think Brad Katsuyama has done that on Wall Street. A lot of what is going on is people trying to obscure what should be clear. It’s just a lot of smoke. I think Wall Street has gotten just a little too good at making things more complicated than they are.
Hoelterhoff: That’s why we have the FBI with sniffer dogs, don’t you think?
Lewis: I haven’t had a moment to look at what the FBI says they’re doing, but it sounds like they’re investigating an insider trading case.
That’s an interesting case to make. If a subset of the market is given an advanced notice of price changes and can trade on those changes before everybody else knows, I mean it is insider trading, but should it be classified as such?
It’s going to be odd, because I think the SEC is aware that that happens. And the SEC doesn’t seem to regard that as a civil violation.
So we have this weird situation where people may be gone after for criminal conduct that isn’t regarded as a civil violation by the SEC. I don’t quite understand how people are going to square these circles.
Hoelterhoff: Any news on Aleynikov?
Lewis: He was sent to jail for a year. Then his conviction was overturned. And then Cyrus Vance went after him again. And he’s waiting to find out if that lawsuit is going to be tossed out. They think it is.
Goldman Sachs has been required to pay his legal fees.
I think Goldman Sachs would probably, at this point, rather have the whole thing go away. I don’t think there’s a lot of energy behind the prosecution.
Hoelterhoff: Nobody, including the prosecution and jury, seemed to know just what he did.
Lewis: It’s the judicial consequences of Wall Street creating stuff people don’t understand. The FBI did not understand what he took, the value of the high-frequency trading code and Goldman’s role in the market.
So they went after him as if he had stolen, you know, the crown jewels of Wall Street.
Hoelterhoff: How do you work? When do you know: This is a book?
Lewis: Everything starts as an article. I’ve never really conceived anything right away as a book. The article about Sergey Aleynikov ended up mushrooming.
Stuff is sitting in piles in my office. I have three or four ideas that I feel like there’s a book there, but I’m just not quite sure how to do it.
Hoelterhoff: I’ve seen you at the theater. I know you take your three kids to games. You leave time for life to unfold. How do you arrange a day or a week?
Lewis: We have the Google family calendar. Before a week starts, my wife and I sit down to decide who’s driving who to school or when can we go out on a date.
When I’m home, the structure is largely driven by whether it’s the softball season or the baseball season, because I coach them all. And it is a 25, 30 hour a week commitment.
Hoelterhoff: How much writing gets done every day?
Lewis: I’ve now got a kind of pattern. Maybe a year of research and then I start writing. This book I started writing in September and finished end of January. So it was moving at about 20,000 words a month.
Hoelterhoff: “Flash Boys” looks to sell very nicely. Who invests your money?
Lewis: I don’t have an adviser. I bought some municipal bonds a few years ago and I had someone who actually just specializes in California municipal bonds do that for me.
But other than that, my financial life is really dull. I either put it in index funds or I give it to Warren Buffett to invest. Let him worry about it.
(Manuela Hoelterhoff is an executive editor at Bloomberg News. Any opinions are her own. This interview was adapted from a longer conversation. Michael Lewis is a columnist for Bloomberg View.)