Flash Boys. By Michael Lewis

Flash Boys

Michael Lewis

Allen Lane. First Published 2014.

The economic crisis of 2008, which brought to a crashing halt the exuberant expansion of the previous decade, with effects felt in India, as in the rest of the world, was apparently caused by over-smart ‘rocket scientists’ (such as, for example, maybe an IIT graduate, with post-graduate qualifications from Harvard) who were lured into finance by hyper-capitalist Wall Street. There they operated without any sense of the real world, building ever more complicated financial instruments, until they were selling for enormous aggregate amounts of money, worthless stuff dressed up to look extremely attractive to greedy investors who couldn’t understand any of it, but who slavered at the thought of becoming wealthy beyond the wildest dreams of any human. The crash, the failure of several large investment firms, and the general aftermath brought a degree of sanity to one aspect of this technological transformation of the financial markets, namely to the idea of ‘derivatives’ and ‘sub-prime’ loans and mortgages. But there were other innovations that were made at this time that continue to be in use, misuse and abuse. And as information and communication technology advances, more and more such tools continue to be made, enabling rapacious, amoral and barely legal predators (a word which occurs frequently in ‘Flash Boys’) in the financial markets to continue to prey upon the unsuspecting ordinary investor – the pension funds, the insurance companies, the charitable trusts and, of course, the retail investor.

Financial markets – stock exchanges; bond, derivatives and currency markets; futures markets – these have always been the archetypical and essential components of a capitalist system. They have however never been paragons of virtue or shining examples of the good in human societies. Consider, for example, the savage characterisation to which they are subjected in many of Charles Dickens’ works. (Dickens does not talk about any actual stock market – he does deal at length with capitalist strategies to raise money for risky, and mostly fraudulent, enterprises.) ‘Flash boys’ describes in some detail one more way by which crooked traders use advanced technology to cheat ordinary investors.

In my understanding, a stock market exists to channelize money from hundreds of sources, each of which may be a small amount, but which in the aggregate adds up to the large sum required to undertake a large, and presumably socially useful enterprise. (It is another point altogether whether any such large enterprise - dams, factories, even bridges - can actually be characterized as socially useful in the long run to humanity and to life on earth.) In return, the contributors of the small sums are promised proportional shares of the benefits, i.e. the profits. Done well (in all senses - economic, ethical, social), and as indeed it has been many times, the result of this process is often of greater value to society than just the profits (or capital gains) generated for the shareholders. For example the benefits accruing to everyone from the activities of a company like Larsen and Tubro is probably greater than that represented by just profits and gains to the shareholders of the company. Done honestly but badly, as it is happening more and more, the stock market process may generate gains for the shareholders, but not necessarily for all of society – Pepsi and Coke are prime examples of this type of enterprise. Done dishonestly, the stock market benefits the cheats, not the investors, and certainly not the general public.

The fact that a stock exchange is required for this purpose, i.e. to channelize small sums and build a large amount, makes it a truism that such an institution adds value to society, and obviously, the people associated with the institution will have to be paid for generating this value. Thus stockbrokers and investment banks make money, as does the exchange itself, and all the people who run it. In an ideal world, of course, no such middlemen would be needed, and the large number of small people with small amounts of money would join together, automatically, to set up large enterprises. Ants do it, and so do bees, but humans are autonomous, and its hard to get them to act together. Attempts have been made and are made still to get everyone to do the same thing – Nazi Germany, Soviet Russia, Maoist China, maybe even modern-day China – but these attempts have either ended in failure or are objectionable on other, non-economic grounds. So stock exchanges, if run honestly for the purpose stated above, are a common good.

But not all that happens in the exchange, in the financial market, and not all that the traders and the brokers and the bankers do, is good. Far from it. Among the more pernicious activities we have insider trading, artificial bull runs, synthetic bear runs, artificially created market sentiment, and so on, none of which can be considered, without argument, as good for society, or sound reasons for the existence of the stock exchange. All the same, the brokers and the traders and the bankers make money, huge amounts of it from such activities. And a lot of it is legal, even though the nature of their ‘services’ is very hard to understand, and their true value even more difficult to estimate. [It needs to be pointed out that ‘legal’ is not necessarily ‘ethical’ or ‘moral’. Consider, for example the following passage that occurs in the book, describing a perfectly legal, and according to the author, a morally and ethically sound set of events. ‘After a big buyer enters the market and drives up the prices of Brent crude oil, for example, it’s healthy and good (!) when speculators jump in and drive up the price of North Texas crude, too. It’s healthy and good (!) when traders see the relationship between the price of crude oil and the price of oil company stocks, and drive these stocks higher. It’s even healthy and good (!) when some clever trader divines a necessary relationship between the share prices of Chevron and Exxon, and responds when it gets out of whack’ (the ironical exclamations are mine). I really can’t see anything ‘healthy’ or ‘good’ in the situations described. All of them appear to me to be gambling, which may not be morally bad, but belongs in casinos, and is not what a market that exists for the good of society as a whole should be doing.] The long term consequences for society of a lot of what the traders and the brokers do are bad, bad even for capitalism. Society, through various institutions such as the Government, or the courts, or the Press, sees the ill effects and tries to prevent them by changing the laws and maybe bringing in additional regulations. But, as pointed out in the book, every change in the laws brings in a fresh set of loopholes, ready for exploitation by the traders and their ‘running dogs’. According to ‘Flash Boys’, precisely one such set of regulations, and the consequent loopholes, is responsible for nurturing the bizzare phenomena of High Frequency Trading.

According to the book, the US Government mandated that all buying and selling of stock should be carried out electronically, thus offering the retail investor direct control of his transactions. Well, it didn’t do any such thing. High frequency trading is only one of the ways in which this particular regulation allows amoral traders to forcibly come in between the buyer and the seller of shares, and make billions of dollars while adding zero (actually negative) value to the basic economic processes underlying those transactions. Here’s a brief summary of how HFT works (as I understood from the book).

First, we have to know that there is not just one market where we can buy or sell shares, but many. (As we shall see, more is better for the HFT companies.) Think of a seller who sits at a computer at home (or office) and makes a bid to sell X shares of some company at a price between Y and Y+dY (dY is a small amount compared to Y). He (most of the people doing this are white males) sends his request to markets A, B, C and D. Now let’s assume there a buyer who wants to buy at price between Y+dY and Y+2dY. For simplicity of explanation, let’s further assume that the buyer is only in market D. Now this is where advanced technology comes in. Because of the difference in location of the markets, the time it takes for the sell request to travel from the seller to market D is a few milliseconds more than it takes to go to market A. A HFT company has invested in buying superfast connections between the markets A and D – connections which are exclusive to it. These lines (OFC, sometimes line-of-sight microwave, and, more recently, line-of-sight laser, connected by the fastest switches and routers available) are only a few tens of microseconds faster than those of the ordinary investor (the ‘buyer’ and the ‘seller’ mentioned above), but these unbelievably small fractions of time are enough. The HFT company sees the sell request on market A the instant it gets there, rushes around the markets a few tens of microseconds before the request itself can get around, sees the buy request on market D, and now it knows the existence of the two complementary requests before they can match up in a normal way. The company buys from the seller at price Y and sells to the buyer at price Y+2DY, and makes a profit of 2DY for doing nothing of value to anyone. The seller has lost DY, and so has the buyer. For, left to themselves, the sale would have gone through at the mid range of Y+DY. This high frequency chicanery is apparently legal.

This is just the simplest of the possibilities. Michael Lewis describes several others, and hints at still others, even more complicated. We have ‘dark pools’ and complicated varieties of buy and sell orders and ‘co-location’ of computer hardware, and other jargon, all of which tries to hide the fact that the most sophisticated financial market in the world is now so far removed from the simple high-minded purpose I described in the beginning, that nobody understands just what it does that allows it to claim that it deserves the tons of money it is making. It is highly doubtful if a casino would be allowed to operate in such an opaque manner. Note that the high frequency trading, or in fact even the simple one-on-one trade between the buyer and seller, I described in the previous paragraph is impossible with human intervention. Computer programs talk to other computer programs, do all the deals at blinding speeds counted in microseconds and maybe even nanoseconds. The stock exchange is now just an ecosystem of computer programs (or algorithms) talking to each other, and reacting to each other. Sudden and inexplicable crashes therefore can (and do) come about by the unmeant creation of feedback loops. The lack of clarity is precisely the opportunity for a brilliant but unscrupulous technical wizard to make money, unethically, but just within the law.    

Lewis is generally down on the HFT companies. He is careful not to mention any particular company as illegal or even unethical. But his disapproval of them, in general, comes through. The book has heroes, in particular a group of idealistic (or so he says) young techies who get together and set up their own exchange, IEX, which they claim is fair to everybody, and offers the HFT companies no particular advantage. He also mentions Goldman Sachs with some approval. The book is an illuminating and interesting read. But Lewis is not the best of writers for one such as me who is reading about all of this for the first time, and who has, apparently, a constitutional disinclination to spend too much time and effort in trying to understand all the machinations. His language is sometime unnecessarily profane – though he claims to be just quoting his protagonists and his heroes. He makes several important points about technology and the markets. One of them is that the world is no longer 'flat', at least not for online trading. The closer you are to the stock exchange - which is now just a huge computer - the better. Even a few tens of meters will make a difference. 

Lewis does not deviate too far from the mainstream capitalist line, but the book makes it clear there is no such thing as a free market, so beloved of all those on the ideological right who misquote Adam Smith.

Cheaper By The Dozen. By Frank B. Gilbreth Jr. and Ernestine Gilbreth Carey

Cheaper By The Dozen

Frank B. Gilbreth Jr. and Ernestine Gilbreth Carey

A Yearling Book. First published 1948.

This is a story from Main Street, America - very Reader’s Digest-y. It is a series of humourous, ‘heart-warming’ anecdotes strung together in roughly historical sequence, about a family of twelve children, six girls and six boys, and their parents, Frank and Lillian Gilbreth. According to the book, these two pioneered ‘motion study’, or what may today be called ergonomics – the science, and maybe art, of performing tasks, especially industrial tasks in a factory, most efficiently, with no unnecessary effort or time. Considering that their researches were conducted and their theories were developed in the early part of the twentieth century, when Henry Ford had just built the production line to manufacture his cars, it would just perfectly fit in with the ‘zeitgeist’. One could probably place the couple among the earliest industrial engineers.

But the book is only marginally about industrial engineering. It is mainly about the father, Frank Gilbreth, and how he impressed his forceful, if benevolent personality on his family. Probably of necessity, he introduced a large degree of regimentation into their life at home, with some of the measures producing hilarious and unforeseen consequences. By and large this a very readable book, with obvious, but harmless, exagerrations, mostly for dramatic effect. Of course only those stories that can be lead to an overall pleasant effect find place in the book. Surely there must have been many nasty and terrible things that happened, as happens in any family, but these are not even mentioned. Thus, it is not a serious book about a large family growing up in an America that was just then flexing its newly-found muscles as the economic, military, and even cultural, superpower. It is forcibly a ‘happy’ book, with happy stories about a happy white upper-middle class American family. The version I read now is complemented by a Norman Rockwell-like painting of the family on the cover. This is very appropriate, considering that the book is an expression of the light, happy, conservative emotions seen in Rockwell’s paintings.

The Book Thief. By Markus Zusak

The Book Thief

Markus Zusak

Black Swan. First published 2005.

It is less about books and theft, than about a little girl growing up into young adulthood in Nazi Germany. Liesl is virtually orphaned when only about six, her communist father is imprisoned and probably killed by the newly 'elected' Nazi government; her mother, also a communist, is driven to give up little Liesl and her littler brother for adoption (The political opinions of the parents is implied, never explicitly stated). The brother, however, dies on the way to his foster parents, who live in a suburb of Munich. This event traumatizes Liesl and hangs over her every action and thought for the duration of the book. Liesl's new parents are a kindly old man and his tough and abrasive, but ultimately soft-hearted wife - a harsher version of Marilla Cuthbert of 'Anne of Green Gables'. As Liesl grows up she joins school, makes friends, especially Rudi - a boy who keeps pestering her for a kiss - and slowly learns to read. She steals a few books, though the acts described as thefts are not so really, they are more the taking of what no one needs, or, in one occasion, grabbing a book from the bonfire to which it has been consigned in a communal book-burning. 

Such events form the background of the story - the rise of Nazi Germany, Kristallnacht, book-burning, 'Heil Hitler', Hitler Jugend (into which Rudi and Liesl are conscripted without really knowing much about it), rationing and hunger, the 1936 Olympics and Jesse Owens (who unbelievably and exaggeratedly becomes Rudi's hero), World War II, Jew hunting, Jew killing and the Holocaust. Liesl herself is not Jewish, neither are her foster parents. They are bewildered by the discovery of the hatred borne by some of their neighbours and fellow-citizens towards others. They try their mite to stop it, but they are not heroes, and what they can do is very little. Until, one day, the son of an old acquaintance of theirs, a Jew, seeks shelter in their home as he flees the Gestapo. A major part of the book describes the consequent tensions and anxieties. For Liesl this is a strange and frightening, but also wonderful experience, as she learns to care for the refugee and make his cramped basement quarters as comfortable as possible. In the course of time, the Jewish refugee decides he cannot continue to be a dangerous burden on the family and simply goes away, only to be captured sometime later and sent to concentration camp. Rudi and Leisl’s parents die in the bombing of Munich. The war ends. Liesl and everyone else slowly pick up and re-knot the dropped and torn threads of their lives.

The book is soft teenage or young adult literature and the language is gentle. It uses the device of a personified ‘Death’ as the narrator. This is occasionally intrusive and irritating, but not enough to turn the reader off entirely. The language is ‘English’ English, though the characters, of course, would ‘actually’ speak German. There are occasional words (especially mild curse words) and sentences in German to embellish the ambience. The effect, on the whole, is quite pleasing.

The book falls squarely in the category of ‘Holocaust Literature’. There is now so much of this genre, not only books, but essays, movies, plays, and all varieties of media, that these descriptions do not any more evoke the same particular sense of shock and horror they did when I first read about them as a schoolboy. One of the problems in reading it in the context of present-day politics is that I am constantly brought up against the fact that most present-day Jews are rich and prosperous, and some them, the Zionists, visit upon others much the same evil that was visited upon them – consider the way Israel treats the Palestinians. There is also the fact that other genocides at other places and other, later, times have occurred and keep happening – Pol Pot in Cambodia, Stalinist Russia, Rwanda, Gujarat, Bangladesh, Iraq, Afghanistan, and on and on and on. And we now learn more and more about the horrors of American slavery, and the virtual extermination of the native peoples in America and Australia. So, while the Holocaust still remains for me the primary evil event in the world, it only just occupies the top spot. In any case, it cannot serve as any kind of reason or excuse for what Israel is doing. Zionist propaganda has however mostly succeeded in using this horror in just that way. The world is constantly exhorted ‘never to forget’ the Holocaust. We are allowed, even encouraged, however, to forget, and even forgive, Augusto Pinochet of Chile, for example.

‘The Book Thief’ is too slender a reed on which to lay the weighty charges of Zionist blindness to the sufferings of non-European people. However I do have the slight feeling that one of the unstated motives of the book is to expatiate some of the guilt of non-Jewish Germans, and to say, ‘Not all Germans were bad, or whole-hearted supporters of Hitler’s madness’. And while this undoubtedly true, this line of argument could eventually lead to the world forgetting the actual Holocaust, and re-imagining it as evil perpetrated by liberals and communists, who in the present day happen to be dark-skinned.

A Game with Sharpened Knives. By Neil Belton

A Game with Sharpened Knives

Neil Belton

Phoenix Paperback. First published 2005.

Belton takes the facts from a couple of years Erwin Schrodinger's life in the early 1940's and weaves a fascinating tale with it, equally of history, politics, diplomacy, psychology, social drama and human relations.

Schrodinger is best known among students of science, particularly physics, for his equation. This equation reconciles the wave nature of elementary particles such as electrons and protons, with their simultaneous particle nature. Until this equation came along, physicists were floundering to make sense of the experimental observations of numerous phenomena, each of which could be explained only with a different set of equations. Schrodinger's 'wave equation' as it is called, makes it possible to set up a single set of equations, the solutions of which yield predictive descriptions of all manner of physical phenomena, ranging from the subatomic to the macroscopic scales. (Newton's equations, commonly used to make calculations at 'human' scales have been shown to be a special case of Schrodinger's equations.)

The equation makes it possible to calculate all the measurable physical properties of a subatomic particle, or a set of subatomic particles. However, the physical interpretation of the descriptor, called the wave function, of such a particle that occurs in the equation is, even today, a matter of controversy, much more so immediately following the publication, in 1926, of the equation. Schrodinger himself did not much like the popular statistical interpretation of the wave function as a probability wave. In the book, his struggle to find a satisfactory explanation, and at the same time extend the validity of the equation to explain relativistic phenomena, as well as phenomena at the largest scales of the Universe, forms a strong, though minor, vein. Described in the same vein are his struggling thoughts on the nature of Life and the possible physical principles that underlie Biology. These were clarified and finally published by Schrodinger in a truly seminal and widely influential work 'What is Life?', published in 1944, some years after 'A Game with Sharpened Knives' ends.

Schrodinger had a peripatetic career, spending time in many European Universities. In 1936 he came back to an Austria threatened by Hitler. When the country was annexed by Nazi Germany, Schrodinger had to flee, and after a few years in Oxford and Ghent, he was offered, and accepted a position at the Institute of Advanced Studies, newly set up by the Irish Government headed by the nationalist De Valera, one of the first prime ministers (or Taoiseach - pronounced 'tee schach') of a fully independent Ireland. European politics, Nazi Germany, Irish politics, its uneasy neutrality during the war, and its internal strife, the struggles in Northern Ireland, all these form another interesting and sometimes mysterious thread in the book. There are spies, smugglers and perhaps militant rebels who wander in and out of Schrodinger's life in Dublin, making for a fair amount of dread and anxiety for him personally, for his family and friends, as well as for the reader. 

The main narrative, however, concerns the psychology of Schrodinger as a brilliant, Nobel prize-winning scientist brought to straightened circumstances by historical events, and, perhaps even more so, by his amorous adventures. He is constantly battling what he perceives as his increasing scientific irrelevance - a state of mind that I have personally seen in many of my senior colleagues. At the same time his uncontrollable libido leads him into love affairs with which pleasurably satisfy his immediate urges, but soon degenerate into dilemmas, especially when his lover becomes pregnant by him, in a place - catholic Ireland - and time when abortion, even contraception, and divorce are taboo. Not all his women are as undemanding as his wife, Annemarie, whom he brings to Dublin from Austria, along with his mistress, Hilde. Both these women are friends, and bring up their children together, Hilde representing herself as Annemarie's friend in a fig leaf camouflage. A third woman comes into the story as Schrodinger's Irish lover. She is Sinead, a stage actress, who has a deep, involved relationship with Schrodinger, but gives up on him when she realizes she is pregnant and that the relationship is going nowhere. (This character is apparently modeled on Sheila May, Schrodinger's real life Irish lover.) Throughout, Schrodinger is painfully aware of all his flaws, but unable to correct them, and do the right thing by all his women. It soon becomes an impossible task anyway, considering the contrary demands each relationship makes on him, and Schrodinger, now in his early fifties, is psychologically, if not physically, much the worse for it. The book itself ends with Sinead going away, and Schrodinger going back to his wife and his mistress.

This is a brilliantly written book, dense with characterization and description, with a seamless weaving together of the various elements of Schrodinger's life, science, love, sex and politics. Sometimes it is like listening to jazz music, though with none of the lightness. The writing style is reminiscent of Graham Greene and John Le Carre, more like the former than the latter, in that there is none of the characteristic patterns of speech and dialogue found in Le Carre. Like Greene, Belton writes in a understated, grey and depressed manner, and, like Le Carre, he invokes a 'perpetually drizzling' world in Dublin. Even when he describes a trek undertaken by Schrodinger and Sinead, he describes the earth and the rocks, rather than the sky and the sea, and one gets the impression of dirty rain, though that feature is never actually mentioned.

I wanted to read this book ever since I saw the review by Hilary Mantel in the London Review of Books. She calls it 'austere authoritative fiction, a fine melancholy novel...' I cannot state it better. I wish someone could write a similar novel about GNR.