“It is a very simple detective story,” Michael Lewis is saying. “A young Canadian trader figured out that something squirrely was happening in the stock market. And he went on a search to figure out how it operated.” Lewis is describing his new book, Flash Boys: A Wall Street Revolt, which details how high frequency trading has allowed so-called “dark pools” to make huge profits by gaining an unfair edge in the market. Average investors, in this narrative, are cheated.
Lewis, who was formerly a writer at The New Republic, has written about Wall Street before, and is the author of several bestsellers, including Moneyball and The Big Short. In a phone conversation this week we talked about his politics, his critics, his lost faith in the government, and The Wolf of Wall Street. He immediately began by discussing book promotion.
Michael Lewis: Being on tour consists of dread, followed by a brief period of excitement, followed by a long period of boredom, followed by deadness of spirit.
Isaac Chotiner: That sounds like dating a little bit.
ML: Well, in this way: the absence makes the heart grow fonder. The further away from my book tour I get, the more I like it. And this is really true: by the middle of a day of talking about it, I hate it. Have you ever covered a political campaign?
IC: I worked on one.
ML: Well, you know the kind of person—and people in politics are often this kind of person—who seems to get more enthused the more they repeat the same thing over and over?
IC: That’s why they go into politics.
ML: It’s a funny kind of disposition. It only happens if what you are saying you are not sure of, and so the more you say it, the surer you get, and the more excited you get. You say to yourself: “Oh my God, people might not contradict me.” I have the opposite feeling. When I get off the phone and then repeat what I said to someone else, I think it’s a lie.
IC: Why do you think it’s a lie?
ML: It feels phony to repeat yourself in that way. It’s not the content of what I am saying, exactly. But the repetition makes me feel fraudulent and kind of contrived. For every day I am on tour, it takes me a day to decompress. I will be normal by May 15th. I am a more loveable person than I was 4 or 5 days ago, but I have a ways to improve.
IC: New Republic readers demand to read this interview before May 15. We have to soldier on.
ML: Oh, alright.
IC: I was wondering how spending so much time with Wall Street people and on Wall Street has changed you ideologically.
ML: I am too wooly minded to even have politics. They are all over the map. To this day I vote for the man rather than the party. Although I do lean Democrat. There has been one steady drift in my outlook caused by my constant contact with the financial system. I am ever more dubious that people who make lots of money are doing something useful. I started out only a little dubious. I have gone from thinking it is absurd to vaguely criminal. Wall Street can do lots and lots of damage while making lots and lots of money.
IC: How much has Wall Street behavior sparked the inequality conversation that is going on now?
ML: They are very connected. If you go back and look at the boom in CEO pay, it is tied directly to Wall Street compensation. Social norms changed. And they changed first on Wall Street. This bothers me a lot. What do I want to tell people coming out of school? I want to tell them about noblesse oblige, which has just died. There is an absence at the top of the culture.
IC: Have you read the new Thomas Piketty book?
ML: I just downloaded it because it’s impossible to get copies of the hardcover any more. It is sold out.
IC: I had the same experience. You would have more luck getting The Satanic Verses in Iran. The reason I ask is because Piketty and others talk less about noblesse oblige than things such as higher tax rates. The government has to step in.
ML: I feel such despair at how the government responded to the financial crisis. It did a lot of good things to prevent a depression. But the Wall Street firms ended up even more of a problem. They got bigger. I thought they should be broken up in one way or another.
IC: So you think they are worse now?
ML: Probably not worse in the sense that they are probably more afraid to do bad things. More skittish. But as a market problem they are worse because they are bigger. The effect of a lot of the regulation has made it harder on would-be-competitors who could challenge them. And Dodd-Frank throws decisions to the regulators, and then that discussion ends up being run by banks. I just hate it. I have given up on the government. I wrote this book because I feel like these guys in my book have figured out a market version of Occupy Wall Street. This may be the way we have to deal with this. People ask me what the SEC should do. Well, there are things I’d like them to do, but for now they may ned to just get the hell out of the way. Maybe they can force some transparency. People at the SEC have said that they are counting on these market solutions.
IC: What are your thoughts about the culture on Wall Street? I don’t know if you saw Wolf of Wall Street, but it seemed to me that the movie was arguing that the culture there inspires bad behavior.
ML: I did see it. I know too many people there and love too many people there so I have mixed feelings about this. They are not all bad people. The problem is that the incentive system is really screwed up and that screws up the behavior.
IC: What did you think of the movie?
ML: It was very funny, but I didn’t think it was very much about Wall Street. I thought it was about Martin Scorsese’s obsessions and addictions. He apparently has tried to get that opening scene with Leonardo DiCaprio trying to snort coke out of the butt of a hooker into several of his movies, and this is the first time they let him put it in.
IC: It’s always nice when someone’s lifelong dream can be realized.
ML: I agree!
IC: Your book has been criticized as too Manichean, as presenting the battle over high frequency trading as having good guys and bad guys—
ML: I don’t set out to contrive a narrative. In this case, far more so than in any other book I have written, there really are good guys and bad guys. Part of this may be that they aren’t incentivized to be bad, the way the bad guys are. Their interests are not as screwed up. But it is blacker and whiter than my other material.
The heroes are the people who went to figure this stuff out about high frequency trading. And I do think of them as heroes. They were so dogged in their investigation. It wasn’t obvious that it paid them to engage in it. They pissed off so many people on Wall Street. They have taken risks with their careers. They have also done two things. They have tried to figure out all the forms of predatory activity that are occurring because of the ways the market has been audited. And they have tried to figure out how to build an exchange where this can’t happen.
Let’s compare it to The Big Short. There were heroes in that book, or rather protagonists. But the protagonists were shaded by the fact that they were making a personal fortune betting on the collapse of America. There were plenty of readers who thought they were scumbags. I didn’t think that but many did. Now, one of the things that I did not do was put a face on the villains. I wanted to emphasize the system. I was really worried that everyone would focus on the face rather than the system—exchanges, banks. My guys focused on this, and that’s great.
IC: Some reviews speculated that your book didn’t have villains because you didn’t have access to them.
ML: I chose this. It perplexes me that people can read the book—professional journalists—and not have the imagination or the wit to see the work that wasn’t in the book. I interviewed people at 8, 9, 10 high frequency trading places. I heard other points of view. But they were not compelling.
IC: There is some joke here about the banality of evil.
ML: [Laughs] It’s true, in this case. Although many of the people in the system often don’t realize how bad it is. Having said that, 3 or 4 people who might have had a clear global view are still making hundreds of millions off this, and did not want to talk to me.
IC: You said the word "fraudulent" earlier, so let me ask: Do you feel what you are describing with these high frequency trading schemes is fraud?
ML: This is interesting. Eric Hunsader, at Nanex (which provides market data), has been good about identifying anomalies in the marketplace, and he tells me that in fact what is going on is a direct violation of regulations. He sent me this clause about how exchanges are not supposed to supply faster feeds for money than they do to the marketplace as a whole. So he argues everything that is going on is illegal. But it’s a subtle form of fraud because the SEC has been aware the whole time and has condoned it.
IC: There was a Wall Street Journal editorial that I guess was in part a response to your book. One of the points was that the regulators had allowed and even made the system, and so blaming Wall Street wasn’t fair.
ML: I agree with some of that. The problem is that the SEC is divided. Many people there are quite hostile to what has been going on but are not able to get any action from the political people above them. But it is true that as an institution it has indulged this, and it is not like they are ignorant. Having said that, the heroes of my book have been telling people at the SEC things they don’t know. But it is rather unfair to start throwing people in jail for things the SEC said was okay to do.
IC: It was interesting that people at places like Goldman Sachs also seemed concerned. At the same time, a lot of these big banks don’t know what is going on in their own house.
ML: It is true that these banks are so complicated and balkanized that the right hand didn’t sometimes know what the left hand was doing. I think what was actually happening in Goldman was that they at first thought of themselves as being able to make money. But then they realized they couldn’t compete with the smaller shops. They weren’t as technologically agile. And then guys walked in and figured this out and were shocked with what was going on in the Goldman Sachs dark pool. They were surprised how the stuff was run.
IC: On a different note, what effect did Moneyball have on journalism? Everyone wants to write their own Moneyball, it seems.
ML: That hasn’t occurred to me. What has occurred to me is the experience I am having right now. The most similar experience I have had is Moneyball, with people in an industry holding up disruptive mirrors. How do you think it affected journalism? I haven’t seen that.
IC: You know how people say Hollywood had Die Hard, and then they tried to make Die Hard on a boat and a plane etc?
ML: Who has ripped off Moneyball?
IC: The number of news articles that say something like, “Moneyball for Soccer…”
ML: I think there is a reason for this. In most spheres of business or human activity, the actual details are so tedious that they want a sports analogy. It makes their lives more interesting.
IC: What do you think of the state of financial journalism?
ML: I am going to give you a different answer than I would have two months ago because I have just watched the response to the book. On the one hand, there is a lot more of it. Bloomberg is just an empire that didn’t exist a long time ago. There is just more noise. On the other hand, the financial world has become way too complicated and very secretive. Since when did the stock market become a secret? And the journalists who report are at the mercy of their sources and easily manipulated. Stuff is hard to find out.
IC: Is that true in other fields?
ML: Not sports, or politics, or Hollywood. It is true in the military, maybe. The Pentagon. Something like that. But finance is peculiar. The combination of the complexity and the willingness of sources puts journalists in a tough position. And the emphasis, as everywhere else, is on speed. So, I don’t know, it’s not horrible. But there is a market for people willing to take their time and figure things out.
This interview has been edited and condensed.