Michael Lewis’ Flash Boys gives us an interesting, yet somewhat biased glimpse about life as a high-frequency trader. As controversial as it may seem, it is an entertaining book that has roots in reality. In all its glory, Lewis’ book offers the secrets of the insider, an elite group, known as high-frequency traders (HFT). But some secrets are not all laid out. Some are left for the reader to search on their own. At the end of Flash Boy’s Lewis entices the reader by cryptically mentioning the tower, operated by the owner of FCC license number 1215095.

Who owns the FCC license to use this elusive tower? Michael Lewis does not tell us, wanting the reader to search the Internet for the answer. In the blogs at the Wall Street Journal, Moneybeat confirms: “…the license in question here belongs to Epsilon Networks, a joint venture between a brokerage company BGC Partners Inc. and a high-frequency technology company, Thesys Technologies LLC. Thesys is the technology arm of Tradeworx Inc., a high-frequency trading firm founded by Manoj Narang.”

The FCC license number 1215095 allows use of a microwave tower located in Pennsylvania. The premise of this tower (FCC license number 1215095) is to send stock quotes at lighting fast speed to the firms sending orders to the exchanges, the HFTs and the exchanges themselves. The appeal of high-frequency trading, after all, is the speed and ability to make money fast. Michael Lewis makes this industry seem glamorous. The fact is, high-frequency trader’s watch and gather data, but they have the edge because they can gather that data faster than you. Picture a “flash boy” sitting in a room with six computer screens working the algorithms to sell off at a moment’s notice. Sort of makes you think of James Bond, but nerd—HFT agents.

Michael Lewis using metaphors indicates that if you know the rules of the game then you can win the game—if you know what to look for. However, Michael Lewis asserts that maybe there are some cheats in the game and some possible indiscretions. And maybe even some core weaknesses in the industry. 

Since the FCC license number 1215095 tower transmits microwaves from one place to another, that signal can be disrupted, perhaps to result in a market crash. But can disrupting one signal make a whole market come to a screeching halt or is there more to it? What is the REAL problem with HFTs?

Mainly, it is about “front running”. Michael Lewis does his part in superficially explaining how high-frequency traders may be able to “front run” orders. They do this by gathering order data (through an infrastructure point, like the now infamous tower of FCC license number 1215095), and then sending an order to execute the same trade, but faster than the customer order. The way this results in a profit is when the original order arrives in the market (after the HFT trade is filled) that order can move the stock price in favor of the HFT trader.

For example, a fund manager—let’s call him Joe—electronically sends an order to buy 100,000 shares of Apple stock (AAPL). The HFT trader recognizes this order and sends his own order to buy AAPL stock that makes it to the exchange before Joe’s order does—front running it. The HFT buys the AAPL stock a millisecond or two before Joe does. When Joe, then, buys his 100,000 shares of AAPL (a millisecond or two later), that demand pushes the price of AAPL stock up a few pennies at which point the HFT trader then sells the stock he just bought (yes, after just a millisecond or two) for a few cents profit on that 100,000 block. Now multiply this, sort of activity, by thousands of trades. HFT traders can have a nice little business. But the question is, is it legal. And if it is, is it moral?

Michael Lewis made quite a splash blasting high-frequency traders as being corrupt and taking that corruption to new extremes. The underlying theme of Flash Boys would suggest how the stock market could be manipulated to taking (at best) advantage of regular traders and (at worst) leading to market instability and a potential crash. This is, certainly, one way to spin this tale of secrets, lies and deception of the mysterious Flash Boys. But, could HFT traders provide a benefit to the market? They create volume. They create liquidity. In fact, there are many other HFT techniques that do not involve front running and ripping off the average investor. Perhaps the blanket demonization of HFT traders may be somewhat extreme.

Technology has taken some of the the appeal out of trading. Making it seem not exciting or glamorous with just seemingly mundane blinking green and red numbers on a screen. However, the thing with tech is you can manipulate it—and even make glitches work to your advantage. HTF trading is not your great-great-grandfathers Morris code-esque technology. It is highly sophisticated. One of the big concerns for regulators and market participants is the possibility of something going wrong. Cables can get cut, towers can fall down, power outages may occur and the system can get hacked, and yes, some unscrupulous traders may try and play the system… Indeed it seems that for now, it is Michael Lewis’ Flash Boys that get the last laugh.

Amy Boggs, Traders Exclusive