I greatly enjoy Michael Lewis and his books, but Flash boys was extremely inaccurate, full of factual errors. I've worked in the finance industry, in HFT at one of the firms mentioned in the book. I joined around the time Flash Boys came out, and it was required reading in the firm. Here are some points:
- Michael Lewis really only got one side of the story - that of Brad Katsuyama, who had a vested interest in casting HFT players in a bad light to promote his own business - building the new exchange IEX.
- Brad also blamed HFTs for systems at RBC failing to make massive trades like they used to. There was nothing nefarious here - RBC had just fallen behind the time in technology, like trying to send a Fax in a world where everyone already uses Email. If Brad, or RBC, or RBC software engineers picked up the phone and called any of the exchanges, they would probably gladly update them on the industry and save them all the work of re-discovering it themselves.
- The claims about front-running are completely false. Front running would mean that a market maker somehow knows someone's orders at two different exchanges and somehow is able to "get in front of the line" or even know that those orders belong to the same person. This would mean the exchanges leak information or allow certain users "ahead of the queue". None of this is true. What Michael Lewis called front-running, was HFT firms reducing their risk on other exchanges when they would get traded against on one exchange. They did this without any knowledge that Brad Katsuyama was on the other end, or that he was just late trying to make the same trade at another exchange at a later time. There are no guarantees that you can make the same trade at different exchanges - the same rules apply to everybody.
- Unsurprisingly, IEX as an exchange is no different from others, in that they need market makers (a.k.a. HFTs) to provide liquidity on their exchange. I wrote the code for the FIX gateways to connect our firm to IEX, and it was all business as usual.
I work in the industry too and the things that people mislabel as "front running" is really aggravating. At worst, you could call it "order anticipating": using publicly available knowledge to figure out that if someone hit Exchange A and B, they're probably headed to Exchange C next. But they have no inside knowledge that the same party will in fact send an order to Exchange C next. They're taking a risk by anticipating that.
"Front running" as defined by the SEC has a more narrow definition. It basically means that you have a customer that has placed an order for XYZ and you aware of the order, but you placed your own order to be executed in front them, thus forcing them to buy it from you at a higher price than if their order was executed first. HFTs are not "front running" anybody.
This book explains what the stock market actually is: https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393...
It's much less friendly than it seems and only "efficient" for a select few.