Flash Boys: Not So Fast -- An Insider's Perspective on High-Frequency Trading

by Peter Kovac

Quick Summary

A detailed rebuttal of Michael Lewis's "Flash Boys" written by a former high-frequency trading executive. Kovac, who was COO of one of the largest automated market-making firms in the U.S., systematically challenges Lewis's claims that the stock market is "rigged" by high-frequency traders, arguing instead that electronic market-making has dramatically reduced trading costs for all investors and that Lewis's protagonists at IEX were primarily motivated by competition from more efficient market participants who displaced traditional bank traders.

Detailed Summary

Peter Kovac's "Flash Boys: Not So Fast" functions as a chapter-by-chapter companion to Michael Lewis's bestselling "Flash Boys," providing an industry insider's counterpoint to Lewis's narrative about high-frequency trading (HFT). Kovac spent eight years as COO of EWT (later sold to Virtu Financial), one of the largest automated market-making firms in the U.S., handling regulatory compliance, risk management, and trading operations.

Kovac's foundational argument establishes critical historical context: prior to the electronic trading revolution, stock markets were dominated by designated "specialists" or "market-makers" who held de facto monopolies on executing orders in particular stocks. These monopolies consistently resulted in worse prices for investors, as documented in numerous scandals. The computerization of markets and the introduction of competition through Regulation NMS (2007) allowed entrepreneurial trading firms -- many of them far from Wall Street -- to compete with incumbents by offering better prices, smaller spreads, and faster execution.

On Lewis's central claim of "front-running," Kovac draws a crucial distinction between illegal front-running (trading ahead of known customer orders) and the legal activity of reacting quickly to publicly available information about market conditions. He argues that what Brad Katsuyama experienced -- his large orders being partially filled before he could execute across multiple exchanges -- was not evidence of front-running but rather a natural consequence of sending sequential orders to multiple venues in a fragmented market structure. Other participants legitimately adjusted their quotes in response to observable trading activity.

Regarding Spread Networks' fiber-optic cable from Chicago to New York (a key set-piece in Lewis's narrative), Kovac explains that the value of speed in markets is primarily about risk reduction for market-makers: the faster a firm can update its quotes to reflect changing conditions, the tighter it can price its spreads, which directly benefits all investors through lower transaction costs. Speed is not primarily about predatory strategies but about competitive efficiency.

Kovac addresses the claim that stock exchanges are complicit in favoring HFT firms by noting that exchange fee structures (maker-taker pricing) were designed to attract liquidity providers who post quotes (makers) by paying them small rebates, while charging liquidity takers who execute against those quotes. This structure incentivizes the provision of liquidity, which benefits all market participants.

The book cites data showing that transaction costs have declined 80% for retail investors over the past decade (per TD Ameritrade) and that Vanguard estimates saving $1 per $100 of stock traded. Kovac argues that the primary casualties of electronic market-making's rise are the traditional Wall Street equities traders -- people like Lewis's protagonist Katsuyama -- whose middleman role has been automated away, and who have a clear self-interest in portraying their displacers negatively.

Kovac acknowledges that the HFT industry is not without problems -- including certain aggressive strategies, questionable exchange practices, and the need for continued regulatory improvement -- but argues that Lewis's sweeping condemnation of an entire industry based on incomplete understanding does a disservice to the millions of investors who benefit from lower costs and better execution.