Dan DeFrancesco: The Other Side of the Story

When I first got a job at Waters I asked US editor Anthony Malakian if there were any reading  materials I should check out to better understand the topics I’d be covering. He gave me a few suggestions, but the one that stood out to me was Michael Lewis’ Flash Boys. 

I had read some of Lewis’ other books (Moneyball, Liar’s Poker, and The Blind Side) and was a fan of his style. Lewis takes potentially boring (offensive line play in The Blind Side) or complex (the bond market in Liar’s Poker) subjects and makes them interesting with his character development. When you read a Lewis book, you aren’t just learning about a topic; you’re learning about the people. 

Flash Boys was an interesting read, but I was disappointed in the lack of perspective from high-frequency traders (HFT). I had been warned by Anthony that the book was a bit one-sided, but I didn’t expect there to be basically zero representation of HFT firms. Granted, as a fellow journalist, I can appreciate the difficulty of getting anyone in the capital markets to talk about touchy subjects. However, there are two sides to every story, and it’s only fair to show both of them.

Life as an HFT

As you can see here, I had the chance to hear that other side of the story. This month I profiled Mike Madigan, CTO of WH Trading, a proprietary trading firm located in Chicago. During our conversation, I asked Madigan about how the landscape of HFT had changed since Flash Boys was released. Madigan admitted that he is not a regulations expert—technology is his bread and butter.

What he did say, however, was that WH Trading has remained the same despite the new, increased scrutiny on HFT firms. He admitted that there are a few bad apples in the space, but that’s something that rings true for every industry. The majority of people involved in HFT have good intentions, according to Madigan, although what he finds frustrating is the stream of regulations that put added stress on the firm. HFT firms have to be on guard at all times to ensure they have all the necessary data on their trading operations for compliance purposes. 

Times Are Changing

Madigan gave an example of how things have shifted since the release of Flash Boys. A few years ago, one trader might change their quote, causing another to change theirs, making the original trader change their quote again, and so on. This would eventually lead to oscillation in the markets. The Chicago Mercantile Exchange (CME) would call and ask the firms to look at it, the spread would widen and the issue would be solved, according to Madigan. Nowadays, that incident has quite a different outcome, he says. 

“Now, if you do something like that, not intentionally, you’re doing something detrimental to the exchange, and you’re in big trouble. You had better have all of the documenting logs, audit logs, application logs and whatever,” Madigan explained. “It’s just a little scary, because everybody in here are solid, good guys. Nobody is trying to do anything that would cause trouble in the markets. But there is that fear that something could happen. Do I have all my i’s dotted and my t’s crossed? Do I have everything that these guys are going to want from me if something happens? How far back do I have to keep it? A lot of that is kind of gray; that’s what concerns us.”

The popularity of Flash Boys among the general public hasn’t helped. It fits a narrative most people are all too willing to accept: Here is another way Wall Street is looking to screw over everyone else. At the end of the day, that type of thinking is easier to swallow than actually trying to understand what’s really going on. 

“I guess it’s easier to point the finger at somebody who has been successful,” Madigan said. “You spend millions upon millions of dollars to build this. But people always like to point the finger at the guy who did well and say: ‘Oh, he must be doing something underhanded.’”