Coming Soon: An Executive Summary of ‘Inheritance: How Our Genes Change Our Lives–and Our Lives Change Our Genes’ by Sharon Moalem / Also New and of Interest This Week

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‘Inheritance: How Genes Change Our Lives–and Our Lives Change Our Genes’ by Sharon Moalem (Grand Central Publishing; April 15, 2014)

 

A full executive summary of the new book by Sharon Moalem called Inheritance: How Our Genes Shape our Lives–and Our Lives Shape Our Genes will be available here on Tuesday, April 29. A podcast discussion of the book will be available shortly thereafter. A preview/synopsis of the book will be available here on Tuesday, April 22.

*To check out the book at Amazon.com, or purchase it, please click here: Inheritance: How Our Genes Change Our Lives–and Our Lives Change Our Genes. The book is also available as an audio file from Audible.com here: Audio Book

Here is a trailer for the book:

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Also new and of interest this week:

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Random House; April 8, 2014

#1. Creativity Inc.: Overcoming the Unseen Forces That Stand in the Way of True Inspiration by Ed Catmull

Book description from Amazon.com:

From Ed Catmull, co-founder (with Steve Jobs and John Lasseter) of Pixar Animation Studios, comes an incisive book about creativity in business—sure to appeal to readers of Daniel Pink, Tom Peters, and Chip and Dan Heath.

Creativity, Inc. is a book for managers who want to lead their employees to new heights, a manual for anyone who strives for originality, and the first-ever, all-access trip into the nerve center of Pixar Animation—into the meetings, postmortems, and “Braintrust” sessions where some of the most successful films in history are made. It is, at heart, a book about how to build a creative culture—but it is also, as Pixar co-founder and president Ed Catmull writes, “an expression of the ideas that I believe make the best in us possible.”

For nearly twenty years, Pixar has dominated the world of animation, producing such beloved films as the Toy Story trilogy, Monsters, Inc., Finding Nemo, The Incredibles, Up, and WALL-E, which have gone on to set box-office records and garner thirty Academy Awards. The joyousness of the storytelling, the inventive plots, the emotional authenticity: In some ways, Pixar movies are an object lesson in what creativity really is. Here, in this book, Catmull reveals the ideals and techniques that have made Pixar so widely admired—and so profitable.

As a young man, Ed Catmull had a dream: to make the first computer-animated movie. He nurtured that dream as a Ph.D. student at the University of Utah, where many computer science pioneers got their start, and then forged a partnership with George Lucas that led, indirectly, to his founding Pixar with Steve Jobs and John Lasseter in 1986. Nine years later, Toy Story was released, changing animation forever. The essential ingredient in that movie’s success—and in the thirteen movies that followed—was the unique environment that Catmull and his colleagues built at Pixar, based on philosophies that protect the creative process and defy convention, such as:

• Give a good idea to a mediocre team, and they will screw it up. But give a mediocre idea to a great team, and they will either fix it or come up with something better.
• If you don’t strive to uncover what is unseen and understand its nature, you will be ill prepared to lead.
• It’s not the manager’s job to prevent risks. It’s the manager’s job to make it safe for others to take them.
• The cost of preventing errors is often far greater than the cost of fixing them.
• A company’s communication structure should not mirror its organizational structure. Everybody should be able to talk to anybody.
• Do not assume that general agreement will lead to change—it takes substantial energy to move a group, even when all are on board.

*To check out the book at Amazon.com, or purchase it, please click here: Creativity, Inc.: Overcoming the Unseen Forces That Stand in the Way of True Inspiration. The book is also available as an audio file from Audible.com here: Audio Book

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Simon & Schuster; April 8, 2014

#2. The Boom: How Fracking Ignited the American Energy Revolution and Changed the World by Russell Gold

Book description from Amazon.com:

Russell Gold, a brilliant and dogged investigative reporter at The Wall Street Journal, has spent more than a decade reporting on one of the biggest stories of our time: the spectacular, world-changing rise of “fracking.” Recognized as a finalist for the Pulitzer Prize and a recipient of the Gerald Loeb Award for his work, Gold has traveled along the pipelines and into the hubs of this country’s energy infrastructure; he has visited frack sites from Texas to North Dakota; and he has conducted thousands of interviews with engineers and wildcatters, CEOs and roughnecks, environmentalists and politicians. He has also sifted through reams of engineering reports, lawsuit transcripts, and financial filings. The result is an essential book—a commanding piece of journalism, an astounding study of human ingenuity, and an epic work of storytelling.

Fracking has vociferous critics and fervent defenders, but the debate between these camps has obscured the actual story: Fracking has become a fixture of the American landscape and the global economy. It has upended the business models of energy companies around the globe, and it has started to change geopolitics and global energy markets in profound ways. Gold tells the story of this once-obscure oilfield technology—a story with an incredible cast of tycoons and geologists, dreamers and drillers, speculators and skeptics, a story that answers a critical question of our time: Where will the energy come from to power our world—and what price will we have to pay for it?

*To check out the book at Amazon.com, or purchase it, please click here: The Boom: How Fracking Ignited the American Energy Revolution and Changed the World. The book is also available as an audio file from Audible.com here: Audio Book

Get 50% off your first 3 months at audible.com!

#56. A Summary of ‘Flash Boys: A Wall Street Revolt’ by Michael Lewis

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‘Flash Boys: A Wall Street Revolt’ by Michael Lewis (W. W. Norton & Company; March 31, 2014)

Table of Contents:

i. Introduction/Synopsis

PART I: THE MYSTERY: ELECTRONIC FRONT-RUNNING

1. Brad Katsuyama

2. Brad Katsuyama’s Problem (and the Stock Market’s Problem)

3. Going Beneath the Surface: Katsuyama’s Detective Work Begins

  • 3a. Background: How the U.S. Stock Market has Changed Over the Past Decade
  • 3b. The Detective Work: Katsuyama’s Experiments

4. Thor, the Hammer!

PART II: SOLVING HIGH-FREQUENCY TRADING

5. The Detective Work Continues: Investigating HFT

6. HFT Unraveled

7. Market Turbulence, and the Flash Crash

8. The Hammer Gets Fixed

9. Thor’s Sales

PART III: COMBATING HFT (AND WALL STREET)

10. The Evolution of the Corruption on Wall Street: 2005-Present

  • 10a. Corruption in the Public Exchanges
  • 10b. Corruption in the Big Banks and Their Dark Pools

11. Katsuyama’s Trip to the SEC

12. A New and Improved Stock Exchange

13. An Ungameable Stock Exchange

PART IV: THE MOTHER OF ALL STOCK EXCHANGES: THE IEX

14. The IEX Takes Flight

15. IEX’s Data

16. Goldman Sachs Backs IEX

17. Conclusion

 i. Introduction/Synopsis

Over the past 20 years, and particularly in the past decade, the stock market has undergone some significant changes. The most visible change is that much of the action has now become computerized. For example, whereas stock markets used to consist of trading floors, where floor traders swapped stocks back and forth, we now have computer servers where sellers and buyers are connected automatically. Now, on the one hand, this automation has led to some substantial efficiencies, as once necessary financial intermediaries have now largely become obsolete (this has led to savings not only because the old intermediaries earned an honest commission for their dealings, but because their privileged position sometimes led to corruption).

It is not that the new stock market has done away with intermediaries entirely. Take brokers, for example. Brokers are still used by large investors to help them move large chunks of stock where the market may not be able to fill the order immediately. The brokers take some risk in this action, and provide liquidity in doing so—since they help move capital to its most useful location—and thus brokers still provide a very useful service.

While brokers have always existed, the new stock market has also added a new breed of intermediary. This new breed of intermediary is known as the high-frequency trader (HFT). The high-frequency trader operates on speed, relying on location and advanced communications technology to learn about the movement of the market before others, and uses this knowledge to make winning trades.

To give you an indication of how important high-frequency trading has become, consider that at least half of the trades now being made in the United States are coming from high frequency traders.

Those who defend high-frequency trading argue that these quick trades actually help move money through the stock market, and thus add liquidity to the system (the way brokers do); and that, therefore, high-frequency traders provide a valuable service.

However, just how high-frequency trading works has largely remained a mystery to anyone outside of the industry itself; and many have become concerned that at least some forms of high-frequency trading are not so much liquidity-contributors as a way of scalping money off of trades that would have happened anyway.

In Flash Boys: A Wall Street Revolt, Michael Lewis follows one man who made it his mission to find out what was going on at the heart of HFT. That man is one Brad Katsuyama, a broker from the sleepy Canadian bank RBC.

Katsuyama’s interest in the mystery began back in 2007, when he found that the trades he was trying to make from his desk at RBC were not being executed in the way they once had. In short, Katsuyama was being ripped off. And that’s not all. Katsuyama soon found that other brokers were also being ripped off—which meant that the big investment firms who were entrusting their money with the brokers were being ripped off too. And since the investment firms manage your money and mine, we were being ripped off as well!! This was big.

Katsuyama’s dogged persistence eventually led him (and a growing band of fellow mystery-solvers) to find that it was indeed the high-frequency traders who were ripping him (and everyone else) off (though the HFTs were not the only culprits involved). What’s more, Katsuyama’s team also discovered just how the HFTs were doing it. The long and the short of it is that the HFTs are just gaming the technology. And in a way that is not only ripping others off, but making the system more volatile, and prone to errors and disasters as well (witness the flash crash of May 6, 2010).

Rather than deciding to join the HFTs at the trough (which would have been easy enough to do), Katsuyama and his team decided to fix things. Specifically, the team decided to start their own stock exchange: a stock exchange (called the IEX) that was designed to be immune to advantages in technology, and hence fundamentally fair to all (it was either that or wait around for the SEC to do something—which may take forever).

Now, you would think that a stock exchange that is fundamentally fair to all would be a big hit. But then again, a whole heck of a lot of people have no interest in making things fair to all. Which side will win? The fate of the IEX (which opened in October of 2013) has yet to be determined…

Here is Michael Lewis on Charlie Rose explaining how he got the idea for his new book:

What follows is a full executive summary of Michael Lewis’s Flash Boys: A Wall Street Revolt.

PART I: THE MYSTERY: ELECTRONIC FRONT-RUNNING

1. Brad Katsuyama

In 2007, Brad Katsuyama was working as a stock broker for RBC, in New York (actually, Katsuyama was the head of RBCs brokerage team, which consisted of some 20 traders [loc. 356]).

Katsuyama’s main role was to mediate between large investment firms and the public exchanges (such as the NYSE and Nasdaq). Specifically, Katsuyama bought large chunks of stock (tens of thousands, hundreds of thousands, and even millions of shares at a time) from the large investment firms, and then turned around and sold them on the public exchanges (loc. 414-18).

The reason investment firms do not sell these large chunks of stock directly to the market themselves is because often the exchanges only carry demand for a fraction of the shares the investment firms are looking to sell. So, for example, an investment firm (let’s call them INV) might be looking to sell 3 million shares of Intel, while the exchanges show demand for only 1 million shares (at a best bid price of $3.72 per share). Offloading the full 3 million shares directly on the market would take INV time and effort, so they get people like Katsuyama to do it for them (for a price, of course).

It would be unclear, of course, just what price Katsuyama would be able to get for the 2 million shares he would have to sell over and above the 1 million the market had a demand for immediately; therefore, Katsuyama would be taking a risk by buying the lot en masse. As such, the price per share that Katsuyama would be willing to pay INV would have to be lower than the current market price of the share. So let’s say the price per share that INV and Katsuyama agreed on was $3.66 per share. Katsuyama would sell the first 1 million shares to the market for $3.72, and then “work artfully over the next few hours to unload the other 2 million shares” (loc. 418). So long as Katsuyama could sell the remaining 2 million shares for an average price of $3.63 per share, he would at least break even. (Obviously, any price higher than that would earn him a tidy profit, and any price lower than that would earn him a hurtful loss [hence the risk]).

By buying and selling shares that might otherwise have sat still, Katsuyama was helping move money through the stock market from where it was less valuable to where it was more so, and hence providing liquidity—which is, of course, valuable in any capitalist system (loc. 418).

2. Brad Katsuyama’s Problem (and the Stock Market’s Problem)

At the moment, though, Katsuyama was having a problem. Specifically, when he went to sell the first million shares of Intel for $3.72, he found that he was not able to make the full sale. Rather, he might sell a few hundred thousand shares for $3.72, and then the price would collapse (loc. 429). This was not supposed to happen. Sure, the price of a share might legitimately move lower after a large sale of 1 million shares had occurred, but that was not what was happening here. Instead, the price of the share was collapsing before the full trade of 1 million shares had even gone through. The market was reacting to Katsuyama not after he had made his move, but in the middle of doing it (loc. 429-58).

This happened time and again, and both the size of the original order that went through, and the price collapse were largely unpredictable; thus, in effect, Katsuyama no longer had an accurate indication of what the market actually was (loc. 422). This was a major problem. As Lewis explains, Katsuyama “had been supplying liquidity to the market; now, whatever was happening on his screens was reducing his willingness to do it. Unable to judge market risks, he was less happy to take them” (loc. 421; see also loc. 440).

Katsuyama wasn’t the only broker at RBC running into this problem; indeed, all of them were (loc. 467). And this was costing RBC big money: “at the end of 2007 Brad [Katsuyama] conducted a study to compare what had happened on his trading books to what should have happened, or what used to happen, when the stock market as stated on his trading screens was the market he experienced.  ‘The difference to us was tens of millions of dollars’ in losses plus fees, he said. ‘We were hemorrhaging money.’” (loc. 470). (Lewis refers to his characters by their first names throughout the book. I prefer to stick to the more formal approach, and will use last names only).

At first, Katsuyama thought that the problem lay in RBCs equipment (loc. 436, 463). However, it quickly became clear that this was not the case; for the more Katsuyama poked around, the more he found that many others (far removed from RBCs equipment) were experiencing the same problem. For example, Katsuyama went to a friend of his working for SAC Capital who was using technology provided by Goldman Sachs and Morgan Stanley, and found that his friend was running into exactly the same problem he was. As Lewis explains, “right away [Katsuyama] saw that, even though his friend was using technology given to him by Goldman Sachs and Morgan Stanley and the other big firms, he was experiencing exactly the same problem as RBC: The market on his screen was no longer the market. His friend would hit a button to buy or sell a stock and the market would move away from him. ‘When I see this guy trading and he was getting screwed—I now see that it isn’t just me. My frustration is the market’s frustration. And I was like, Whoa, this is serious.’ Brad’s problem wasn’t just Brad’s problem. What people saw when they looked at the U.S. stock market—the numbers on the screens of the professional traders, the ticker tape running across the bottom of the CNBC screen—was an illusion” (loc. 555).

Katsuyama recognized now that the market had to be set-up, and that the set-up was occurring through the technology, he just didn’t know how: “‘That’s when I realized the markets are rigged. And I knew it had to do with the technology. That the answer lay beneath the surface of the technology. I had absolutely no idea where. But that’s when the lightbulb went off that the only way I’m going to find out what’s going on is if I go beneath the surface’” (loc. 555).

3. Going Beneath the Surface: Katsuyama’s Detective Work Begins

Katsuyama was now determined to get to the bottom of the mystery, and since RBC was losing so much money, they were willing to back him in the effort. As Lewis explains, “Brad persuaded his superiors at the Royal Bank of Canada to conduct what amounted to a series of science experiments in the U.S. stock markets. For the next several months he and his team would trade stocks not to make money but to test theories—to try to answer his original question: Why was there a difference between the stock market displayed on his trading screens and the actual market? Why, when he went to buy 20,000 shares of Intel offered on his trading screens, did the market only sell him 2,000? To search for an answer, RBC agreed to let his team lose up to $10,000 a day” (loc. 636).

3a. Background: How the U.S. Stock Market has Changed Over the Past Decade

Before we launch into Katsuyama’s experiments, it is important to review just how the American stock market works nowadays, for it  has in fact undergone some enormous changes in just the past number of years.

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*For prospective buyers: To get a good indication of how this (and other) articles look before purchasing, I’ve made several of my past articles available for free. Each of my articles follows the same form and is similar in length (15-20 pages). The free articles are available here: Free Articles