Stretching the Truth

By Lloyd Graff.

The American Girl Doll, Ivy, that Lloyd’s granddaughter Eliana received for her birthday (left)

My oldest granddaughter Eliana celebrated her 9th birthday Monday, and her grandmothers splurged on an American Girl doll for her present. She and her sisters love these dolls and they have a small family of them accumulated from several birthdays.

I am fascinated by the success of the doll company, started by Pleasant Rowland in 1986 on a shoestring, an idea and a bit of a lie. She sold her company, called Pleasant Company, to Mattel (owner of Barbie™) in 1998 for $700 million cash.

I have enormous respect for Rowland as a marketer. She built a brand based on history, wholesomeness, and quality that has endured and grown hugely under Mattel’s management. But she fudged the story about the genesis of the doll in her early catalogues. In Rowland’s story of the American Girl Doll, she writes that “deep in the basement of a small museum lies a tattered, water-stained doll trunk. Open the dusty lid and the long-ago childhood of some lucky girl comes instantly to life. Tucked gently inside a beautiful porcelain doll – dearly loved and much played with. I discovered this trunk by chance more than a year after I had begun working on the American Girl Collection. It served as a powerful reminder of why I had begun the collection, and what I hoped it would accomplish.”

However, the story written around this doll and its image is false. The doll was purchased for Sybil Hanks (born 1908) by her parents and named Nancy Hanks. She was kept in pristine condition and never played with before being donated to the Wisconsin Historical Society in 1966 along with Hanks’ entire collection. When Rowland put the doll in the catalogue, it was placed by a water stained trunk to convey a “well-played with” image.

Rowland’s story stretched the truth a little, but don’t we all in business and in life? Haven’t we all said “you look mahvelous!” to a friend who needed a boost, even if they looked pallid and frazzled.

When is stretching the truth a “lie” and when is it just smart marketing or saying the right thing at that moment?

I listened to a fascinating TED talk recently on this subject by Dan Ariely, the brilliant social scientist and commentator. His topic was ‘“cheating” and “stealing” not just lying.’ His point is that we tolerate and even accept a lie if it is perceived not to hurt other people and is believed to be a “small one.” Telling a friend that they “look mahvelous” is probably not going to offend anybody but the most sensitive sourpuss.

But how about Patience Rowland’s little lie to the parents of 8-year-old girls? Did she violate the sense of honesty and purity she meant to convey in her doll creations by dramatizing a fiction to the parents and grandparents who were shelling out a paycheck for dolls and doll clothes dedicated to a purified image of wholesomeness?

I am in the “who cares?” category. We love our stories and myths. They bring meaning and depth to our humdrum lives. My beloved granddaughter Eliana cherishes her dolls and their families. She gobbles up the books about the imagined stories of her doll figures and embellishes her dolls with her own version of their biographies.

The purists who begrudge Patience Rowland her fortune because she saw gold in a romanticized doll story and executed her vision to perfection miss the point. Myths, even made of little lies, are the stuff of life. My Dad and I used to joke around that all our dirty oily screw machines were used by “a little old lady on Sunday.” If we ever found a pristine National Acme that had been sitting in government storage for 25 years, we would call it a “little old lady machine” and laugh.

Stretching the truth. Indulging a little lie. It’s business.

And “you look mahvelous” too!

Question: Is lying a sin?

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Hiring or Renting?

By Lloyd Graff.

As an owner of two small businesses, which are doing pretty well these days, I am in the throes of a daily decision making quandary. Do I hire more people, rent more people, or just watch which way the wind is blowing? This is a very real problem for me and I sweat it almost every week.

The unemployment/employment numbers display the split personality of the current American economy starkly. The Unemployment Rate and number of Unemployed Persons have decreased significantly over the last year. However, in June, the average workweek for all employees on private non-farm payrolls was only 34.5 hours for the fourth straight month. (

The Graff-Pinkert & Co. used machinery business is busy. Our machine cleaning and repainting area has been understaffed for years. This year we finally decided to do something about it by hiring a second shift. Rex Magagnotti, who watches over the plant, in addition to his major role in buying and selling machinery for the company, has been urging me too attend to our log jam of dirty machines for a long time. I hesitated spending the money, largely because of all of the add-on costs of full-time employees, particularly expensive health insurance. The compromise was to hire part-time people, summer people, and rented employees from temp agencies. This way I can get my elbow grease and cleaned machines without a sense of deep commitment to the folks we hire.

Like many small business owners, I am deeply invested in my employees.

Many have worked for the company for more than 20 years. They are members of the “Graff-Pinkert family.”

This was not the approach I took when I hired a new electrician and office manager last year. They were clearly full-timers, and I was all in with them. But for a second shift, I just wanted hardworking summer folks or people who knew they were temporary, and expendable. It’s the new American workforce, less than 30 hours a week, rental people from temp agencies like Manpower or contract workers.

I have learned that some workers also play the game very skillfully, maneuvering their hours so they can draw unemployment pay for many months after their mediocre short-term work ends. I find this annoying, but if somebody is going to spend their creative talent on gaming the system, so be it. I have better things to do than worry about their petty shrewdness. They will never end up with good long-term jobs.

The Affordable Care Act (ObamaCare) is certainly one reason part-time employment is soaring and full-time jobs are scarce. As a hirer, I am always struggling with the calculation of whether a person is worthy of full-time employment and the huge premium I pay for such services. It is very difficult for a potential low skill hire to make a convincing case that they are worthy of the full timer premium.

The issue of the day is the push to almost double the minimum wage to $15 per hour. It is the rebound reaction to the dearth of high paying full-time jobs. If the inflated minimum wage becomes local or national law, the sure result will be shorter hours, fewer jobs, and high real unemployment. It will mean young workers will not get the vital experience they need to become productive, high-paying earners.

I sympathize with poorly paid part-time workers. Their plight stinks. I look at Graff-Pinkert’s best employees who learned skills on the job and prospered over the years. Today they would have a harder time getting in the door and proving their worth.

There is still plenty of opportunity for bright, ambitious, hard-working people – even those without a lot of book learning. But unless they have connections or good luck, the economy and the politicians are inadvertently pushing them into 29-hour jobs or difficult to stitch together freelancing gigs.

It’s tough out there, but I have to watch my bottom line. I will be rationing my full-time jobs and looking for talent for the short term.

Question: Is $15.00 per hour the right minimum wage?

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The Right Place at the Right Time

By Noah Graff.

See the video below

A few weeks ago, I published a blog about my video series on YouTube. It is a documentary of my Greyhound Bus trip from Chicago to San Francisco when I was 19, called Where Are You Going?

The series centers around the colorful passengers who included a chef from a nudist spa, a 36-year-old bi-sexual grandfather, a man who had just gotten out of jail, and a guy who lives on a ranch in seclusion, house sitting for free.

I also filmed my dad driving me to the bus station, imparting some last minute wisdom. One of the things he told me has stayed in my mind over the years. We discussed the concept of “being in the right place, at the right time.” I told him that I hoped the coming bus ride was going to change my life. He responded by saying that if a person is in the right state of mind, he can find meaning and importance in all kinds of places, perhaps anywhere. Therefore, being in the “right place” is mostly caused by the person, rather than mere chance or luck. The idea has proved true for me throughout my life, including during the experience of the bus ride, as I had hoped. People on the bus told me stories that I could never have made up, their views opened my mind, and they gave me an opportunity to create a unique work of art.

In the short video included in this blog, my diverse fellow passengers illuminate my dad’s belief that a person’s frame of mind affects what happens in one’s life. A person’s ability to see special things when they come along is essential for finding happiness and success.  Please have a watch. It’s my favorite video of the series.

Question: What is the best trip you ever took?

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Potential or Experience

By Lloyd Graff.

A young Billy Beane

In Michael Lewis’ great book, Moneyball, he writes about Billy Beane, now GM of the Oakland A’s, when he was a high school phenom outfielder. Beane was a sure first round draft pick, which at that time meant a $100,000 signing bonus. But there was conflict in the Beane household. His parents wanted him to sign a pro contract right out of high school. Billy wanted to go to Stanford on a full ride.

Beane told Lewis that he started doubting his own baseball talent after his junior year of high school. He saw other star players catching up to him physically, and his hitting confidence was starting to erode. His senior year he was still an exceptional player, but in his heart of hearts he doubted himself.

Billy Beane took the money and did make the Majors, but he was a fringe player. When he had the chance to get into baseball management he gladly gave up the uniform. He regretted rejecting his opportunity to attend Stanford.

Now Beane is considered one of the smartest General Managers in the game. His team is in first place with a tiny payroll. He just traded his number one minor league prospect and two other highly regarded minor leaguers to the Chicago Cubs for two quality Major League pitchers, Jeff Samardzija and Jason Hammel. Oakland is now one of the favorites to reach the World Series.

I believe Billy Beane’s memory of himself as an 18-year-old “next big thing” had  a lot to do with the trade. I think he is a bit of a skeptic about “potential.”

I see a parallel debate when running a business, whether it is machining, retail or software. You must constantly weigh potential versus production in your staff. If you go with mostly youth and enthusiasm rather than pros with at least 10,000 hours experience, you are going to run into trouble with errors in judgment that could screw up the business. If you go with seasoned pros you may see a lack of risk taking and a tendency to try to recreate out of date successes. The knack is to know when to bring in youth and when to rely on experience. If you can keep experienced people motivated and willing to expand their knowledge you have something quite special.

I wish I had a guaranteed formula for success, but I think observing the Billy Beane approach in baseball is instructional. Stock up on youth and promise, but don’t be afraid to trade it in for veterans when they can seal the deal.

Question: Is your company looking to hire experienced pros or potential?

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Is Soccer Boring?

By Lloyd Graff.

All hail soccer, the great American sport, as we cheer and lament the U.S. futbol team that competed valiantly in the World Cup in Brazil. After the tournament, many of our best players will return to their respective European pro teams, and we will once again become indifferent to the boring “minor” league soccer (MLS) played in our country.

The MLS has been piddling along now for 18 years, following other incarnations of the world’s favorite sport in the U.S. Now it is reformulating itself once again, with some of the richest guys in the world buying into what they see as a virgin market opportunity–a chance to appeal to the millions of middle class kids running all over the “pitch,” only to ignore the game once they reach their twenties.

Can it play in Paducah? Will Americans ever buy into professional football (soccer) like they do in England, Argentina and Mexico?

I think it really is possible. Some people theorize that the utter ineptitude of the MLS folk to generate an audience is really a brilliant conspiracy by several NFL team owners to sabotage the league and safeguard the value of their National Football League properties. It may sound a bit far-fetched to bamboozle soccer as a defensive move, but the explosive growth in the value of an NFL franchise over the last 18 years coinciding with the boring product of the MLS makes the theory at least worthy of mention.

It is possible that with American kids’ participation in American football and baseball both on the wane, those super wealthy people pushing the rebranding of soccer here are finally going to strike a chord with the American public. American football is struggling with litigation and the devouring of its best players by injury. I think the game has peaked both in participation and popularity. Baseball is importing much of its talent from the Caribbean and Asia. This is also not a recipe for long term American fan support.

The National Hockey League, a truly international league, has found new life spurred by suburban hockey rinks and HDTV that finally makes the game television worthy. The NBA is also an example of a successful world league with its Champion San Antonio Spurs. The polyglot group of guys from Argentina to Mars is an archetype for world peace. But basketball still has its heart in the city playgrounds and backyard backboards throughout America.

Sports do go up and down in popularity. Could anybody have predicted the popularity of Mixed Martial Arts 10 years ago?

In my opinion, it is too early to say whether football (soccer) can actually take off as a spectator sport here. But I do think that this time around, some serious foreign money is really going to try to change our taste. If Americans can learn to love sushi and make the avocado the equivalent of the apple in today’s kitchen, we can adopt the world’s favorite sport.

The National Football League should be worried.

Question 1: Is the NFL too brutal?

Question 2: Is soccer boring?


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Thinking of Chicago in Silicon Valley

By Lloyd Graff.

This modest 1300 square foot 3-bedroom 2-bath home in Palo Alto, sold for $1,750,000 in February of 2014.

What’s going on in the world? This is how it looks to me after two weeks in Silicon Valley, on sort of a vacation.

The U.S. economy continues to rebound – but rather like a partially deflated basketball. Growth is tepid after a rough first quarter when the ferocious five-month winter in the North killed retail. Yet the numbers show unemployment receding, with some of the long-term unemployed actually finding work, but wage growth is still very light.

New home sales are mediocre, mortgage rates are trending down again. Home re-sales are robust in San Francisco, San Diego and Boston, but mediocre in Chicago and New York. Detroit is bouncing back again, but it is long way from getting out of the toilet. Some people expected Baby Boomers to be moving en masse to apartments but it is not happening. A weak home market, especially in suburban markets, and high prices for apartments and condos in city centers make an exodus by boomers to the city uneconomic. A Boomer exodus to warmer climates has been slow to happen, probably because 60-70-year-old folks feel they need to work more to afford a pensionless retirement with incredibly minuscule interest on savings.

I have an unusual view of the housing, Baby Boomer and unemployment world. I live in the depressed area of the Southern Suburbs of Chicago, in the once high-end suburb of Olympia Fields. It is the home of the elite Olympia Fields Country Club, which hosted the 2003 U.S. Open Golf Tournament. Back in the day, it allowed no Blacks, Jews and probably not Eskimos, if any ever applied. Today it cannot afford to be quite as restrictive. A middle class Navajo might pass muster. Olympia Fields ranked in the top five Chicago suburbs 35 years ago. Today it might make the top 40 in the Chicago metropolitan area.

My 3000 square foot home is worth slightly more than the $136,000 we paid for it in 1979. My wife and I have put a ton of money into improvements for it. It is within walking distance of the Metra commuter train. You can get to downtown Chicago in a half hour on the express train.

During the housing boom of 2004-2007, many African Americans used 100% financing to buy homes in Olympia Fields. A lot of them lost their homes a few years later. Several neighbors of ours are now renting their homes from lenders and speculators who are still buying up more homes in the neighborhood for a song. Half of the re-sales in Chicago’s suburbs are for cash these days. Low mortgage rates are for the few in 2014, not the masses. My neighbors, at least those that I know, are an eclectic group of bus drivers, teachers, doctors, lawyers and retired folks.

When my wife and I travel to Silicon Valley to see our daughter’s family, we see the bungalows built in 1959 up for sale, with full page ads in local newspapers. Usually they are unoccupied, staged with brought-in furniture, carpeting, lighting and landscaping to give the small houses drama. Prices start in the $1.5 to $1.8 million range and often attract overbids. It is unusual for a house to last a month on the market near Stanford University.

New multi-family housing is going up, but there are no available vacant lots to build single family houses. If you want to buy into the area, you play the game, otherwise, head 30 miles down the freeway where more affordable housing still exists.

We’ve now had the opportunity to see both ends of the housing spectrum. Chicago is generally still soft, but where we live it is toasted marshmallow soft. Some people see depressed housing prices as part of a conspiracy against African-Americans. This month’s cover story in The Atlantic is a long diatribe, arguing for reparations for Black people as compensation for 500 years of persecution. The story focuses on Chicago.

I’m wondering. Should I be paying reparations to my next door neighbors in Olympia Fields? I get the writer’s point, but America is not Nazi Germany. Olympia Fields is not Nuremberg.

America is a country of rich and poor, to be sure, but I do not feel the outrage that I see in the popular press or from self-serving politicians and professional do-gooders.

At Graff-Pinkert we recently hired several men, comprised of Hispanics, Whites, and African Americans, for our machine cleaning department at $10.50 per hour, no benefits. They are eager to work and found the job vacancy on Craigslist. Most of them are turning out to be good workers who don’t mind working hard and getting dirty.

It’s America, summer of 2014. Boomers keep on trucking. People are finding work if they are smart enough to read Craigslist, take their hats off, and make appointments on time. Googlers are paying $2 million for homes in Palo Alto that bus drivers would pay $150,000 for in Olympia Fields. If you mow grass for a living you make the same in both locations, but the season is longer in the Valley.

Question: Do people work harder today than they used to?

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Where Are You Going?

By Noah Graff.

Four days ago, I uploaded Where Are You Going?  to YouTube. It’s a documentary I shot when I was 19 years old about a trip I took on the Greyhound Bus from Chicago to San Francisco. In the film I captured the stories of my colorful fellow travelers. I interviewed Rick, a chef from a nudist spa in California, Robert, a 36-year-old bisexual grandfather, KC, a man who was living on a ranch in seclusion house-sitting for free, and Bill, a man who had just gotten out of prison. I wove their stories around mine, a 19-year-old filmmaker on my own journey, trying to figure out my path in life.

I hadn’t planned on putting Where Are You Going? on YouTube until about a year ago. I’ve been toiling over my latest movie, Saving Ferris, for several years now — I’m embarrassed to admit. It’s a documentary about the Chicago locations of Ferris Bueller’s Day Off, my favorite film, and I’m glad to say that I’m really happy with it. It’s by far the most professional movie I’ve made. So I decided it would be a good idea to release Where Are You Going?  first, to hopefully build a fan base before releasing Saving Ferris.

As I’ve been posting the videos on YouTube the last few days, I’ve been reflecting on my mindset as a carefree 19-year-old, going on one of the most important, coolest adventures of his life. At 19, I thought that one day I might go to Hollywood and be the next Quentin Tarantino — really, I did. I was making a feature length movie at 19 and was going to enter it in film festivals and thought I was going to be discovered. It was a great time in my life. I didn’t feel held down by the need to have a practical job. I had my dreams, I was young, I was doing cool stuff that other people my age weren’t doing, so why not me?

Where Are You Going never got into a film festival for one reason or another, but soon after I finished it, I began working on a new masterpiece. I made a documentary about a restaurant in Florence, Italy, called Trattoria Mario, where I frequented while studying abroad — I entitled it My Home In Florence. In many respects My Home In Florence was a better movie than Where Are You Going?, but it also wasn’t accepted into any film festivals. Then in 2007, I produced my third opus, Jew Complete Me, a reality show about my search to find the Jewish woman of my dreams. The show had a strong following for a while and was watched by people all over the world. As of yesterday, it had over 326,000 views on YouTube. While making it, I admit I still had the long shot dream that the right person would discover it and I would be thrust into the big time, like being paid to do real TV or movies — or something. But despite the show’s popularity that didn’t happen, nor did I find my soul-mate.

Making Saving Ferris, I had a different mindset than when I made the three previous major projects. Today I no longer have the aspiration to break into the commercial film industry. I like being a machinery dealer, and it provides a much easier lifestyle then 90 percent of folks in the film production business have. I’m not saying that many struggling professional filmmakers aren’t happy. They may feel totally fulfilled because they love what they do everyday. I still sometimes ponder what my life would be like if I had chosen that path. Maybe I could have been one of the lucky prosperous ones if I had just tried a little harder. But today, I see filmmaking in my life as a labor of love. It’s something I get to do, not something I have to do to pay the mortgage. I have the privilege of having fun using my creativity, and with the blessing of YouTube and social media I have the chance to exhibit my work to the world. I feel good in this situation, but I’d feel even better if my new videos could catch fire and be seen by thousands of people.

So if you have a few minutes, please check out Where Are You Going? (first episode also posted below). The first two out of 13 episodes are on YouTube, and the rest will follow in the next few weeks. I have also put a trailer up.

It’s a work I’m proud of, and I think many of you will enjoy it.

Question: When you were 19, what did you think you would do in the future?

Where Are You Going Trailer

Where Are You Going? (My Greyhound Bus Story) Episode 1

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Keeping Your Kid Alive

By Lloyd Graff.

Ed Damiano with Bionic Pancreas. Courtesy of NPR

I grew up around diabetes. Grandma Graff was a constant presence in our family. She was a practicing diabetic. She measured her food by the bite. Injections of insulin were like clockwork. To me, as a kid, she was diabetes. Her husband was also a diabetic but did not manage it well. I never met him. He died at 54. My father was diagnosed late in life and managed the disease quite well with finger pricking and injections.

When I heard the story Monday on National Public Radio about Ed Damiano’s obsession to build a viable robotic pancreas for his 15-year-old son David before he goes away to college, it really hit home.

Ed Damiano was an engineering professor when his son was diagnosed with Juvenile Diabetes at 11 months old. Some diabetic kids die sleeping in the middle of the night. Since the time David was diagnosed up until today, Ed has gotten up in the middle of the night to check if his son is still breathing. Ed has also put a monitor in David’s room, but the fear of the unexpected catastrophe has ruled his life. His wife Toby, a pediatrician, also knows the horrors of the illness only too well from her practice.

Ed moved away from academic life to focus on his obsession, building an artificial pancreas to keep his son alive and safe. His goal is to accomplish the feat before his son goes off to college.

His son’s pancreas cannot balance sugar and insulin for his body properly, so Damiano has developed a mechanical pump and system of measurement to act as a substitute organ which he calls a “bionic pancreas.”

The bionic pancreas is controlled by an App on the iPhone. It utilizes two small pumps mounted on the user’s body. A probe constantly monitors the user’s blood sugar level, then directs the pumps electronically to discharge the correct amount of insulin and glucagon to maintain proper levels. The bionic pancreas automatically makes a new decision for dosing every five minutes.

The device was tested on 52 diabetic teens and adults around the country and had great results. Now Ed has the go-ahead to let volunteers try it. Damiano is confident the bionic pancreas will be ready by the time David goes away to college.

I love this story because I have seen how uncontrolled body regulation can wreck lives. I love that the people in our medical industry who make creative devices like these often use turned metal parts of perfect dimensions coming off screw machines and CNC lathes.

The scourge of diabetes has not been cured, but because of the determined tinkering of Ed Damiano the day is approaching when a diabetic can almost live a normal life.

Question:  Are U.S. regulators too tough or too easy on new medical products?

Read the original NPR story here.

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Important Work

By Lloyd Graff.

Lisa Earle McLeod

Lisa Earle McLeod’s question is a simple one. “Do you have a Noble Purpose? Or do you just sell (make) stuff?”

I talked to her yesterday for quite awhile after she returned home to Atlanta from one of her many speaking gigs. I’m fascinated by outstanding public speakers, partly because I’m a mediocre one myself. I watched Ms. McLeod’s presentation on video and was impressed by her energy and authenticity. I wanted to get her take on public speaking and how it relates to her core message.

McLeod is a sales leadership consultant, whose clients include companies such as Merck, Google and Apple. Her career really started in high school. She was popular and decided to run for senior class Vice President. She had to give a speech to the class before the voting. She gave a great talk, she thought, and then lost the election. She asked a friend about her speech. The friend told her she “had put on a persona” and did not seem authentic. Lisa McLeod decided to learn from her defeat. She studied public speaking. She watched videos of the great ones like Steve Jobs, Tony Robbins and Bill Clinton. She found a professional coach and practiced. She told me you have to believe your own material, put in the time and energy to achieve mastery, and keep some bullet points in front of you, just in case you lose the thread and need a path back to your message.

Frankly, when I first heard of her work, my cynical self thought she was peddling recycled clichés. But after speaking to her and listening to her talks, she came off as real and her message had meaning.

A coal miner

McLeod argues that if you are working just to hit somebody’s numbers, even if they are your own, the work will get stale, quickly. People need to put an authentic human spin on their endeavors to fuel their motivation and be able to connect it to others.

The leader of a group can help the group forge an identity, but the group goal may not resonate with an individual’s purpose.

I have struggled with this notion throughout my career. Making a profit reselling a used machine tool hardly sounds noble to me, even if I spin it like a top and turn it inside out in my head. I’m not curing cancer. I’m not even milking cows or bending steel.

Yet I find myself absolutely engrossed in my game, even after doing it for over 40 years. When I got off the hospital ventilator six years ago, I had no doubt that I wanted to go back to the machinery trading business, and the writing game. They provided the challenge and intensity that I felt I needed in my life. For me, work is my creation. Connecting the dots in deal-making or writing a piece is what makes me feel happy and charged. When I go on vacation I don’t want to turn my juices off. My blogs are my little creations. Are they “noble”? Doubtful. But they give me energy and a reason to get out of bed and create something that did not exist before I applied my effort and frontal lobes to a problem or a blank sheet of paper.

My “Noble Purpose,” Linda Earle McLeod, is “to connect the dots to create value.” It works for me.

What is yours?

Question: Do you do important work?

For more info on Linda Mcleod visit her Web site at

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Book Review: Flash Boys

Jerry Levine.

Michael Lewis has written several great books about various marketplaces. Two standouts are Moneyball and The Big Short. These books extol the virtue of determining the true value of an item in an opaque market. How do you find the real value of a minor league baseball player or a securitized sub-prime mortgage bond fund, then exploit that knowledge to find a hole in the market?

Lewis’s most recent book, Flash Boys, takes the opposite tack. Here, the math oriented, technically superior high-frequency traders (HFT) who are exploiting the hole are the bad guys, even though they seem to have a lot in common with Oakland’s Billy Bean, or hedge fund manager Steve Eisman.

In Flash Boys Lewis takes on the innovators, the HFT, for their predatory behavior. He also goes after the big Wall Street banks and their so-called “dark pools,” where big trades are made but no official printed rules exist, and where the banks making the market assure buyers and sellers that they are both simultaneously getting the best price. But both sides can’t be winning, and this contradictory claim is one reason customers’ trust in the big banks has eroded in recent years.

Once upon a time, as many of us remember, if an investor wanted to buy or sell a stock he would call a broker who would find a way to execute the trade as efficiently as possible — talking to other human beings. The arrival of computerized exchanges eliminated many of the people from the process. Now bids and offers are matched by computers. In theory this means that markets should become more efficient and the cost of trading should fall. But the effects of technology are rarely so simple.

Today, if you place an order for 1000 shares of IBM, the order is supposed to ping from exchange to exchange claiming a few shares at each stop, seeking the best price until the order is complete. But the moment the order hits the first exchange the information is out, and the high-frequency traders (with ultra fast computers and shorter fiber optic cable) see your order (especially if it’s large), and race ahead of you to the other exchanges. They buy the stock you want, and then sell it back to you for a slight up-charge. All of this happens in a matter of milliseconds — millions of times a day.

High Frequency Traders execute a combination of two old Wall Street scams — first, insider trading (seeing your order), and second, front running the market. However, in this situation, it is entirely legal. It is an unintended consequence of SEC Regulation NMS passed in 2007, intended to protect the consumer from paying too much. But it opens the door for HFT to squeeze in between trades and create arbitrage opportunities worth billions.

The heroes of the book are the so-called “flash boys,” Brad Katsuyama and a team of talented oddballs who ferret out the schemes going on and create a HFT-proofed exchange called IEX, signifying “Investor’s Exchange,” where the price a trader sees is the price he gets.

The exchange is backed by some leading hedge funds and banks who felt they were getting bilked by the HFT. The average small investor is also being taken advantage of by HFT but likely doesn’t notice a penny or two per share on an occasional trade. But if the investor is invested in a pension fund or mutual fund, he is being hurt by HFT.

Currently, even though the new IEX exchange is well on its way to financial success, there doesn’t seem to be any evidence that high-frequency trading has declined. And, in reality, the villains of this story, the high-frequency traders are not quite villains. They are just smarter and faster than everyone else. Even Katsuyama comments, “It’s not their fault. It’s brilliant what they have done legally, within the bounds of the regulation.”

Lewis’s Moneyball revolutionized the way the market for baseball talent is evaluated from the major leagues to fantasy leagues. It will be interesting to see if Flash Boys has the same effect on the financial markets.

Question: Do you feel abused by financial institutions?

Jerry Levine is a writer for Today’s Machining World, and a retired engineer who worked in BP’s chemical division.

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