Here are some books I’m reading or planning to read this winter.
### Flash Boys - Michael Lewis
A narrative explaining the rise of the predatory and morally ambiguous tactics used by high-frequency trading firms. Lewis follows the story of several key players who investigate and uncover the shady system of electronic front-running and dark pools, such as Brad Katsuyama. He shines a negative but not necessarily accusatory light on HFT firms, a dark and grim one on the current state and structure of the market, and a faintly hopeful one on the possibility of progress thanks to the efforts of people like Katsuyama.
If you’re interested in working in the fintech industry and don’t already know what HFT is and why it’s so controversial (which you definitely should, lest you unknowingly be drafted to predate the hapless investing public), this is a good narrative to learn from.
Thinking, Fast and Slow - Daniel Kahneman
If you’ve taken a psychology course before you’ve certainly heard of heuristics. Kahneman is one of the authors of the original paper on heuristics, and has written this recent book which explains his model of human thinking: a two-system model, in which one system is “quick” thinking and the other “slow” thinking.
The book offers what I think is a mostly accurate model for cognition, and explains some systematic biases and errors of judgement that we are prone to. It is definitely a valuable read that will increase your awareness of your own cognition and decision-making. It was a mandatory read for trading interns at Jane Street.
How to Make Money in Stocks - William J. O’Neil
A best-selling McGraw Hill book that takes an unconventional approach to stock analysis. O’Neil deviates partly from fundamental analysis for stock picking and advocates an approach that focuses heavily on chart reading and pattern recognition. For example, he studied some of the biggest gainers in the past 100 years and identified a cup-and-handle pattern that signifies a stock that is about to advance. A lot of time is focused on identifying these patterns accurately.
O’Neil also includes a fundamentally sound system for picking stocks, with rules for quarterly earnings increases and market direction. These were valuable for me as a novice because they illustrated the importance of having a system and defining clear rules for your buy and sell decisions.
The chart analysis system was interesting because the book includes around 100 heavily annotated charts of big winners throughout history. In each, O’Neil identifies a pattern, a buy point and a sell point. It seems like a machine could be trained to identify buy and sell points based off of O’Neil’s charts and pattern-buy-sell data. It could have potential for a trading algorithm.
Blink - Malcolm Gladwell
This Gladwell book is interesting because it talks about “thin-slicing,” which is our brain’s spontaneous, unconcious decision-making that is often more effective than carefully planned or considered ones but can be subject to systematic biases (sound familiar?). This book actually came out in 2005, whereas Kahneman’s book was published in 2011, making it an interesting precursor.
I’ve yet to read this one, though I’ve read another of Gladwell’s bestsellers, Outliers. Be cautious of Gladwell; though his books are entertaining and interesting to read, he does not have a scientific background and the exceedingly anecdotal evidence behind his claims should be taken with a healthy dose of suspicion.