In the wake of a 60-Minutes report on High Frequency Trading, numerous people have sent dozens of links. Let's take a look at a few of them.
The U.S. stock market is rigged when high-frequency traders with advanced computers make tens of billions of dollars by jumping in front of investors, according to author Michael Lewis, who spent the past year researching the topic for his new book “Flash Boys.”
“The United States stock market, the most iconic market in global capitalism, is rigged,” Lewis, whose books “Liar’s Poker” and “The Big Short” highlighted Wall Street excesses, said during the interview. The new book comes out today. “It’s crazy that it’s legal for some people to get advance news on prices and what investors are doing,” he said.
The author’s comments follow New York Attorney General Eric Schneiderman’s decision to investigate privileges marketed to professional traders that allow them to place their computers within feet of exchanges and buy access to faster data streams. Officials at the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission have also said market rules may need to be examined.
High-frequency traders account for about half of share volume in the U.S., a statistic that shows their pervasiveness and hints at the obstacles faced by proposals to rein them in. Exchanges rely on HFTs for profits as well as liquidity, with electronic market makers all but eliminating the old system of human floor traders who oversaw the buying and selling of equities. While critics such as Lewis see a Wall Street plot, proponents say the new system is faster and cheaper.
One of the heroes of Lewis’s book is Brad Katsuyama, who left Royal Bank of Canada in 2012 to form a new market, IEX Group Inc., along with other former traders from the Toronto-based bank. David Einhorn’s Greenlight Capital Inc. hedge fund invested in the platform, which started trading in October and was established to minimize the influence of predatory strategies, Goldman Sachs Group Inc. has endorsed IEX and is the venue’s biggest broker.
IEX was established partly to address concern that technology advances and fragmentation have made the $22 trillion U.S. equity market too fast and opaque. The platform, a dark pool with ambitions to officially become an exchange, imposes a delay of 350 microseconds, or 350 millionths of a second, on orders -- enough to curb the fastest trading firms. IEX aims for greater transparency by making its trading rules available for public review, unlike some other electronic venues.
Eric Ryan, a spokesman for the New York Stock Exchange, and Nasdaq OMX Group Inc.’s Rob Madden declined to comment on Lewis.
“We completely disagree with allegations that the U.S. equity market is rigged,” Bats President Bill O’Brien said in an e-mail. “While we should never stop trying to improve our market structure, it is unfair and irresponsible to accuse people simply because they use technology and enhance competition. This has helped make our market the most competitive and liquid in the world, greatly benefiting individual investors.”
New York’s Schneiderman is examining the sale of products and services that offer faster access to data and richer information on trades than is normally available to the public. Wall Street banks and rapid-fire trading firms pay for these services, providing millions of dollars in quarterly sales to exchanges and helping ensure their markets are supplied with standing orders to buy and sell stocks.
Bloomberg LP, the parent of Bloomberg News, provides its clients with access to some proprietary exchange feeds.
The investigation threatens to disrupt a model that market regulators have permitted for years as high-speed trading and concerns about its influence have grown. Trading firms pay to place their systems in the same data centers as the exchanges, a practice known as co-location that lets them directly plug in their companies’ servers and shave millionths of a second off transactions.
SEC Commissioner Daniel Gallagher said on March 28 that individuals are concerned that high-frequency traders detract from fairness in the marketplace.
“The problem with high-frequency trading right now is that there’s a perception that for the little guy, the markets aren’t fair,” Gallagher told CNBC during an interview. “That perception to me is a reality. It’s something we need to address.”
NY Attorney General: Market Race for Speed Inherently Dangerous
Synopsis: New York Attorney General Eric Schneiderman discusses his investigation into high-frequency trading and why he believes the SEC needs to revisit regulation on Bloomberg Television’s “Market Makers.”
PennTrade CEO: High Frequency Trading Isn't Rigged
Synopsis: Steve Ehrlich, chief executive officer of PennTrade and former CEO at Lightspeed Financial, talks about high-frequency trading. Ehrlich speaks with Scarlet Fu and Tom Keene on Bloomberg Television's "Surveillance." Stephen Roach, a senior fellow at Yale University and former non-executive chairman for Morgan Stanley in Asia, also speaks.
Co-Founder of Themis Trading: High-Frequency Trading Neither Good or Bad
Synopsis: Sal Arnuk, co-founder of Themis Trading, talks about high-frequency trading and industry regulation. Arnuk speaks with Stephanie Ruhle and Erik Schatzker on Bloomberg Television's "Market Makers."
Schneiderman, Levitt, Roach: High Frequency Trading
Synopsis: New York State Attorney General Eric Schneiderman, former Securities and Exchange Commissioner Arthur Levitt, and Stephen Roach, a senior fellow at Yale University and former non-executive chairman for Morgan Stanley in Asia, speak about high-frequency trading. Steve Ehrlich, chief executive officer of PennTrade and former CEO at Lightspeed Financial, and Sal Arnuk, co-founder of Themis Trading, also comment.
On May 18, Forbes reported NY AG's New Crackdown Targets High-Frequency Trading
High-frequency trading remains in the spotlight as New York’s Attorney General announced a new crackdown on vendors in the business.
NY AG Eric Schneiderman announced he will take a deeper look at high-frequency trading world, particularly vendors that provide services for HFT traders.
He called for reforms that he says would eliminate “unfair advantages” that high-frequency trading firms have over other investors. Those advantages are offered by exchanges and other service providers and include: allowing traders to locate their computer servers within trading venues themselves; providing extra network bandwidth to high-frequency traders; and attaching ultra-fast connection cables and special high-speed switches to their servers, the AG’s office said.
Last year, after probing from the AG’s office, Thomson Reuters agreed to discontinue its practice of selling high-frequency traders a two-second sneak peek at certain market-moving consumer survey results.
“I am committed to cracking down on fundamentally unfair – and potentially illegal – arrangements that give elite groups of traders early access to market-moving information at the expense of the rest of the market,” Schneiderman said in a statement.
Trading or Skimming?
Finally, please consider Speed Trading in a Rigged Market a Bloomberg column today by Barry Ritholtz.
On "60 Minutes" last night, author Michael Lewis made a bland assertion: High-frequency traders, he said, working with U.S. stock exchanges and big banks, have rigged the markets in their own favor. The only surprising thing about Lewis’s assertion was that anyone could be even remotely surprised by it.
The math on trading is simple: It is a zero-sum game. One trader’s gain is another trader’s loss. Only in the case of HFT, the losers are the investors -- by way of their pension funds, retirement accounts and institutional funds. The HFT’s take -- the “skim” -- comes out of these large institution’s trade executions.
Several years ago, the founder of Tradebot, one of the biggest high-frequency firms, had said that the firm had “not had a losing day of trading in four years.” The firm’s average holding period for stocks is 11 seconds.
Any professional trader can tell you that his job is to manage risks. It is a statistical certainty that a percentage of trades will be losers. You are establishing a position with an unknown outcome. Sometimes they go your way, other times they go against you.
How is it possible that one of the largest high-frequency trading firms executes millions and millions of orders for four years without ever having a down day? The short answer is what they do is not trading -- it is skimming. I call it legalized theft. High-frequency trading is a tax on investors, encouraged by the exchanges, allowed by the SEC. It is prima facie proof that something is amiss.
It is interesting to note that the rigging theme is consistent with everyone who looks closely at this subject. My colleague Josh Brown notes that markets haven't become rigged, they have always been rigged. What is different is the ability of high-frequency traders to see other people’s orders, jump ahead of them, and then sell that exact same stock to them, at a higher price. It is the ultimate market-skimming operation.
I am looking forward to reading "Flash Boys." I hope our members of Congress and the folks at the SEC do so too.
Lewis is a good writer, I too will pick up a copy of "Flash Boys", sure to be a best-seller.
Mike "Mish" Shedlock
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