The Spotlight on High Frequency Trading

Michael Lewis, had a segment on 60 minutes(watch the link, seriously) to discuss the topic of his new book, "Flash Boys: A Wall Street Revolt". Lewis was a bond salesman in the '80s and '90s, which was the subject of one of his first notable works, "Liar's Poker". He's also written "Moneyball" and "The Big Short", among other works. The first line in his 60 minute segment was;

"Stock Market's rigged." BAM!

It's not this line that's exciting, it's that there's someone who has decided to do something about it. Brad Katsuyama started IEX, an exchange that's actually focusing on creating a fair marketplace, which is extremely refreshing to see from an intermediary.

The 60 minute spot scratches the surface, but in short, HFT(High Frequency Traders) in the market receive market order data from investors before it's reflected on the exchange, then act on those orders, again before it's reflected on the exchange. This happens SO FAST that the ordinary investor's order isn't completely filled with traditional routing, effectively frontrunning the investor. The biggest players in the game have price data before the exchanges do. The solution Brad Katsuyama and company came up with is clever; staggering their routing, so that the order is sent to the furthest exchange first, and the closest exchange last. All these orders come to their destination exchanges within one or two milliseconds of each other, cutting out the frontrunner.

Here's a clip from CNBC with William O'Brien(President of Global Markets at BATS), Michael Lewis, and Brad Katsuyama hashing it out.


O'Brien is shocked that anyone would vilify ANYTHING about the industry. Haven't we seen this card played before? Yes, because the financial industry has repeatedly shown itself to be the pinnacle of virtue and ethics! Yes, of course! How dare ANYONE claim there's frontrunning! ...with empirical data... and testable ideas... that any trader can verify for themselves...

Doesn't this emotional outburst show your cards more than it hides them? You claim to be upset because you think Lewis and Katsuyama are scaring people away from the market and attempting to gain traction for IEX, but I see no crashes... I see record highs... An ordinary investor is ATTRACTED to the market when whistle blowers like this come to light. This kind of unveiling takes power from those that have no divine right to it. This is EXACTLY what the market needs to restore investor confidence.

Turns out O'Brien was lying anyway.

I have yet to read the book, but I've ordered it.

"You're not really providing liquidity if you're not taking market risk." - Lewis