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“The US stock market... is rigged.” That was Michael Lewis’ one sentence summation of his new book Flash Boys on last night’s 60 Minutes.
In an excerpt of the book in the NYT, Lewis writes that around 2007, one of the Royal Bank of Canada’s stock trading teams began seeing odd market behavior: quotes vanished as soon as orders were entered. Other big banks and hedge funds were having the same problem. In trader-talk, the market kept moving away from them, no matter what they bid or offered. High-frequency traders were milliseconds ahead, buying, selling, and, perhaps most importantly, canceling quotes faster than RBC. The market wasn’t fair, and speed was the reason why.]
“High-frequency trading is a tax on investors”, says Barry Ritholtz. Institutional investors pay a “skim” to HFT shops on every trade. Just how big the skim is is unclear – Lewis puts the daily gains from US HFT trading at $160 million, or about 0.07% of average daily volume of $225 billion – but its very existence is, to Ritholtz, “prima facie proof that something is amiss”.
Matthew O’Brien calls HFT “Wall Street at its most socially useless. HFT funds aren't allocating capital to where they think it'll be most productive. HFT funds are allocating capital to where they think other people will put it 50 milliseconds from now”.
Josh Brown isn’t too worked up. Summoning his inner Carl Schmitt, he points out that the intention of the founding of the US stock market in 1792 was to create an exclusionary clique that benefited members and disadvantaged outsiders: “once they’d seized control of all securities trading... they ran that shit like a powdered-wig mafia”.