Tags: Lewis | flash | crash | high-frequencytrading

Author Michael Lewis: Be Afraid of Flash Crashes

By    |   Thursday, 03 April 2014 01:50 PM

Don't ignore the threat high-frequency trading poses to the financial system, warns "Flash Boys" author Michael Lewis.

"I think it's absurd to dismiss," Lewis told The Huffington Post Live.

Although the size of flash traders' profits is relatively small relative to the overall market, the volume of their trades is huge — roughly half the market's volume, he argued.

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"What is not trivial is the unstable structure you get. You got the heads of the Goldman Sachs' equity department saying we're going to have a flash crash times 10 if this continues."

"There's signs of mistrust of the market that are very apparent," Lewis said, saying it's odd that the stock market has tripled since the financial crisis while the number of Americans holding stocks has drooped. "There's a sense — and it's not an unjustified sense — that something's goofy with this market.

"Even if it's not a lot of money at stake, you really don't want to build a society on the back of a market that's basically rigged."

Critics say his new book does not reveal anything new about high-frequency trading. "Wall Street doesn't ever want to admit it doesn't know something," Lewis noted.

"But they're happy for the education."

They may have known about speed advantage of flash traders, but not what it meant.

The market has experienced flash crashes when stocks plunged dramatically and bounced back in a matter of seconds in the past.

What would happen if a flash crash got out of control?

"I don't know," Lewis told The Post. "I'm not sure anybody knows. I've asked that question of people who should know and nobody has an answer for me."

Billionaire investor Mark Cuban, owner of the Dallas Mavericks, agrees that the risk of flash trading is unknown - and that's exactly the problem.

The problem is not the advantage flash traders hold over ordinary investors; it's the market risk of the interacting algorithms, Cuban told CNBC.

Companies should consider requiring investors to hold their stock for a minimum amount of time — be it a minute, a day or week, he said. "Because at the end of the day, owning a share of stock is supposed to be about owning equity in a company, and I think we've lost track of that, and that's a real problem."

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Don't ignore the threat high-frequency trading poses to the financial system, warns "Flash Boys" author Michael Lewis.
Lewis,flash,crash,high-frequencytrading
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2014-50-03
Thursday, 03 April 2014 01:50 PM
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