Tags: Lewis | high-frequencytraders | frontrunning | trade

Michael Lewis Talks About Flash Boys

By    |   Monday, 07 Apr 2014 02:07 PM

This is the first of several articles on issues raised by Michael Lewis' newest book, Flash Boys: A Wall Street Revolt, which nearly every follower of business news already knows has ramped up the controversy surrounding the trading practices of Wall Street. Even though the year is only one quarter over, it is safe to say this will be one of the most talked about books of the year. Lewis appeared on a special call-in show on C-SPAN and was interviewed by host Peter Slen.

There is a certain "I'm shocked, shocked!" quality to Lewis' discourse that is a bit surprising given that he worked on Wall Street before writing extensively about its business and culture.

Naivete manifests itself in several ways, including the initial shock that something is rotten, the concern that this might undermine trust in markets and the assumption that a solution is at hand through some sort of reform. In fairness, this is a bit of a feel-good story in that the reform may occur through self-help rather than expecting legislators and regulators to act. What makes this naive is that it is impossible to talk about one facet of the machinery of the financial markets without raising many more issues, perhaps grist for future Michael Lewis books.

Lewis credited his son with coming up with the title, and it encompasses both the speed of the data flows and trading and the role of the book's heroes, who identified the issue of front running by high-frequency trading and devised an alternative venue, IEX, which offers the promise of offering traders a fairer shake, at least for a time.

He decried the transformation of trading that has moved the transactions away from the trading floors people recall from newsreels and movies. Now the trades are processed in computer warehouses across the river in places like Mahwah, Weehawken and Secaucus, N.J., where a set of computers called "matching engines" matches the orders. Those computers are surrounded by other computers that are permitted to be "co-located" with the matching engines in order to allow firms that pay as much as $50,000 to $100,000 per month for the privilege to get an edge that might be worth pennies per transaction on a volume large enough to make the enterprise worthwhile.

Front running is the bane of all traders and probably goes back to the proverbial buttonwood tree, perhaps to pre-historic times. Once a trader places an order, it is vulnerable to the intermediaries holding up the transaction just long enough to find a better deal and add something to the spread that they can keep for themselves. In a nutshell, the heroes found a way to make the process spin just a little longer for the high-frequency traders, long enough to deprive them of the advantage they enjoyed.

Lewis pointed out that the opportunity to engage in this particular form of front running arose out of the last effort by the Securities and Exchange Commission to reform the trading system through the enactment of Regulation National Market System (Reg NMS), under authority that dates back to 1975. In theory, all orders would be channeled into a national market and subjected to order handling rules designed to afford customers "best execution." The cynical view is that the practical effect of Reg NMS was to introduce new ways in which the opacity and complexity of the market could enable cheating.

(Archived video can be found here.)

© 2017 Newsmax Finance. All rights reserved.

   
1Like our page
2Share
Robert-Feinberg
This is the first of several articles on issues raised by Michael Lewis' newest book, Flash Boys: A Wall Street Revolt, which nearly every follower of business news already knows has ramped up the controversy surrounding the trading practices of Wall Street.
Lewis,high-frequencytraders,frontrunning,trade
575
2014-07-07
Monday, 07 Apr 2014 02:07 PM
Newsmax Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved