[troutman]

Originally Posted by octothorp

I don't read a lot of non-fiction but just read the new Michael Lewis book, Flash Boys. He does a great job of making a relatively arcane topic (high frequency trading) understandable, and the characters are all fascinating. It seems inevitable that it'll become a movie at some point, and there's a lot of commonality with the movie version of Moneyball (although I never read that book).

I am half-way through this book, and it does have my blood boiling as the review on the back cover suggests it would. I do find some of the commentary over my head.

Is the market rigged?

Michael Lewis Reflects on His Book Flash Boys, a Year After It Shook Wall Street to Its Core

http://www.vanityfair.com/news/2015/...one-year-later

By the time I met my characters they’d already spent several years trying to answer those questions. In the end they figured out that the complexity, though it may have arisen innocently enough, served the interest of financial intermediaries rather than the investors and corporations the market is meant to serve. It had enabled a massive amount of predatory trading and had institutionalized a systemic and totally unnecessary unfairness in the market and, in the bargain, rendered it less stable and more prone to flash crashes and outages and other unhappy events. Having understood the problems, Katsuyama and his colleagues had set out not to exploit them but to repair them. That, too, I thought was interesting: some people on Wall Street wanted to fix something, even if it meant less money for Wall Street, and for them personally.

Two weeks before the book’s publication, Eric Schneiderman, the New York attorney general, announced an investigation into the relationship between high-frequency traders, who trade with computer algorithms at nearly light speed, and the 60 or so public and private stock exchanges in the United States. In the days after Flash Boys came out, the Justice Department announced its own investigation, and it was reported that the F.B.I. had another. The S.E.C., responsible in the first place for the market rules, known as Reg NMS, that led to the mess, remained fairly quiet, though its enforcement director let it be known that the commission was investigating exactly what unseemly advantages high-frequency traders were getting for their money . . . The initial explosion was soon followed by a steady fallout of fines and lawsuits and complaints, which, I assume, has really only just begun.

Somewhere in the middle of it all a lawyer—oddly, named Michael Lewis—who had devised the successful legal strategy for going after Big Tobacco, helped file a class-action suit on behalf of investors against the 13 public U.S. stock exchanges, accusing them of, among other things, cheating ordinary investors by selling special access to high-frequency traders.

https://en.wikipedia.org/wiki/Flash_Boys

While Lewis can only estimate the cost to investors of the abuses, he believes it is over $5 billion per year, perhaps as much as $15 billion per year or even higher.



The effect of the existing system on these savings is not trivial. In early 2015, one of America’s largest fund managers sought to quantify the benefits to investors of trading on IEX instead of one of the other U.S. markets. It detected a very clear pattern: on IEX, stocks tended to trade at the “arrival price”—that is, the price at which the stock was quoted when their order arrived in the market. If they wanted to buy 20,000 shares of Microsoft, and Microsoft was offered at $40 a share, they bought at $40 a share. When they sent the same orders to other markets, the price of Microsoft moved against them. This so-called slippage amounted to nearly a third of 1 percent. In 2014, this giant money manager bought and sold roughly $80 billion in U.S. stocks. The teachers and firefighters and other middle-class investors whose pensions it managed were collectively paying a tax of roughly $240 million a year for the benefit of interacting with high-frequency traders in unfair markets.