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Michael Lewis on Flash Boys, one year later

step-right-up

High Frequency Trading corrupts the US stock market because big traders get prices before everyone else, which allows them to step up front of trades, raise or lower the price as needed, then make a quick profit. This happens in milliseconds. Flash Boys documented these sleazy doings in understandable language so that the public could understand how they are being fleeced.

Lewis writes about what is happening one year after the book was published. HFT is still corrupting the market. However Wall Street knows it is being watched and monitored. Fines have been imposed. Everyone knows their crooked game will be over soon enough. Remarkably, you and I, the small investor (and you may be invested through mutual funds or a pension) have a major inside ally. Goldman Sachs, yes the Vampire Squid itself, is in the forefront of reform, and the biggest user of IEX, a new exchange that cannot be gamed.

I like his analogy of HFT as a slumlord desperately trying to appear above reproach.

In the past 11 months, the U.S. stock market has been as chaotic as a Cambodian construction site. At times the noise has sounded like preparations for the demolition of a hazardous building. At other times it has sounded like a desperate bid by a slumlord to gussy the place up to distract inspectors. In any case, the slumlords seem to realize that doing nothing is no longer an option: too many people are too upset.

One of the largest fund managers found that HFT cost them one-third of 1 percent on every trade. Over the course of a year, this amounted to $240 million swept off the table by Wall Street parasites who provide no value or services.

A poll of institutional investors in late April 2014, conducted by the brokerage firm ConvergEx, discovered that 70 percent of them thought that the U.S. stock market was unfair and 51 percent considered high-frequency trading “harmful” or “very harmful.” And the complaining investors were the big guys, the mutual funds and pension funds and hedge funds you might think could defend themselves in the market.

Everyone needs to get involved.

That some minority on Wall Street is getting rich by exploiting a screwed-up financial system is no longer news. That is the story of the last financial crisis, and probably the next one, too. What comes as news is that there is now a minority on Wall Street trying to fix the system. Their new stock market is flourishing; their company is profitable; Goldman Sachs remains their biggest single source of volume; they still seem to be on their way to changing the world. All they need is a little help from the silent majority.

Because it is indeed time to declare war on Wall Street.

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