Flash Boys

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Originally Posted by Running_Man Michael Lewis is a gifted writer and a great salesman of his books. But to look at his comment at face value - the stock market is rigged, is simply not true, but just a sales pitch. Over the past 25 years everything has gotten better for an individual stock investor. Commissions have sunk to record low levels, and all the high level computing being thrown at the stock market makes this possible. How was my purchase of Microsoft a year ago when I was loving that stock price rigged? What effect did the Flash Boys have on a thousand shares at 28? 2 cents per share? How do the flash boys effect the long term business of Microsoft? They don't. This is a lot to do about nothing, I remember when the bid ask was in 1/8 the and you paid a commission of $49 at a discount broker. If there is a system that averages an 8 percent annual return and the cost of the transaction includes a HFT that is Malkeiling away a market inefficiency that exists in the short term, I am welcoming those to the party. If the HFT sunk the market so that people lost faith in them and dropped PE's permanently 50% I am all for that as well. I will gladly take a double on my dividend return purchases on all my stocks. If people want to go back to when mutual funds routinely had expenses of 2 percent, well then I guess we better eliminate all but the "necessary" trades. Other than that something that causes a 0.02% cost to purchasing a stock is not worth wasting time even thinking about.

Lewis is a gifted writer. Anybody that makes smart, nerdy people sound really interesting, and in this book heroic- is one great author.

I agree that rigged is great term to sell books. However, after reading the book, and watching Lewis on TV and listening to the HFT defenders respond. I have to say that I can't think of a better term to use to describe the unholy alliance between brokers/bank, exchanges, and high speed traders than rigged.

I believe the thing, that you and many of critics of the book are confusing is the differences between computerize trading and high frequency trading.

Computerized trading is great and has brought all the benefits that you describe, lower commissions, tighter spreads, and more level playing field.
Computers are great way of matching buyers and sellers, and they have brought benefits to stock buyers in the same way they've made it easier to buy airline tickets online. Lewis is very supportive of them. Nor do he or I have any problem with computerized programs that crunch numbers and attempt to find e.g. the correlation between the rainfall in Iowa, and the profits of gasoline refineries in Texas to buy and sell stocks.

The only issue we have is with the exchanges that auction the rights for High Frequency traders to put their computers in the same building as the exchange for the sole purpose of gain a few millisecond speed advantage in trade exchange. We also are pissed at the banks and brokerage once again screwing their customers by sending their orders to exchanges/pools where they are going to be scalped. This is no different than the outrage most people expressed when the found out that Goldman Sach was selling mortgage back securities to insurance companies and small towns, while at the same time making it easy for smart guys to short them.

In some ways you are right at a $.01 or .02 it is hardly a big deal, especially for individual stock pickers like you and I. (I think index funds and and large actively manage funds get hurt the worse.) However, collectively there is in at least $10 billion of additional cost/profits that is being lost by investor. That is the equivalent of .05%/year spread across the whole market. It is equal to the expense ratio of an index fund.

Now none of this would be horrible,if the HFT actually provide an economic advantage. If these HFT firms actually increased market liquidity, enable price discovery, or provide stability or any other benefit of middleman.

Instead HTF firms do the exact opposite,they create the dangerous illusion of liquidity, obscure price discovery,and dramatically decrease the stability of the market. But don't take my word or Michael Lewis. Walt Berringer, Schwab's CEO put out this press release today.

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High-frequency trading is a growing cancer that needs to be addressed Schwab serves millions of investors and has been observing the development of high-frequency trading practices over the last few years with great concern. As we noted in an opinion piece in the Wall Street Journal last summer, high-frequency trading has run amok and is corrupting our capital market system by creating an unleveled playing field for individual investors and driving the wrong incentives for our commodity and equities exchanges. The primary principle behind our markets has always been that no one should carry an unfair advantage. That simple but fundamental principle is being broken. - See more at: Schwab Statement on High-Frequency Trading | Charles Schwab Online Newsroom

An unlevel playing field, sounds a lot like rigged to me...In my thread No More option trading for me I talk about why I am no longer going to trade options after reading Lewis's book.

This forum has a lot of index fund fans and while they are directly (but unknowingly hurt by HFT system) they are also hurt when investors like you and I stop being active traders. The paradox of indexing is that works best when not many people do it. The fewer people that have the skill/delusion/arrogance to think we can beat the market by picking stocks, the worse the system performs over all. So when dedicated stock picker like myself says I am not playing this rigged game that is bad for everyone.