Author Michael Lewis is out with a jarring claim: The stock
market is “rigged.”
The man behind the new book “Flash
Boys” appeared on CBS’ “60 Minutes” Sunday to explain why, and
has a lot of people talking Monday morning.
“[The] stock market’s rigged. The United States stock market, the
most iconic market in global capitalism is rigged,” he
told Steve Kroft. “By a combination of these stock exchanges,
the big Wall Street banks and high-frequency traders.”
Confused? Kroft goes on to explain:
Michael Lewis is not talking about the stock market that you
see on television every day. That ceased to be the center of
U.S. financial activity years ago, and exists today mostly as a
photo op. This is the stock market that Lewis is talking about;
the one where most of the trades take place now, inside hundreds
of thousands of these black boxes located at more than 60 public
and private exchanges, where billions of dollars in stock change
hands every day with little or no public documentation. The
trades are being made by thousands of robot computers,
programmed to buy and sell every stock on the market at speeds
100 times faster than you can blink an eye. A system so complex,
it’s all but invisible.
The basic mechanism that he describes is this: You place an
order for a stock, say Microsoft. That order goes to something
called the “BATS exchange” at which point high-frequency traders
pick up on your order, and then race to the exchange with an
order for Microsoft faster than you can get there. They buy the
Microsoft and bring it back to you at an inflated price.
Technically, Lewis says, all of this is legal. But, he says,
ordinary investors are getting “screwed.”
CNBC’s Bob Pisani, however, says the interview
didn’t
bring up one of the biggest issues:
The odd thing about the interview is that they did not bring
up the hottest topic around high-speed trading: that high-speed
traders have access to a “proprietary feed” that allows them to
have a trading advantage over those who rely on the “public
feed.”
There is indeed a “proprietary feed” which has been provided
to anyone willing to pay for it, with the blessing of the SEC,
for many years.
The core argument is that those who access this proprietary
feed can calculate the most current bids and offers (known as
the National Best Bid and Offer, or NBBO) quicker than those who
get the public feed (known as the Securities Information
Processor, or SIP). That can indeed provide a trading advantage.
Still, he says the difference in stock price for private vs.
public traders amounts to cents:
What’s the bottom line? If you are a long-term buyer, under
some circumstances – particularly during times of high
volatility – high-speed traders are indeed trying to scalp a
penny on your trade.
Would I like to see fewer of these price dislocations? I sure
would. Do I think this is some outrageous act of highway
robbery?
Well, I’m not so sure.
For what it’s worth, the econ site Zero Hedge has been
ringing the alarm bell for some time on this.