A new book by best-selling author Michael Lewis called “Flash Boys” claims that the U-S stock market is rigged by high-frequency traders making billions of dollars — penny by penny. The concern is that this is just another form of insider trading. That’s when traders get access to sensitive market information before it’s released to the public. They then use that data to lock in profits.
Critics say high-frequency trading ALSO gives traders to access information faster than the rest of the market and to get that speed of access they use three methods. First they put computers physically next to the stock exchanges– so it cuts down the time the system can get market info. They also use fiber optic cables and lasers to execute the trades more quickly regardless of distance. Last, they pay the exchanges for proprietary data feeds—which give high-frequency trading systems earlier access to information compared to the public feed.
New Book put High Frequency Trading in ControversyA new book by best-selling author Michael Lewis called "Flash Boys" claims that the U-S stock market is rigged by high-frequency traders making billions of dollars -- penny by penny.
The floor of the New York Stock Exchange ceased to be the center of stock trading activity years ago. Today, the bulk of trades are executed electronically via machines like these.
These technological advances have allowed for the rise of high frequency traders – computers that make trades based on set algorithms. They trade faster than you can imagine.
And this speed advantage enables them to steal billions of dollars from investors through front-running, according to a new book by Michael Lewis. Lewis claims the machines are able to detect large orders a flash before everyone else. The machines can then buy that stock before the order hits the exchanges and sell it back to the seller for pennies higher. But according to Dan Alpert at Westwood Capital, high frequency traders are not doing anything illegal. Regulators like the Securities and Exchange Commission along with the Department of Justice and the FBI are looking closer at high frequency trading to see if the rules need to be changed.
If the rules are changed that could mean a big drop in revenue for the banks that use the computers. It could also shut down companies that specialize in high frequency trading like Virtu Financial that was slated to go public this week. It has now postponed its IPO. No surprise given all the uncertainty.
Bernard Donefer Professor at the Department of Statistics and Computer Information Systems at New York’s Baruch College shares his perspective on this issue.
High Frequency Trading under InvestigationBernard Donefer Professor at the Department of Statistics and Computer Information Systems at New York's Baruch College share his perspective on the controversy of High Frequency Trading.