Michael Lewis’s new book, Flash Boys: A Wall Street Revolt, has certainly gathered tons of well-deserved attention. He was on the Daily Show and his interview on NPR is an absolute must-listen podcast in which you’ll painlessly (except for an angry gut reaction) learn an awful lot about how Wall Street is (surprise) cheating the rest of us.
Lewis focuses especially on an area about which I’ve inveighed heavily for two years… the perils of High Frequency Trading.
You don’t have time for books or podcasts? Then if you read or even skim any in-depth article this month, make it this one… an excerpt from FLASH BOYS about how the world of fast-pitched Wall Street trading has become rife with computerized cheating, so pervasive that any justification is impossible through the usual rationalizations of “market forces” and “correct price equilibration.” No little guy can win the full value of his trades. No retirement fund manager can use keen insights to maximally benefit her clients without paying a large “tax” or overhead in stolen value.
The article appears to have a relatively happy ending, with the creation of a new trading center that corrects some of the grotesque advantages of behemoth banks and super-empowered Hugh Frequency Trading (HFT) operations. And I hope the sunny optimism of the final paragraphs comes true! (Failure to correct the cheating will lead us to French Revolution levels of anger, with tumbrel-riding lords losing much more than their “genius” predatory gains.)
What is more likely is a moderate series of reforms that — like those our ancestors performed under Teddy Roosevelt — restore just enough fairness and flatness and wary trust to keep it all in motion for another generation… and maybe restoring a bit of strength to the beleaguered middle class.
Indeed, the hoo-row over this one book appears to be affecting markets! It has prompted a few traders to bet against shares of the Nasdaq OMX Group, the parent of the NASDAQ exchange. One analyst estimates that about 25% of Nasdaq’s revenue, and about 33% of earnings, are attributable to high-frequency trading. The Wall Street Journal offers: The Responsible Way to Rein in Super-Fast Trading.
If HFT is reined in – maybe with timing measures but far better with a tiny Tobin Tax — then this one particular cheating mode will be controlled.
== Would that solve it? ==
But the danger remains… that we might return to the normal patter of 99% of human cultures across 6000 years. And that is the lesson of this article. Those who manipulate and distract us from getting mad and reforming capitalism are not only our enemies… but they are the enemies of the very same flat-fair open capitalism that they claim to admire.
Alas, the relatively optimistic tone of FLASH BOYS must be viewed with caution. The “solution” of a new, neutral exchange can easily be perverted by the next round of cheating — both Adam Smith and Karl Marx called cheating the ultimate enemy of fair and flat and free competitive and creative markets.
Indeed, so long at the stock exchanges are controlled by closed cartels of conniving “seated members” there will be an inherent incentive for them to trade with each other, commission-free, which is the essential unfairness of HFT… and not the timing factor that Lewis dwells upon.
I have also offered another, more science fictional but chillingly plausible reason to fear the many billions of dollars that major trading firms are pouring into the HFT versions of artificial intelligence (AI). It is a failure mode that grown more credible by the day. It could wind up wreaking devastating harm.
And you can find it here: A Transaction Fee Might Save Capital Markets…and Protect us from the Terminator!
See also: The Contradiction of Capital Markets.