Sunday, April 06, 2014

On the rigging of High Frequency Trading (HFT) and the likely impact of Michael Lewis's book Flash Boys

Michael Lewis has exposed to the public what was always known to people of any intelligence or experience in the financial industries: in spite of all the efforts at promoting transparency and level playing fields, financial markets are still, with the connivance of politicians and government agencies, rigged by the largest players.

For an illuminating though short discussion of all this, see:

The particular field that Lewis has now exposed to public scrutiny, High Frequency Trading or HFT, may seem esoteric but its impact is huge.

In fact, HFT is so huge in volume that, you may recollect, some 4 years ago, it caused the famous "Flash Crash" in the entire global economy (that is of course the event to which the title of Lewis's book refers).

If HFT was banned, global trading volumes would be cut in half. In other words, HFT is HALF of ALL global trading in listed shares...

However, the issue MUCH bigger than the rigging of the HFT market, is the IMPACT of the very existence HFT - in terms of shortening the time-horizon of investment decisions and stakeholder-considerations on the part of EVERY company that is listed in the stock market.

Therefore I am in fact for banning HFT entirely. What we should have, instead, is a new structure for companies, globally (see the book recently published titled "Transforming Capitalism from Within").

Meanwhile, we must focus on eliminating the evils within HFT (i.e. the rigging of the market by the large players to the disadvantage of average players)

That can only be done if the US Department of Justice probes the current structure of HFT as "restraint on trade". To be effective, that must be coordinated with the SEC and the FBI. My fear is that these US agencies will either say the market isn't rigged after all (unlikely) or is so advantageous overall that we should leave it as it is (which is what all the big institutions and their paid hacks will now argue in the press and on TV).

Overall, the most likely effect of Michael Lewis's book is that the US agencies will do the usual "face saver" and agree to restrict some irrelevant parts of HFT, or target marginal things - e.g. limits on some types of activity, opening up some minor channels to level the playing field, and other such superficial stuff.

In terms of disadvantaging the average player, we also must not forget that the process (so-called "club deals") of how Wall Street allocates the shares and even the secondary offerings of "hot IPOs" actually creates, for average investors, very much more disadvantage.

So it is Club Deals that need to be fought at least as much as High Frequency Trading.

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