Michael Lewis has made a splash with his latest book, Flash Boys, and his declaration that the stock market is rigged. Jeremiah is shocked – shocked! Cue Claude Rains. Wall Street has been in various stages of denial about High Frequency Trading (HFT) since the flash crash. Those not in denial include Charlie Munger, Mark Cuban, Eric Hunsader, and Brad Katsuyama.
“It [HFT] is legalized front-running. I think it’s basically evil …” Charlie Munger
Of all the ink spilled since the 60 Minutes piece, we like the Vanity Fair review best. For sheer entertainment, you should watch the head of BATS come unglued on CNBC. Mainstream broker Charles Schwab is here.
Here is a quick guide to how HFT works. Let’s say you want to buy 100 shares of Exxon for your retirement fund, at $98.50 per share. An HFT bot detects your order and runs in front of it, buying the shares for $98.50. Then, it spams the exchange with bogus orders for $98.51. Your broker’s system, much slower, blindly buys the shares for $98.51. A second later, they’re back to $98.50.
In the old days, this was called “painting the tape.” It has been illegal since 1934. No one has been prosecuted, though, because supposedly the SEC can’t detect it. Some people say this is a cost of doing business, a small price to pay for added liquidity and smaller spreads. Research debunking all of that starts here, on Nanex. Jeremiah is reconsidering his views on the death penalty.
It is true that if you’re going to hold your Exxon until retirement, the extra penny doesn’t matter much. It’s just like a little tax. That’s the funny part.
Socialists at the IMF have been clamoring for a financial transactions tax, named for economist James Tobin. This would be a win-win from their perspective, funding bankrupt governments, and punishing capitalism. So, far no one has noticed the irony. There is already a tax on financial transactions.
See also: Bob Pisani