Best-selling author Michael Lewis of “Moneyball” and “Liar’s Poker” fame has a new book out called “Flash Boys” in which he says the most iconic stock market in the world - the U.S. stock market - is rigged. And Yahoo Finance Editor-in-Chief Aaron Task agrees.
In an interview Sunday with “60 Minutes” on CBS, Lewis says the stock exchanges, the big Wall Street banks and so-called high-frequency traders are the ones doing the rigging and anyone who is invested in the stock market is a victim. Lewis says the high-frequency traders are able to see stock orders before they’re processed, buy the stock and sell it back to the investor at higher prices all thanks to powerful computers with secret programs that process trades in fractions of a second.
1984 in 2014
It all sounds very futuristic and big-brother, but in the associated video, Task tells Hot Stock Minute’s Lauren Lyster this is nothing new. “Yeah, the market’s rigged and people who follow the markets closely for years say it’s always been rigged. It’s now being rigged in a different way with this high-frequency trading,” said Task. “I think the people who follow this stuff closely have known this for years, but '60 Minutes' and Michael Lewis brings it to a whole new level of awareness for the average investor.”
This so-called front-running that Lewis describes is legal. The key player in Lewis’s new book is Brad Katsuyama, a trader at Royal Bank of Canada, who started investigating how it was that every time he went to buy a stock, someone else got their first and drove the price up. He found that companies were paying big bucks investing in technology that was faster – sometimes milliseconds faster – than the other guy and those milliseconds added up to big bucks on millions of trades a day. Katsuyama told “60 Minutes” he and his partners went about trying to figure out how to beat the high-frequency traders at their own game and succeeded by devising a way to have their trades arrive at different exchanges at the same time, cutting out the high-frequency traders.
It's a matter of trust
The trades in question are happening between institutional investors when large blocks of stock change hands. Lyster says this is not a game for individual investors because high-frequency traders have too big an advantage. “The average investor who is trading on whatever platform they use shouldn’t be worried about the pennies that are being skimmed,” said Lyster. “You probably shouldn’t be trading for that advantage anyway. You can’t compete as an average person.”
Task says it’s not that individual investors are being ripped off when they trade in their brokerage accounts. The front-running affects large trades by institutions and in that way, it affects everyone, as Lewis said. “We’re all investors in mutual funds and pension funds so ultimately it affects us,” Task said. “But it’s about people’s confidence in the markets and the integrity of the markets and I think it’s an issue that needs to be addressed.”