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The Great HFT Debate

31 March 2014

7 Things I Learned From 60 Minutes’ ‘Flash Boys’ Report

If nothing else, 60 Minutes’ interview with Michael Lewis and accompanying expose on high-frequency trading thrust the controversy front and center in the court of public opinion. But it may not do much to move the industry toward any consensus.

The buzz around Michael Lewis’s new book, “Flash Boys,” and his appearance on CBS’s 60 Minutes Sunday night (below) was palpable. While high-frequency trading has been a hot topic among capital markets professionals for half a decade, and though it has often drawn public scrutiny since the global financial crisis, the mass appeal of Lewis’s books has the potential to turn the market structure debate into a very public trial of Wall Street in general.

As anticipated, the Twitterverse was afire with comments both in support of and assailing Lewis and HFT during and immediately following his interview with 60 Minutes correspondent Steve Kroft. And it wasn’t just market structure experts weighing in; average investors already seem to have taken up Lewis’s anti-HFT rallying cry. But regardless of whether you think HFT is a manipulative behavior that should be banned or a necessary function of efficient markets, the hype generated by “Flash Boys” already has revealed some important themes in the controversy.

1. The general public understands very little about how Wall Street really works. To the average investor, computerized trading, algorithmic trading and high-frequency trading are all one in the same. Educating the public about the inner workings of the markets may be a monumental task, but it is necessary if the public is to form a fair opinion of HFT.

[Related: "Take the Time to Understand the Complexities of the Markets"]

2. Even the market experts disagree on the role of HFT in the capital markets and its fairness. It’s not just the regulators who don’t understand HFT; market participants of all types and sizes continue to struggle with how to come to grips with it. And the battle lines appear pretty clear.

3. Haim Bodek, the original HFT “whistleblower,” now comes across as a moderate in the high-frequency trading debate. Though he is popularly known as one of the leaders of the anti-HFT movement, Bodek’s positions on computerized trading actually are much more nuanced than most observers realize. (See Bodek’s views here.)

4. Just in case it wasn’t clear what New York attorney general Eric Schneiderman thinks of HFT, his tweets following Lewis’s interview on 60 Minutes made it obvious:

5. Amid the hype for “Flash Boys,” Brad Katsuyama shouldn’t be confused with Michael Lewis. Lewis is sensationalizing a controversy to sell books. It is unclear whether he has any real, altruistic motive to improve the capital markets. But Katsuyama and IEX have skin in the game.

6. C- for CBS. 60 MInutes did a great job explaining one side of the story, but the report was absent any point of view other than that presented in “Flash Boys.” 60 Minutes presented the argument that the markets are rigged as fact. Better journalism would have provided a forum for both sides of the debate.

7. A little information can be dangerous (see No. 6, above). As 60 Minutes pointed out, less than half of Americans currently trust financial institutions. While everyone agrees we should continue to work to make the markets more efficient and more fair, the one-sided 60 Minutes HFT report gives the average investor no reason to change his mind, and may even erode confidence further. It is unlikely to add any real value to the HFT debate, and this is bad in the long-term for investors and the industry.

Spotlight-white-trans For more stories in the The Great HFT Debate Spotlight Series click here.

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8 Comments to "7 Things I Learned From 60 Minutes’ ‘Flash Boys’ Report":
  • Missing
    hendry

    01 April 2014

    A well-timed plug piece for Lewis' book and CBS plays the patsy!  Was Michael Lewis actually front-running his book?  Enquiring minds want to know. 

    Dog bites man! 

    Brad Katsuyama and IEX discover the concept of "latency".  He now realizes he should have a had a two dollar broker in the Blue Room - would have made millions! 

    No mention of SEC, FINRA, Reg NMS, Reg ATS but Schneiderman is going to save John Q public by encouraging a return to the horse & buggy. 

  • Comment_steve-wunsch
    stevewunsch

    01 April 2014

    Good summary, Les. I agree in particular with your last sentence and would only add that the increased attention to the debate will only make things worse. The SEC's 80 year mission to destroy Wall Street will more easily gather reinforcements, now including not only the CFTC, but state attorneys general and the FBI. There is no chance that investor confidence will improve as a result. We should remind ourselves that if any of these entities had been around at any time between 1790 and 1934, we would not have a Wall Street at all, or a world-leading capital market, or the wealthiest nation or the most important city in the world. 

  • Comment_dave_cummings
    Dave Cummings

    01 April 2014

    Customers need to use brokers with good technology.  This is the most important thing.  In the 60 Minutes piece, RBC used bad technology and got bad fills, then fixed their algorithm and then, in their own words, got nearly 100 percent of the fills they wanted.  Problem solved.  Use good technology.  Quit whining. 

  • Missing
    anonymole

    01 April 2014

    What I think this all boils down to is Main Street's general perception that Trading is not Investing. And that while investing is a positive for society, trading is not. Name one book, of the last 10 or more years, that portrays trading and traders as philanthropic altruists; as people with their hearts in the right place, doing the "right" thing. Don't bother looking because there aren't any.  Why? Because at its core trading only benefits traders, and if a trader thinks he can get away with some manipulation of the system - he will.

    Main street knows that traders design nothing, create nothing, produce nothing, effectively only taking from the system. That traders basically profit from friction within the machine and not from the operation of the machine itself. And that the world could get along just fine without traders wedged in between investors as the traders grift out their nefarious living.

  • Missing
    kathleenhawk

    02 April 2014

    It's not the existence of high-frequency trading that's being criticized, it the gaming of the system to skim profits that are paid by investors. The profits are not for services rendered or any value delivered to anyone except the skimmers and possibly the entities they pay for the ability monitor incoming trades and squeeze a little money out before investor can execute. 

    The other primary issue is the lack of transparency in the system, and the resulting lack of intelligent choice for the investor.

    The regulatory mandate of the SEC, as well as other agencies, is to protect investors. I think we can expect to see this adding fuel to the investigative fire.

  • Missing
    mnajarian

    02 April 2014

    This is nothing new. I've designed and installed high speed fiber networks for quite some time. It makes total sense to me that Bats would be the first exchange to receive the request. Simple time and distance calculation. What I'm more concerned with and what was exposed is the cost disparity of the transaction. If I send buy order for a thousand shares and those thousand shares are broken down into 4, 250 share chunks, I expect the blocks to be priced at the same value. However, if 2 of the blocks are priced at $100 and the other 2 at $110 than I have a big problem because someone is manipulating my order. That is why the SEC is going to investigate and pursue, hopefully.

  • Anon_avatar
    Anonymous

    02 April 2014

    maybe we should start referring to limit orders as "don't let HFTs mess with my fill" orders. If we had some natural participants placing passive liquidity into the order book, then we wouldn't have the quote fade so much. Why complain so much that others aren't providing liquidity when you aren't??

  • Comment_dave_cummings
    Dave Cummings

    03 April 2014

    How long must an investor hold a stock to go from evil to virtuous?  A minute, an hour, a day, a year?

    I was just wondering...

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