A few days ago I wrote about The Market’s Rigged by Michael Lewis. Lewis describes how high-speed traders have rigged the market in their favor. The Justice Department seems to agree.The St. Paul Pioneer Press today printed an article from the New York Times that stated that “federal regulators are scrutinizing Goldman Sachs’ high-frequency trading operations, the latest crackdown on what the government sees as potential market manipulation by some of Wall Street’s biggest banks.” Justice is investigating Goldman Sachs’ “to determine whether it [high-frequency trading] violates insider trading laws.” The following is also from the New York Times.
The message of Flash Boys: A Wall Street Revolt is that the financial markets – Wall Street – are rigged. They are rigged in a number of ways. For example, the agencies that rate stocks and bonds awarded AAA ratings to bonds consisting largely of subprime mortgages, junk. Big American firms
rigged credit ratings to make bad loans seem like good loans, created subprime bonds designed to fail, sold them to their customers and then bet against them . . .
Flash Boys focuses on high-speed trading (HST). HST occurs in micro-seconds. High-speed traders set themselves up with cutting-edge software and hardware so they can execute trades a few microseconds faster that a typical investor. The situation is a nut shell is that
the stock market was [and is] no longer a market. It was [and is] a collection of small markets scattered across New Jersey and lower Manhattan. When bids and offers for shares sent to these places arrived at precisely the same moment [unlikely], the markets acted as markets should. If they arrived [at two different markets] even a millisecond apart, the market vanished, and all bets were off. Brad [the protagonist trying a create a fair market] knew that he was being front-run – that some other trader was, in effect, noticing his demand for stock on one exchange and buying it on others in anticipations of selling it to him at a higher price. He’d identified a suspect: high-frequency traders.
The high-speed traders want a market with lots of ups and downs, a lot of movement; they do not want a stable market. They also want many markets, not just a central market or two like the New York Stock Exchange.
. . . volatility was so valuable to high-frequency traders: It created new prices for fast traders to see first and to exploit. It wouldn’t matter if some people in the market had an early glimpse of Apple’s price if the price of Apple’s share never moved.
Essentially, the more places there were to trade stocks, the greater the opportunity there was for high-frequency traders to interpose themselves between buyers on one exchange and sellers on another. This was perverse. The initial promise of computer technology was to remove the intermediary from the financial market, or at least reduce the amount he could scalp from that market.
This is the first book I’ve read that describes details of the financial world today, some years after the crash in 2008 and the Great Recession. I’ve read a number of books about the crash and what led up to it. It is disturbing to find out that this sort of chicanery is still going on. The financial world in still engrossed with making money with smoke and mirrors. What happened to the idea that capital markets exist because they are the best way that corporations can raise capital – corporations that build things of benefit to the country? I guess this country no longer builds much of anything, but it has become very good at finding non-productive ways of making obscene amounts of money. The best and the brightest are now rewarded for finding ways to make money off of milliseconds.