Author Michael Lewis’s argument that U.S. stock trading is rigged reflects a misunderstanding of how the market operates and its history, said Bill O’Brien, the president of exchange operator Bats Global Markets Inc.
“Shame on you,” O’Brien said during an interview today with CNBC, addressing Lewis and IEX Group Inc.’s Brad Katsuyama, a hero in the author’s latest book. “You don’t understand that the market has always had intermediaries,” O’Brien said.
O’Brien was on CNBC debating Lewis, whose new book “Flash Boys” says exchanges, Wall Street banks and high-speed traders are ripping off investors in the $23 trillion U.S. stock market. Bats runs four U.S. stock exchanges and was founded by a high- frequency trader, Dave Cummings of Kansas City, Kansas-based Tradebot Systems Inc.
“I think of the high-frequency traders as just basically exploiting a system that’s got these glitches in it,” Lewis said on CNBC. He said he’s not opposed to computerized buying and selling because it’s generally been “good for the markets.” Speed traders have simply “found loopholes to jump through. You know, it’s sort of like, I don’t know, blaming the lion for eating the antelope.”
Lewis said, “The problem is that Wall Street has clawed back a lot of those benefits,” adding later that “What’s happening is a kind of skim. Wall Street is capturing unnecessary revenues. It’s a tax. Unnecessary intermediation is going on.”
In “Flash Boys,” Lewis says large Wall Street brokerages let HFT firms pay for the right to trade in their dark pools, making the broker’s customers vulnerable to being taken advantage of by the fastest computerized firms. The current market structure also encourages needless transactions, Lewis writes.
With his latest book, Lewis added his voice to an increasingly loud debate about high-frequency trading. In March, New York Attorney General Eric Schneiderman said he’s scrutinizing practices that give some computerized firms a speed edge. Agents from the Federal Bureau of Investigation are investigating whether HFT firms break U.S. laws by acting on nonpublic information to gain an edge.
High-frequency trading comprises a diverse set of strategies driven by computers automatically buying and selling assets including stocks at rates measured in thousandths or even millionths of a second. Bats, the New York Stock Exchange and Nasdaq Stock Market rely on them to facilitate much of their volume, after more than a decade of regulatory and technological changes, including the pricing of shares in penny increments, cut profits and pushed humans out of the business.
Firms using the tactics account for about half of share volume in the U.S., a statistic that shows their pervasiveness and hints at the obstacles faced by proposals to rein them in. While critics such asLewis see a Wall Street plot, proponents say the new system is faster and cheaper.
“What is missed in the book and in the general discussion of HFT is there are some HFT traders who respect the sanctity of the investor, and some who don’t,” said Arthur Levitt, who oversaw the Securities and Exchange Commission in the 1990s and is now a Bloomberg LP director. “When markets tank, some HFT traders disappear like specialists and over-the-counter brokers used to disappear. On the other hand, some HFT traders are there for the whole game.”
In the book, Lewis profiled IEX and its chief executive officer, Katsuyama. The five-month-old platform has curbs meant to combat trading practices the firm deems predatory.
“It’s a very, very old tactic to try to build a business on the planks of fear, mistrust and accusation,” O’Brien said today on CNBC. “This has certainly taken that to a new level.”