The equity world has been all abuzz since Michael Lewis appeared on 60 minutes last Sunday to talk about his new book “Flash Boys a Wall Street Revolt.”
The book chronicles the story of Royal Bank of Canada trader Brad Katsuyama, who after seeing his orders constantly being picked off began to investigate and found that (he believes) high frequency trading (HFT) firms were able to spot his orders and get to the market in front of him.
In the 60 minutes interview and numerous subsequent interviews, Lewis talks about the evils of HFT, at one point claiming that U.S. equity markets are rigged. This was a startling claim to some but the consensus of most market participants I have spoken to is that ‘if it is rigged, it is much less so than in the past when brokerage fees were multiples higher and stock traded in eights instead of pennies.'
Despite that HFT is nothing new and has been investigated and talked about by industry professional and regulators alike, the recent spotlight has brought renewed attention to it and renewed interest from regulators to look into whether restrictions need to be put on it. What does the book reveal that regulators don’t already or should already know?
Yet regulators and government authorities are ramping up investigations. The U.S. Justice department confirmed it is investigating high-speed trading practices. Bloomberg reported Friday that the Commodity Futures Trading Commission is joining the Federal Bureau of Investigation, Securities and Exchange Commission and New York Attorney General’s office in probing high-speed trading.
All this from a dubious claim in a book and a 60-minutes interview.
There may be certain structures within the U.S. equity markets that makes high frequency trading troublesome but the futures world with first in first out matching structures and no formal market making role is a different game altogether. Yet Acting CFTC Chairman Mark P. Wetjen provided this less than sturdy argument to Bloomberg: “I don’t have the impression at the moment that futures markets are rigged.”
Really. That quotes gives the impression that he has no idea of what HFT is or how it operates in the markets he is charged with regulating. They have been talking about it for some time yet everyone is running scared and hedging their bets.
In addition to raising a healthy debate on the subject, the controversy has served to promote the new exchange, IEX, launched by Katsuyama, the protagonist of the book. A number of brokers have put out announcements that they will access the new exchange. Just it has been less than a week since the release and Interactive Brokers and TradeStation put out announcements that they will be connecting to IEX.
If IEX delivers what it promises, it should be a success in the crowded field of equity trading platforms but there is a disturbing intersection between investigatory whistleblowing and promotion in the Lewis book, especially given the massive road show Lewis has embarked on.
Katsuyama could not have had a better marketing campaign for IEX and perhaps that is how “Flash Boys,” should be viewed.