Another example: Mr. Lewis spends the first 96 pages excoriating the practices of high speed traders, then casually has one of the heroes of his story (John Schwall, a Wall Street technology insider whose “father had been a firefighter…like his father before him”) ask the question, “[h]ow was it legal for a handful of insiders to operate at faster speeds than the rest of the market and in effect, steal from investors.” Wait, this is a book about folks who have done nothing more than take advantage of market opportunities in a legal way? The problem is that by dramatically juxtaposing the word “steal” — which most folks think of as illegal — next to the word “legal,” it is easy to conclude that something is terribly amiss.
Others have written on both sides of the debate regarding high speed trading far more eloquently than I can and debates about good and bad liquidity will go on for a long time. But to me, since the day I began to be involved with the markets professionally as a trial attorney for the Commodity Futures Trading Commission in 1982, it was apparent that some persons had an edge when they traded, either because they were exchange members or had access to the latest technology, and that other persons who did not share that edge were envious (including me). Every year, some folks clamored to acquire and use the latest, newest technologies while others decried progress or were frustrated because they did not possess such new advanced means (e.g., remember the outcry when some floor members wanted to use headsets or handheld computers).
This is not to suggest that some high frequency traders, like other traders, may not seek to bend rules illegally or engage in practices that cause real market harm (although, as Mr. Lewis acknowledges, the 2010 “Flash Crash” was precipitated by a mutual fund, not a high speed trading outfit).
This is not also to suggest that some market practices should be reviewed to understand their implications (e.g., make taker practices and rebates to promote market liquidity) and whether there have been unintended detrimental consequences to well-intended regulation (e.g., Securities and Exchange Commission Regulation NMS).
But in and of itself, the fact that some traders have been smart enough to exploit technology and take advantage of legal situations created by regulation is not a problem let alone a crime. And as Mr. Lewis also points out, some folks, like the new exchange IEX, can endeavor to fix perceived problems for their own commercial benefit. This is what capitalism is all about. Carpe diem!
Again, Mr. Lewis’ book is exceptionally well written and engaging, and if you like innuendo and suspense, it’s for you. However, once you begin to deconstruct his tale, you will come away thinking that, ultimately, Mr. Lewis’ story “…is full of sound and fury. Signifying nothing.” However, in my view, Shakespeare’s drama Macbeth, which contains this famous soliloquy, is far more compelling! Better to spend your money on a paperback of that — even an electronic version!
This commentary was part of Gary DeWaal’s “Bridging the Week” newsletter. Click here for complete newsletter.
Mr. DeWaal will be launching a new website on Saturday April 12.