More on Michael Lewis and high-frequency trading

Michael Lewis’s new book about high-frequency trading dropped on Monday with less than 24 hours notice and the media is scrambling to catch up. There’s plenty of love for Lewis and his books out there, but Tyler Cowen has been linking to some critiques. For Bloomberg, Matt Levine writes:

In my alternative Michael Lewis story, the smart young whippersnappers build high-frequency trading firms that undercut big banks’ gut-instinct-driven market making with tighter spreads and cheaper trading costs. Big HFTs like Knight/Getco and Virtu trade vast volumes of stock while still taking in much less money than the traditional market makers: $688 million and $623 million in 2013 market-making revenue, respectively, for Knight and Virtu, versus $2.6 billion in equities revenue for Goldman Sachs and $4.8 billion for J.P. Morgan. Even RBC made 594 million Canadian dollars trading equities last year. The high-frequency traders make money more consistently than the old-school traders, but they also make less of it.

And here’s Matthew Philips on What Michael Lewis Gets Wrong About High-Frequency Trading:

1. HFT doesn’t prey on small mom-and-pop investors. In his first two TV appearances, Lewis stuck to a simple pitch: Speed traders have rigged the stock market, and the biggest losers are average, middle-class retail investors-exactly the kind of people who watch 60 Minutes and the Today show. It’s “the guy sitting at his ETrade account,” Lewis told Matt Lauer. The way Lewis sees it, speed traders prey on retail investors by “trading against people who don’t know the market.”

The idea that retail investors are losing out to sophisticated speed traders is an old claim in the debate over HFT, and it’s pretty much been discredited. Speed traders aren’t competing against the ETrade guy, they’re competing with each other to fill the ETrade guy’s order.

And Felix Salmon:

This vagueness about time is one of the weaknesses of the book: it’s hard to keep track of time, and a lot of it seems to be an exposé not of high-frequency trading as it exists today, but rather of high-frequency trading as it existed during its brief heyday circa 2008. Lewis takes pains to tell us what happened to the number of trades per day between 2006 and 2009, for instance, but doesn’t feel the need to mention what has happened since then. (It is falling, quite dramatically.) The scale of the HFT problem - and the amount of money being made by the HFT industry - is in sharp decline: there was big money to be made once upon a time, but nowadays it’s not really there anymore. Because that fact doesn’t fit Lewis’s narrative, however, I doubt I’m going to find it anywhere in his book.

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• Felix Salmon
• finance
• Flash Boys
• Matthew Philips
• Matt Levine
• Michael Lewis

Flash Boys

Michael Lewis (The Big Short, Liar’s Poker) is back with another book about the financial markets: Flash Boys: A Wall Street Revolt. It’s the story of high-frequency trading and the traders who are fighting against it.

Flash Boys is about a small group of Wall Street guys who figure out that the U.S. stock market has been rigged for the benefit of insiders and that, post-financial crisis, the markets have become not more free but less, and more controlled by the big Wall Street banks. Working at different firms, they come to this realization separately; but after they discover one another, the flash boys band together and set out to reform the financial markets. This they do by creating an exchange in which high-frequency trading-source of the most intractable problems-will have no advantage whatsoever.

The characters in Flash Boys are fabulous, each completely different from what you think of when you think “Wall Street guy.” Several have walked away from jobs in the financial sector that paid them millions of dollars a year. From their new vantage point they investigate the big banks, the world’s stock exchanges, and high-frequency trading firms as they have never been investigated, and expose the many strange new ways that Wall Street generates profits.

From a Bloomberg article about the book:

His latest target, high-frequency trading, comprises a diverse set of software-driven strategies that have spread from U.S. equity markets to most developed countries as computer power grew and regulators tried to break the grip of centralized exchanges. While the tactics vary, they usually employ super-fast computers to post and cancel orders at rates measured in thousandths or even millionths of a second to capture price discrepancies on more than 50 public and private venues that make up the American equities market.

I don’t know too much about it but from what I’ve read, high-frequency trading seems to involve huge Wall Street banks using the Office Space/Richard-Pryor-in-Superman-III trick of shaving fractions of a penny off of trillions of trades every year, except that it’s perfectly legal. The NY Times has an excerpt of the book to further whet your appetite.

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• finance
• Flash Boys
• Michael Lewis