Market is Rigged

on 60 minutes now…Michael Lewis promoting his book

Is this the book where he talks a lot about high frequency trading ? I heard that it shows a lot of banks like CS or UBS, etc were hurting clients, while RBC was the only one that actually did the right thing?

its actually a trader from RBC and a few other folks starting their own exchange and getting the backing of a lot of big bank and einhorn as well

this is the book

It was a pretty nice segment. Insider Trading 2.0 they call it these days. That’s why its best to trade based on 1-3 month outlooks. Machines cant analyze that far out like humans can.

I’m surprised there isn’t a bounty on Michael Lewis’ head yet.


I opened this thread getting ready to rip the premise, but if the premise is HFT is evil and exploitative, I 100% concur. It is legalized theft that adds nothing to the market. HFT is fraud.

HFT is one of those things that I think will be illegal at some point, and future generations will be amazed that it was ever allowed.

I’ve been thinking about where you would draw the line between legal/ethical boundaries a lot recently. (And does this line have to be drawn in the first place). Ethically speaking, market participants should indeed add value to the market. But why? When the mkt is free-for-all why do participants have to add value? Free lunches don’t make economic sense. Hence they don’t exist. But hft (which basically rigs the mkt) makes economic sense (if you’re the one making bank).

Preach. Why is this?

Why is perfectly acceptable for an individual to buy seconds ahead of spikes in demand only to sell into that demand for a profit, but unethical for a computer to do the same thing only in miliseconds.

I take issue with the “market is rigged” title. I abhore HFT and think it’ll be illegal within a year or two, but that doesn’t mean the market is rigged. Yes, we’re paying a penny or two more per share per trade, but if you’re a long term investor that really doesn’t matter.

I guess “HFT drives up the cost for other investors” wasn’t sexy enough of a title.

michael lewis’ words not mine lol

Isn’t he a little bit late to the party. I said the same thing a month ago. Only difference is he said it smarter, with examples and names shit. You know white ppl talk.

This, there isn’t much else to say – HFT is rent seeking.

Every other type of investing in the public markets serves some legitimate purpose – longs allow people to (try to) make sensible investment decisions, IPOs / SEOs / PIPES / etc. allow companies to raise capital, and shorting allows people to hedge their longs and/or help expose fraud in the market (of which there is much under $600mm of cap).

HFT serves no legitimate purpose except to increase the cost of trading for many in order to benefit few.

increased liquidity could be the only argument that holds water for HFT

If you have a low-frequency strategy, then paying an extra cent or two shouldn’t have a huge impact on your results, unless you have enormous trade sizes like major hedge funds, mutual funds, and pension funds.

So the main losers here are day traders, maybe swing traders, and large funds. A fundamental investor with low turnover and moderate account size probably isn’t going to be much affected.

Still, what is going on still feels like legalized skimming and front running; I don’t think it will be bad at all to make this practice illegal, because there seems to be zero benefit to markets or the economy accomplished by allowing this. HFT firms always say “we provide liquidity,” but that falls flat on its face because

  1. The so-called liquidity can disappear at a moment’s notice. It’s not there when one needs it.
  2. It only makes money by providing liquidity when liquidity is already there. You want to buy something, it buys it first and sells it back to you. It couldn’t possibly front-run you and make money if there wasn’t ALREADY liquidity out there.
  3. In fact, the scheme makes money by TEMPORARILY DRYING UP LIQUIDITY so that the initial purchaser pays a higher price as a result of a temporary (and artificially manufactured) decline in liquidity.
  4. HFT creates the potential for flash-crashes due to interlocked algorithms that feed each other.

Effectively, there is zero benefit from allowing thesee kinds of trades to take place, unless you are or are invested in an HFT firm itself. To the extent that HFT makes us prone to flash crashes, there’s decidedly a big disadvantage, too.

I did like the idea they had in the article of sending orders to the farthest exchanges first, so that orders would arrive at approximately the same time.

Don’t most fundamental investors still have work sponsered retirements plans with the assets tied up in mutual funds, pension funds, etc?

Yeah HFT exacerbates crashes, HFT does not provide increased liquidity in reality.

People who scam the banking system with credit card fraud don’t impact you and me much either but it increases the overall cost of borrowing and encourages banks to slap on extra fees to recoup the losses from digital theft, so we each end up paying more in the end even if this type of behavior is relatively infrequent. Same idea. Some slippage is inevitable in any business endeavour, but it’s unclear why HFT should possibly be legal since it is systematic, embedded slippage in the market. To me it is nothing more than fraud.

Yes, but the costs of HFT will still be spread out over thousands or millions of shares, so as long as the fund is low frequency the individual impact is likely to be small.

My main point is that if the argument is “I’m losing tons of money to these guys, it should be illegal,” that argument is not likely to hold very well. Most of us are affected only on the margin by a few pennies. If the bid-ask spread is lower in an HFT world than in a world dominated by exchange specialists, it is hard to tell whetehr the computers are making our lives better or worse on a trade-by-trade basis.

A stronger argument against it is that the ability to sniff out your trades before they hit exchanges so that you can front run is more along the lines of insider trading rules, and could potentially get into anti-trust kinds of arguments if you find that one or two HFT firms effectively control almost all the volume of shares traded.

Another stronger argument is that there is virtually zero economic benefit and a substantial economic cost through risk of flash crashes and higher prices generally. It’s still a tough argument, though, because flash crashes are relatively rare and the higher prices are generally by a few cents, so lawmakers can get away with asking “what’s the big deal, anyway.”

The other challenge is how one would actually go about and make HFT illegal. What exactly will be the dividing line between high-frequency and just rapid day trading? One proposed solution is to have a tiny per-share cost to enter an order. This would be an insignificant cost if you were ordinarily trading at low frequency, but which would be substantial if you were creating millions of orders per day in order to scalp 1 or 2 cents per share by front-running.