That’s what Michael Lewis, author of Liar’s Poker and other financial books. My first thought was, “Well, he ought to know.” After all, Lewis breezily confessed to “blowing up” accounts and other financial shenanigans during his brief career as a bond salesman. But Lewis’s needs to be taken seriously. He’s a good writer, and his popular treatments of financial issues are always news. His new book, Flash Boys, explores the world of high-speed trading.
He points out that some high-speed traders pay for high-speed data lines that let them peek at the orders of large institutional traders. In essence, high-speed traders look at other high-speed traders’ orders. By doing this, they can skim money off the top of each other’s trades. So my second thought was, “Okay, this is like drug dealers shooting other drug dealers. Not a problem unless I travel through that neighborhood.”
But that kind of crime can make an entire city too dangerous for normal people to live in. If that market for buying and selling stocks is like the corner outside a crack-house, then people will worry that it’s too dangerous for them to even go near there. And that’s the problem with the book. There are simple ways for investors to protect themselves from the market depredations, but when people hear that the market is rigged, they think of other things far more serious.
There have been lots of investigations of high-speed trading and its effects on average investors. If you are a long-term investor, there are times when these players will try to scalp a penny off of your trade. Important? Yes. But earth-shattering? No. If I think Apple is valuable at 530, a penny or two won’t make much difference. I’m looking to make a lot more than a penny or two, and I’m going to hold it for a lot longer than a few seconds.
In the end, high-speed traders are mostly trying to out-play other traders, like online gamers in “Warcraft.” A major way markets are really rigged, though, is that popular authors can pump book sales by scaring individuals. That ought to be investigated.
Douglas R. Tengdin, CFA
Chief Investment Officer