High-speed traders 'rig' US stock market
THE United States stock market is a rigged game where high-frequency traders with advanced computers make tens of billions of dollars by jumping in front of investors, according to author Michael Lewis, who spent the past year researching the topic for his new book, Flash Boys.
While speed traders' strategies, developed over the past decade with help from exchanges, are legal, "it's just nuts" that they're allowed, Lewis said during an interview televised on Sunday on CBS' 60 Minutes. The tactics are too complicated for individual investors to understand, he said.
"The US stock market, the most iconic market in global capitalism, is rigged," he said during the interview. His books, Liar's Poker and The Big Short, highlighted Wall Street excesses.
The new book came out yesterday. "It's crazy that it's legal for some people to get advance news on prices and what investors are doing," he said.
Everyone who owns equities is victimised by the practices, in which the fastest traders figure out which stocks investors plan to buy, purchase them first and then sell them back at a higher price, said Lewis, a columnist for Bloomberg View.
To show how lucrative the tactics are, he said a technology firm spent US$300 million (S$378 million) to build a line that would shave three milliseconds off the time it takes to communicate between New Jersey and Chicago, then leased it out to securities companies for US$10 million each.
The author's comments follow New York Attorney-General Eric Schneiderman's decision to investigate privileges marketed to professional traders that allow them to place their computers within feet of exchanges and buy access to faster data streams.
Officials at the US Securities and Exchange Commission and Commodity Futures Trading Commission have said market rules may need to be examined.
High-frequency trading comprises a diverse set of software-driven strategies that have spread from US equity markets to most developed countries as computer power grew and regulators tried to break the grip of centralised 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.
High-frequency traders account for about half of share volume in the US, a statistic that shows their pervasiveness and hints at the obstacles faced by proposals to rein them in.