
Michael Lewis hits back - rberger
http://www.salon.com/2014/04/11/michael_lewis_hits_back_at_critics_this_time_i_punched_wall_street_in_the_balls/
======
RodericDay
>> “What is true,” says Lewis, “is that the sums of money involved — if you
spread it across the market — are trivial, it’s a penny a trade. But it’s
offensive as hell that rich people are stealing from middle-class people —
even if it’s just a penny. There’s also the issue of what HFT does to the
stability of the marketplace as a whole. And then there’s the question of the
whole screwed-up model it creates for success in life, when the guys who get
rich do so by skimming on the market, so all of a sudden the young people at
the best schools want to go skimming in the market — like that’s a noble
career path.”

>> “I don’t understand that argument. The little guy is the big guy. The
little guy is not the day trader on eTrade; it’s all the money packed up in
pension funds and college endowment funds and mutual funds. The savings of the
country is in big institutions.”

Michael Lewis seems like a solid guy and I love how there's endless attempts
to portray him as a sinister, self-interested actor.

~~~
throwaway201404
Lewis may be a solid guy -- I don't know him, so I can't say.

I can say with a great deal of certainty that he hasn't read, or doesn't
understand, any of the contemporary literature on market quality. If he did,
he'd know that the efficient realization of market impact (you buy and the
price goes up) is a property of effective markets. In the absence of actors to
ensure this process of price discovery, all traders will pay unfair prices as
small changes in supply and demand remain undigested.

I would also suggest that "young people at the best schools want to go
skimming in the market" is reductio ad absurdum at best and ad hominem at
worst, which sours my opinion of his ability to make a cogent argument without
resorting to the Wall-Street-bogeyman trope. Then again, I suppose that's his
job as a writer -- a story about the meek Canadian David battling the
establishment equities market Goliath makes for a better read than a nuanced
look at the role of various players in a complex ecosystem.

(Throwaway because my views are not necessarily those of my employer.)

~~~
ganeumann
I'm not sure I understand your argument. Arbitrageurs help with price-
discovery and are useful agents, though much maligned. HFT, as Lewis describes
it, is not arbitrage, it's front-running. This doesn't add to market quality,
it's just information theft.

~~~
yummyfajitas
HFTs are making price impact happen faster than big players can stop it.
That's improving efficiency. That's exactly what Lewis is complaining about.

It's not front running since the HFT is not your agent.

[http://www.chrisstucchio.com/blog/2014/fervent_defense_of_fr...](http://www.chrisstucchio.com/blog/2014/fervent_defense_of_frontrunning_hfts.html)

~~~
001sky
I'm not sure i follow the argument that introduction of information by a
middleman is adding to market efficiency. Your note expressly suggests
liquidity be be witheld...when trading with people who have information.

 _As a result, market makers try to focus on providing liquidity to people
with consumption preference while avoiding (or charging higher prics to) the
informed._

Only to usurp the information to benefit the market maker (or other
intermediary party...fronting or not) at the expense of the person introducing
information. Or, are you trying to say that person is actually 'witholding'
information and by 'appropriating' it, you are then responsible for
'introducing' it?

~~~
yummyfajitas
Big players are hiding info about their trades and changes to the demand
curve, at least until after their trade finishes. Predatory traders are
revealing this info.

------
consz
So if the one particular strategy Lewis describes in his book -- inter-
exchange arbitrage that inadvertendly beats someone's split up order -- was
stopped/prevented, is that the end of it? There are many, many strategies
across a million different products that HFTs run that have nothing to do with
trying to "front-run" someone's order, many of them market making a product
that only trade on one exchange (so no inter-exchange arbitrage to front run
anyone) on products that trade an order of magnitude more dollar volume than
US equities, e.g. E-mini S&P futures, US or german bond futures complex, etc.
Are _all_ HFT strategies bad, or does Michael Lewis have a hard on for this
single, particular strategy? My guess is that the overwhelming majority of
profits of any HFT firm do not have anything to do with the particular
strategy described in his book.

~~~
joe_the_user
Well,

One could argue that giving someone latency for money is an inherent
disservice to every other investor - whatever strategy you are following,
you're getting opportunities before everyone else. One approach would be to
have exactly one kind of connection to an exchange with a fixed delay level
that everyone has to live with. Another approach is to have a small on every
kind of transaction (Edit: other claim HFT pay a small fee and I am no expert
but it's clear one could decrease HFT by raising transaction fees).

~~~
asdfologist
IEX does neither. They introduce artificial ~350 microsecond delays on their
orders, among other things.

------
signet
Has anyone read the criticism of the book in question? The Amazon review
linked to in the article is very informative. I just finished the book and it
read like an advertisement for IEX.

[http://www.amazon.com/review/R3PJO6KJGRMWUE/ref%3Dcm_cr_pr_v...](http://www.amazon.com/review/R3PJO6KJGRMWUE/ref%3Dcm_cr_pr_viewpnt#R3PJO6KJGRMWUE)

~~~
yummyfajitas
The review is fantastic. From a quick skim it is spot on in every point - I
can detect far fewer factual errors in the review than in the hype about
Lewis's book.

~~~
firebones
Out of curiosity, since you're a strong defender of HFT here, have you read
Lewis' book yet? You mention the hype, but I've found the hype and the
substance of the book to be quite different. A lot of the hype on both sides
seems to start and end around the first few chapters (one of which was
excerpted publicly) and the "60 Minutes" piece.

When I finally finished the book, I didn't get the sense that his target was
HFT alone. He heaps plenty of criticism on the bankers, the dark pools, the
brokers selling order flow of their customers, the SEC's revolving door and
apathy, and (implicitly, with exercise left to the reader) the conflicts of
interest of the people selling the SEC the systems (MIDAS) that purport to
keep the market fair.

It's the defensiveness of the HFTs and exchanges (like Direct Edge's O'Brien)
that has me a little bewildered at why they feel persecuted in particular,
when a better strategy might be acknowledging that there are some systemic
flaws and look to fix them before another ill-thought out regulatory approach
is put into place.

I don't see IEX as a pure white knight, but I do give them props for getting
into the arena with a solution for one part of the problem instead of
complaining bitterly, spreading FUD and launching ad hominem attacks on
authors who are shining light on a whole slew of questionable practices as a
lot of the people in the hype machine have done on the financial news channels
since the book has been out.

~~~
yummyfajitas
I haven't read the book. That's why I'm not attacking the book, but only
specific claims which people who read the book repeat. Most notably, confusing
people that the "little guy" is David Einhorn, confusing everyone (including
Mark Cuban) that HFT's have some ability to "jump in front" of other orders
(they don't), and obfuscating the fact that HFT's pulling their orders is just
a way of price discriminating against big guys.

 _spreading FUD and launching ad hominem attacks on authors_

The only person spreading FUD is Lewis. I'm unaware of any ad-hominem attacks
on him - all I see is "Lewis is wrong in X,Y,Z, did that idiot even talk to an
HFT?" (Not an ad hominem Lewis being an idiot is orthogonal to the real
argument, which is X,Y,Z.)

------
svedlin
Folks interested in HFT might like this - HFT firm Virtu has a nearly flawless
daily trading record over the past 3.4 years:

[http://www.businessinsider.com/virtu-hft-only-one-losing-
day...](http://www.businessinsider.com/virtu-hft-only-one-losing-day-2014-3)

Prospectus:

[https://www.sec.gov/Archives/edgar/data/1592386/000104746914...](https://www.sec.gov/Archives/edgar/data/1592386/000104746914002070/a2218589zs-1.htm)

Looking at the S&P 500, it was positive for 55.8% of the trading days between
2010 and 2013:

[http://www.crestmontresearch.com/docs/Stock-Yo-
Yo.pdf](http://www.crestmontresearch.com/docs/Stock-Yo-Yo.pdf)

BofA had 10 trading day losses in 2013:

[http://blogs.marketwatch.com/thetell/2014/02/28/goldmans-
tra...](http://blogs.marketwatch.com/thetell/2014/02/28/goldmans-trading-
revenue-more-daily-losses-fewer-outsize-gains/)

US equity HFT revenues are around $1.3 billion, making it a pretty small niche
compared to wider market activity: "TABB Group estimates that US equity HFT
revenues have declined from approximately $7.2 billion in 2009 to about $1.3
billion in 2014."

~~~
NkVczPkybiXICG
Law of large numbers. This is not surprising.

EDIT: Law of large numbers. Not central limit theorem. I blame alcohol.

~~~
asdfologist
Um, what? If anything, applying the theorem in this case would say that
profits should be normally distributed, whereas it's fairly common for market
makers to have perfect/near-perfect trading records.

~~~
NkVczPkybiXICG
Sorry, that was vague. My point was that market participants who make many
trades will rapidly converge on their mean return, with little fluctuation. If
you sample a normal distribution 10M times with a mean of 0.01%, you will very
rarely see a negative sum of the samples.

~~~
asdfologist
The theorem says nothing of the sort. By your argument, if I flip a coin 10M
times, where heads is 1 and tails is -1, and get a mean of 0, then I will very
rarely see tails. You're confusing mean and variance.

~~~
NkVczPkybiXICG
Sorry. I said some pretty silly things.

See the new version of the posts. Hopefully it's a bit more coherent now.

~~~
asdfologist
Ok, I think your main idea was that since they've achieved consistently
positive returns, then they're likely to keep it up. Even if that were true,
the 800lb gorilla question is how they've managed to achieve such consistency
in the first place.

~~~
consz
They have slightly positive return per trade, and they make millions of trades
per day. Their PnL is the sum of their trades -- the expected values grows
like O(n), while the volatility grows like O(sqrt(n)), so for n = several
million, the probability their PnL will be negative is extraordinarily low.

------
kolbe
I will admit that Lewis has rustled my jimmies. But if he's interpreting this
"punching in the balls" as a good guy punching the bad guys, he's mixed up.
Electronic trading is the present, and it should be the future. In fact, every
market that still exists as a network of people calling one-another or
standing in a pit would be made many factors better by opening them up to the
public and allowing trades to take place on electronic exchanges.

I get scared of what Lewis is saying in the same way it scares me when I hear
of school districts banning the teaching of evolution. I'm not scared that
Lewis is right. I'm scared that his misinformed screed will actually gain
traction.

~~~
joe_the_user
_Electronic trading is the present, and it should be the future._

You know HFT isn't identical to any electronic exchange, right. I haven't
evaluated in great depth whether Lewis is correct or not. But I'm pretty sure
you can't defend HFT solely on the basis of "this is inevitable" (after all
exchanges makes elaborate and special allowances for HFT, it's not a strategy
you can sit at home and do). Any market is based on rules. If, for example,
every transaction, no matter how quick or small, involved a small fee, I don't
think HFT could exist as it does now.

Again, the point isn't that I've prove HFT should be banned but rather that
like any other construct, it needs to justify it's existence rather than talk
about inevitability - sort of like you defend patents if you want but you
can't defend based on property rights.

~~~
yummyfajitas
Tangentially, the particular construct you describe ("transaction tax") has
proved it is not worth it. Canada tried it out.

[http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeCh...](http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeChange_submission_KM_AP3.pdf)

It hurt the little guy, raised costs, and allowed the big guy to more easily
hide their orders.

------
doktrin
Tangential question :

What are the barriers to entry to HFT?

Or, put differently - how well funded would a venture have to be to
realistically compete in this space?

Assuming talent (e.g. market knowledge, quantitative skills, ML competence)
was not an issue - how realistic would it be to get access to the fiber & real
estate necessary to compete with the very few market leaders?

~~~
yummyfajitas
Fees million at most. Real estate + connections are commoditized - tens of
thousands a month for starting out.

~~~
doktrin
> _tens of thousands a month for starting out._

I couldn't find any reports of prices _that_ low. According to one article, at
least, Spread [1] charges ~$300k a month.[2]

[1] [http://spreadnetworks.com/network-
map/](http://spreadnetworks.com/network-map/)

[2] [http://www.motherjones.com/politics/2013/02/high-
frequency-t...](http://www.motherjones.com/politics/2013/02/high-frequency-
trading-danger-risk-wall-street)

~~~
yummyfajitas
My NDA prevents me from discussing pricing. If you look up my resume and do
some sleuthing, you can probably piece together the details of where to go for
it.

------
yummyfajitas
The phrase "hits back" implies he somehow addressed the arguments against him,
as opposed to merely saying "yay publicity".

~~~
asdfologist
Umm, all week he and Katsuyama have been in the media addressing the
criticism, e.g. the CNBC debate [0].

[0] [http://www.cnbc.com/id/101544772](http://www.cnbc.com/id/101544772)

------
JackFr
Billy Beane still hasn't been to a World Series let alone won one. Michael
Oher was illegally recruited by an Ole Miss booster who skirted NCAA rules by
adopting him.

Michael Lewis is Malcolm Gladwell with normal hair. He does seem like a solid
guy who really knows what he's talking about. That's how he sells books.

~~~
MikeCapone
That's strange logic. Whatever happened or not with Billy Beane, he's
absolutely right about the HFT-bank-broker strategies that he singles out in
his book. Most of the critics of the book seem to not have read it, sadly..

~~~
JackFr
I suppose my comment was silly and snarky. Clearly Michael Lewis is a gifted
writer. But he's not a journalist, and he takes sides. He uses his enormous
talent to demonize some and lionize others, when often the facts of the case
could easily be viewed from another perspective. The problem isn't simply that
Lewis's critics don't have the facts on their side; it's that they lack his
eloquence and his podium.

To that end, referring to The Blind Side, the fact that Lewis was a schoolmate
of Tuohy at an elite prep school in New Orleans, and the NCAA did investigate
the Tuohy-Oher relationship, its not beyond the realm of possibility that
Tuohy got away with something in adopting Oher.

As to Billy Beane, thanks to Michael Lewis he's touted as a visionary who
literally changed the game of baseball, except the teams he put together have
never been to the World Series, and over his GM career, the A's are slightly
over .500. It's possible that he's not so revolutionary.

This is not to say the Lewis gets his facts wrong. He doesn't by and large.
But non-fiction is like photography in that it is not a clinical
representation, and the same event from different perspectives can be
understood very differently.

------
socrates1998
I applaud Lewis' effort and maybe it will sink in this time, but this is not
really news for a lot of people.

The story is that Wall Street big powerful trading firms have an inside edge
against retail (middle class) customers.

It's not exactly new. This has been happening for decades.

They did it before computers with information, now they are doing it with
fiber cable.

~~~
mhb
If they're using their edge to reduce the bid/ask spread of the retail
customers to a penny instead of the 25 cents or more that it used to be, how
is that hurting retail customers?

~~~
MikeCapone
If that was all they were doing, that'd be fine. But read the book.

Some exchanges have 150 types of orders that are mostly undocumented and
unknown to most regular players, created specifically so that HFT can not do
what they publicly appear to be doing, or take incentives without providing
liquidity, etc. The public price that everybody seems is outdated compared to
the private prices that HFTers see, so they can risklessly front-run people
because they already know if a price has dropped or rise, etc. All that stuff
isn't just fast market-making.

~~~
NkVczPkybiXICG
Undocumented?
[http://cdn.batstrading.com/resources/membership/BATS_FIX_Spe...](http://cdn.batstrading.com/resources/membership/BATS_FIX_Specification.pdf)

The "public price that everyone else sees" is the same price as the HFTs see.
These are available on the direct feeds from the various exchanges, and
there's no discrimination against non-HFTs. Anyone who pays for it can get it.
It's an equivalent advantage to having a Bloomberg - more data, faster.

~~~
MikeCapone
It isn't. The SIP is much slower than what the HFTers can put together. Read
the book, it's in there.

