
Michael Lewis: shilling for the buyside? - nbouscal
http://scottlocklin.wordpress.com/2014/04/04/michael-lewis-shilling-for-the-buyside/
======
drcode
Yeah, Michael Lewis' recent interviews do seem a bit suspect. He is yelling
"Hey joe sixpack, Wall Street is eating your lunch!" and then when you hear
the details of the supposed "fraud" it all revolves around companies like
Goldman Sachs (who work with Katsuyama) whining that they're not getting a
fair shake in the world. (Oh right, Goldman Sachs is managing Joe Sixpack's
pension fund via two levels of indirection- Oh noes, poor Goldman Sachs!)

Plus, the interviews he's given on 60 minutes and Fresh Air never once mention
the terms "market order" or "limit order". If you don't explain those two
basic terms at the heart of the HFT controversy, you're not giving people
information, you're only giving them disinformation.

That said, there's obviously lots of shady ass shit happening on Wall Street
every day, but Michael Lewis is not helping the situation one iota, from the
looks of it.

~~~
tootie
It affects mutual fund managers who many joe sixpack types do have a stake in.

~~~
throwaway13qf85
"Joe Sixpack" is a terrible name for the average US stock investor. The median
number of shares owned by the adult US public is exactly zero. Most people who
own (publicly traded) stocks are already wealthy. "Joe Chateau Lafite" would
be a better name.

Source: some Matt Levine article.

~~~
aetherson
Even if this were true, so what? If you have to reach the 60th percentile, or
the 80th, before Americans have stock amounts, why is that a big deal? It's
clear that many Americans who are not the ultra-rich/utterly-financially-
secure types own stock, and own stock in amounts that are relevant to their
own financial health.

I don't think it's helpful to anyone's understanding of any situation to try
to pretend that tens or hundreds of millions of Americans -- who are on the
whole somewhat wealthier than average -- are mega-rich snobs who drink ten-
thousand-dollar-a-bottle wine.

~~~
bradleyjg
You need to distinguish between two ways people are affected:

1) Indirectly via mutual funds, pension funds, and so on.

2) Directly through buying individual stocks on E*Trade or the like.

The second amounts to an expensive hobby (in risk adjusted terms). Whether
some people who aren't ultra-rich choose to indulge in such an expensive hobby
is neither here nor there, the underlying fact remains that there's no good
reason to care about or optimize for their benefit. Yet for some reason so
many articles on this subject instead of talking about the funds that are
broadly and rationally held, analyze the situation for the small retail
investor.

------
elecengin
I think "shilling for the buyside" is a bit strong. Lewis aggressively pursued
a compelling and simple narrative in a market that doesnt have an easy story.
I get the impression he didnt even recognize that the field he decided to plow
was a minefield. The HFT debate is complicated and has serious implications:
his treatment didn't respect it.

From acquaintances that knew Katsuyama personally, he was described as a
genius marketer, not a technologist. Before even Lewis came along, he had
crafted a large part of this narrative: the Thor matching technology succeeded
on a compelling story. Lewis got sucked in.

The personal reactions you may have seen (William O'Brian on CNBC) are
authentic: HFT participants (and those who deal with them) have been villified
in an industry already viewed in a negative light. There are some bad apples,
but there are also many who genuinely believe that they are doing a service
for the market.

I don't blame Lewis for this. I just hope that there is an author that can
create a compelling story that doesnt fall for the tired trope of the evil HFT
trader. The story exists - it is just very technical and nuanced at times.
Unfortunately, many HFT participants have been shamed away from standing for
what they believe in so there are very few left to tell the story.

If you want to read a rebuttal and learn more about the markets at the same
time, check out this analysis by Larry Tabb - a market research consultant
prominent in the US execution technology market:
[http://www.scribd.com/doc/215693938/No-Michael-
Lewis](http://www.scribd.com/doc/215693938/No-Michael-Lewis)

~~~
erichocean
> there are also many who genuinely believe that they are doing a service for
> the market

You make it sounds like HFT is some sort of non-profit, community service
vocation, like teaching, or fire fighters. Do people actually think this?

Regardless of the merits of HFT, that kind of argument seems very
disingenuous. I haven't met a single person engaged in HFT who is doing it to
smooth the function of the market or "provide liquidity". They may think it
has that effect, but _no one_ is in it for that reason. If anything, it's what
they tell themselves to justify skimming money from the other market
participants.

~~~
tptacek
You can replace the letters "HFT" in your comment with "any market maker" and
come to exactly the same conclusion.

Liquidity has always, _always_ been subsidized by "skimming". The rake market
makers take from trades is the cost of liquidity: ie, of being able to buy
shares immediately without getting shafted because the only orders on the
market are from large traders who are holding out for very high prices.

Have you ever tried to sell a house? That's what crappy liquidity looks like:
there are buyers and there are sellers, but nobody is anywhere near agreeing
about the price of the goods being traded, and so it takes months to get in or
out of a position, and you sometimes have to do it at extremely unfavorable
prices.

~~~
danielnaab
The problem is that market making is different than the critique, which is
that having privileged access to exchange data centers is an unfair advantage
that allows rent-seeking. To access information before the general public
allows traders to inject themselves into transactions that don't require a
market maker.

That fact that no one will defend this practice while vehemently defending
"HFT" speaks to an impedance mismatch. We're not talking about the same thing.

~~~
harryh
They have faster access to exchange data centers because they paid for it.
Anyone can pay for this access. They use this privileged access to provide
faster and cheaper service to their customers (purchasers of liquidity).

It's no different than McDonalds paying a lot of money to buy a prime corner
location to build one of their restaurants.

~~~
danielnaab
You can pay for a lot of things, but that doesn't mean it's in the interest of
society or the market as a whole. You don't require faster access to provide
liquidity, but it sure helps with arbitraging trading activity.

~~~
tptacek
You can pay for a lot of things and that doesn't mean it's _not_ in the
interest of society or the market as a whole either. The trading in any one
instrument on an exchange is a zero-sum game, but the structure of the market
and the relationship between exchanges, buy-side firms, sell-side firms, and
retail investors doesn't have to be.

Before electronic trading, the specialists who executed orders on the NYSE
floor ALSO paid shitloads of money for their access.

One difference between today and the heyday of the specialist system is that
in the specialist system, middlemen skimmed _overtly_ from investors: the bid-
ask spread was gigantic, and all that money went to the middlemen.

~~~
gnopgnip
The increased liquidity/ reduced execution risk changes it from a zero sum
game.

------
tpeng
People ITT are not making a distinction between different types of HFT.
Katsuyama and Lewis do not criticize all forms of computerized trading, but
specifically computerized scalping that is aided and abetted by exchanges.
Their chief complaint is that HFT uses more current prices than the exchanges
themselves and they use this to scalp other traders.

[http://www.zerohedge.com/news/2014-04-03/bats-admits-ceo-
lie...](http://www.zerohedge.com/news/2014-04-03/bats-admits-ceo-lied-about-
hft-cnbc)

This is actually very simple. Natural buyers and sellers do not need
intermediaries, but intermediaries do need the natural traders. So if the
natural traders can coordinate, they should be able to set rules that favor
themselves and disfavor intermediaries. I won't say that what HFT does is
"unfair" (capitalism does not contemplate fairness), but I think it's highly
ironic that HFT and their supporters are complaining how "unfair" it is that
natural traders are working together, and yes, marketing their new exchange.

~~~
msandford
Very nicely put. Yes it's a bit hilarious.

The HFT folks seem to be saying "you don't have a right to add up all the
total amount of asks at a certain price across all the exchanges and expect to
get execution at that price" and with a bit of thought I might agree with
them. But it is very counter-intuitive. If you see 10,000 shares for sale
across 10 exchanges at $54.00 your VERY next thought probably isn't "oh that's
actually 1,000 shares, but advertised on all the exchanges so it only LOOKS
like 10,000" Once you understand how things works, sure fine.

The counter to that, though, is that the HFT folks don't have any right to
have access to order flow. If market participants want to route their orders
to a particular dark pool or exchange they have every right to. The "markets
are always right" sword cuts both ways.

~~~
auntienomen
They do have every right to route their orders where they will. It's telling
that most of the buy side prefers to route their orders to public exchanges
rather than dark pools like IEX.

~~~
tpeng
The buy side doesn't route orders. Brokers route orders, and they aren't
required to tell their clients where they route the orders. (Some good brokers
do allow traders to direct routing, but I believe it's not common).

Also, there is a network effect to overcome here. Try to give IEX more than a
few months before writing their obituary. They haven't even fully launched yet
(they are still a dark pool)

------
RockyMcNuts
The market exists the benefit for the 'buyside' e.g. people who own stock, not
for the benefit of the middlemen like exchanges and HFT marketmakers.

You may not like homeowners and think some of them are or should be convicted,
but it's ridiculous to say someone is 'shilling for homeowners' when they
point out that real estate brokers are overpaid and skimming.

Some more balanced discussion -
[http://streetwiseprofessor.com/?p=8333](http://streetwiseprofessor.com/?p=8333)

[http://blogmaverick.com/2014/04/03/the-idiots-guide-to-
high-...](http://blogmaverick.com/2014/04/03/the-idiots-guide-to-high-
frequency-trading/)

[http://blogs.hbr.org/2014/04/high-frequency-trading-
threat-o...](http://blogs.hbr.org/2014/04/high-frequency-trading-threat-or-
menace/)

In a nutshell, people who run big portfolios don't want to give away
information about what they're doing, and they don't want HFT types to be able
to pay exchanges to get first crack at front-running them.

On the other hand there is a legitimate market-making function, and there's a
tradeoff between transparent markets and forcing people to share info that
lets other people trade against them.

~~~
tptacek
The buy-side is buying liquidity. The sell-side is selling it. That's
basically what the terms mean.

It's not particularly meaningful to say that the market exists "for" the buy-
side. The real estate market exists for the real estate buy-side, too. But it
takes 5 months to sell a house, because nobody is selling liquidity; instead,
you have to work through an ineffectual sell-side agent who takes tens of
thousands of dollars out of your hide for the privilege.

~~~
RockyMcNuts
no, the buy side is long. the sell side is selling things like IPOs, etc. that
the buy side might want to buy. sometimes they provide liquidity, sometimes
they're just an agent and rent-seeker.

markets, trades, liquidity are a means to an end, not an end in themselves.
every trade is a friction and a cost, and only happens because the two sides
aren't happy with their portfolio.

"more friction in your machine is generally bad and just creates heat."

"oh, but that's not meaningful, people who make sandpaper and grippy tires are
needed to create friction"

"..."

~~~
harryh
Your uses of the terms "buy-side" and "sell-side" do not conform to how the
financial community (of which the author of this blog post is a member) uses
them. It's not the buying vs selling of securities. It's the buying vs selling
of financial services (of which liquidity is one).

~~~
RockyMcNuts
Your definition is probably better but I wouldn't expect more than 20% of
people in the industry to define it correctly that way. (and the buy side is
selling financial services to someone too...the buy side holds portfolios of
securities, sell side makes money generating transactions...distinction can
get quite arbitrary when you have buy side strategies that involve lots of
transactions and selling liquidity)

bottom line is... greasing the wheels of commerce good, making wonky wheels so
some goofball can sell more grease services bad.

------
matthewmcg
I am still reading the book, but it seems like Lewis' main criticism in the
book (vs. interviews) is against the so-called HFT front-running of orders
that get routed to multiple exchanges. He is careful to distinguish market-
making/liquidity providing functions from the multi-market latency arbitrage
and spends a good part of Chapter 4 exploring this distinction.

Perhaps his public statements in interviews haven't been so nuanced.

Also, these rebuttals to the book don't really address the front-running
issue. Is it simply an unavoidable consequence of the physical reality of
separate markets? Should anything be done about it? Is it even still occurring
or has competition among HFTs and savvier buy-side order routing eliminated
it? I would like to read a rebuttal that discusses this.

~~~
tptacek
One of the more disingenuous things about Lewis' book (caveat: I'm only
halfway through, because I'm listening to the audiobook and, on the advice of
another reviewer, switched to the book _Dark Pools_ in midstream) is the
rhetorical sleight of hand he plays with the term "front-running".

In Lewis' universe, the price movement that happens when an informed trader
tries to piecemeal-fill a 100,000 share order is "front-running".

But in Larry Harris' universe†, not only is price movement during block
shopping not "front-running", it is the fundamental reason for the existence
of sell-side firms; in other words, the challenge of stealthily shopping
100,000 shares of thinly-traded product XYZ is the reason that Katsuyama made
$2MM/yr.

Lewis posits that the natural state of affairs is that there's an NBBO for
XYZ, and that Katsuyama should expect his equities desk to collect fat fees
simply by accepting a block order from a client, pushing a button, and
unloading it at the current best bid, whereupon at the completion of this
order the price will change to reflect the altered supply/demand condition of
XYZ.

But that is crazy. The presence of a 100,000 order changes the supply/demand
conditions for XYZ. For RBC to expect to sell 100,000 shares at the current
bid, it must expect to get something for nothing: to take the price hit for
the increased demand of XYZ out of the hide of whoever is holding it right
now.

Before HFT mania, "front-running" meant something very specific: it was a
problem of agency. A client/broker relationship existed, and the broker
exploited it by trading in front of their client's order. The client had a
right to expect the broker to act in their best interests. But the markets as
a whole aren't a positive-sum system; in the absence of a contractual
relationship, nobody has an obligation to act in the interests of anyone else.
A dollar you make on the market is a dollar someone else didn't make.

†
[https://news.ycombinator.com/item?id=7526783](https://news.ycombinator.com/item?id=7526783)

~~~
tpeng
The specific example given in the book is that an existing ask sized at
100,000 is already sitting on the order book when the buy order goes in at the
ask price. The ask then disappears before the order executes. This is very
different from the market moving in response to an order that has no market
fill.

~~~
harryh
The 100,000 shares are sitting on the order book at different exchanges. It's
not a single block being traded with a single order. That's a critical
distinction.

~~~
tptacek
If it were a single order in the book, I'm not sure I see the advantage HFTs
would have conceptually had. They're not sniffing individual orders and then
outrunning them before the original order hits the exchange; they're
exploiting the individual piecemeal orders that are stealthily trying to move
the block.

They're hunting down the orders of informed traders who are trying to exploit
their own knowledge of the true price of products, and correcting the price on
the market before those informed traders can take their knowledge out of
everyone else's hide.

~~~
kylebrown
The institutional orders get baited to BATS BYX with "taker rebates" (on BZX
the fee structure is the normal maker-rebate taker-fee, but on BYX it is
reversed). It hits BYX first because the broker's router is programmed to send
it there first for that rebate, but its only for a minimal amount of shares.
And that's a signal which the HFT firms use to pull or front-run equivalent
offers on the various other exchanges.

The other big scam seems to be HFT firms buying a broker's order flow - for
hundreds of millions of dollars. For example, Schwab sold its order flow to
UBS for 8-year contract in 2005, for $285 million. It was massively
underpriced, Schwab is said to have left a billion dollars on the table. And
UBS, in turn, sold Schwab's order flow to Citadel for an undisclosed sum. Why
is the right to execute a broker's order flow so valuable? Nobody seems to
have a good answer, but the obvious reason is that its easy scalping.

~~~
e40
I see a lot of heat generated in this discussion, but I don't see an answer to
your second paragraph. That's the answer I want to see.

~~~
mmodahl
It is the easy scalping he mentioned.

A market maker can only stay in business if they sell as much as they buy and
if the average sale price is above their average buy price. They lose money if
they provide liquidity in the way of market moving forces.

Market makers try to avoid informed and "toxic" order flow and broker flow is
guaranteed source of small uninformed orders that are most likely going to be
crossing the spread.

------
forgotAgain
This article seems like nothing more than an overly long ad hominem attack.

The only critique that matters is whether or not front running of buy orders
by HFT traders is real or bull. Anything more is just an attempt to cloud the
waters.

~~~
Guvante
It was especially disappointing when he dismissed the front running as always
having been there.

~~~
harryh
He didn't say front running has always been there. He said market making has
always been there. Market making is a valuable service and it's great that
it's cheaper than ever.

------
lmg643
This was a great article. I started reading the book. Early on, one of the
examples given was "Brad talked to a friend of his at SAC Capital" about how
HFT firms were taking advantage of information in the markets.

That is the kind of unintentionally ridiculous anecdote which undermines the
moral center of this book. SAC Capital, after all, is the same fund which ran
into one of the largest insider trading cases in history, which is also about
taking advantage of information in a, let's say, special kind of way.

I know a lot about this subject, probably too much to let the judgment fall
cleanly in one camp or another on HFT, but with all the hubub right now, I
find it might be useful to get biblical for a second - let the person who is
without sin cast the first stone.

~~~
matthewmcg
Is the anecdote really unintentionally ridiculous? Lewis acknowledges SAC's
later infamy in a parenthetical (quotation below). And the point of the
anecdote is that even a party that went to great (and illegal) lengths to gain
an informational edge didn't understand the new phenomenon of latency
arbitrage by the HFTs.

Quotation: "He had a good friend who traded stocks at a big-time hedge fund in
Greenwhich, Connecticut, called SAC Capital. SAC Capital was famous (AND SOON
TO BE INFAMOUS) for being one step ahead of the U.S. stock market. If anyone
was going to know something about the market that Brad didn't know, he
figured, it would be them."

~~~
lmg643
Of course it's ridiculous. The book makes no actual mention of what SAC did,
to avoid cognitive dissonance. Perhaps SAC was infamous for dwarf tossing -
not illegal but in poor taste. I don't think the 60 minutes audience would
have SAC's transgressions on instant recall. Lewis declines to specify
anywhere in the book that SAC was engaged in criminal violations of
established securities laws, while he writes an entire book about the evils of
HFT, which in large part is mostly an issue of what types of trading we want
to permit and not widespread illegal activity.

And did Brad "figure" SAC would know because he knew that SAC pursued
informational advantages to the extreme? Did he think that was unethical,
crossed a line, so they would know about other activity that crossed the line?
That seems like a really strange line of thinking.

It also seems strange that this super ethical guy would attack activity which
is legal, but turn a blind eye towards known unethical or suspected illegal
business. Did he know about the rumors of insider trading? Did he knowingly
solicit business from a firm which he had reason to suspect was engaged in
insider trading?

------
scottlocklin
If you think I'm a dork, or too much of a Michael Lewis hater, I encourage
people to read this Amazon review, which gets into a lot of interesting small
details Lewis got wrong:

[http://www.amazon.com/review/R3PJO6KJGRMWUE/ref=cm_cr_pr_vie...](http://www.amazon.com/review/R3PJO6KJGRMWUE/ref=cm_cr_pr_viewpnt#R3PJO6KJGRMWUE)

~~~
kasey_junk
This is very close to the blog post I would write if I were going to write a
critic of Flash Boys. I'd add the following:

IEXT has a few main selling points. 1 transparency, 2 simplicity, 3 looking
out for "investors". The problem is that they aren't any of those things and
it is obvious from a simple reading of their technical documents.

First transparency. Their marketing pitch is that as opposed to other dark
pools, they are transparent about what is happening on their markets. Yet the
first thing they say in their technical documents is "IEX will commence
operation as a fully NON- ---DISPLAYED venue." What this means is that their
order books is not available for outside audit. They are meeting the lowest
hurdle to regulatory compliance by providing best bid/offer and no more. If
you think that is ok, let me ask you. If I told you that there was 1 buyer
willing to buy at 10.00 and 1 seller willing to sell at 11.00 what would you
think the "real" price for that instrument is? What if I told you that there
was 1 buyer at 10, 1 seller at 11, 100 million buyers at 9.99 and zero sellers
at 11.01? If you think those markets should be priced the same way, IETX is
for you. If not, realize that IETX would tell you those markets are the same
thing.

As far as simplicity, Flash Boys and the IETX marketing materials make a big
deal about all of the order types that provide advantages to market makers,
yet they remain silent on those order types that are explicitly there for
large institutional investors. Lewis rages against ALO orders yet doesn't even
mention iceberg orders which the sole point of is to hide the amount of shares
a participant wants to sell. Then he extols the virtue of IETX for only
offering 3 order types (which has since risen to 4), yet doesn't explain that
in those 3 order types are many variants that only benefit large investors.
IETX has literally removed all of the order types that allow market makers to
do their jobs, while leaving all the order types that allow large institutions
to hide their order flow. One of the most controversial order types out there
is an ISO order, which is literally a legislative exemption for large block
buyers that allows them to circumvent regulation about the national ticker.
IETX offers those sorts of orders, but you will be happy to know they don't
support "esoteric" orders.

The most egregious problem in Flash Boys is Lewis' use of the term "investor".
He uses this term to make his readers think he is talking about them, after
all anyone who is not an HFT, who is long holding a stock is an "investor".
Yet the practices he describes as predatory, are really simple market
dynamics. If an "investor" wants to buy or sell an extremely large block of
shares, that should move the market price. No other marketplace would think
differently. If McDonalds buys all the cows in America, beef should cost more.
We all understand that. But the giant hedge funds of the world hate this. They
want to use their privileged information of demand to make money, and not
change the prices of the things in demand. They used to be able to accomplish
this because the markets were dumb. They aren't anymore. Price discovery is an
extremely efficient (and cut throat business). IETX does its gosh darn
Canadian best to undercut that. Literally every rule they have is an attempt
to hide demand and undermine price discovery. It's possible that bad pricing
is an overall societal good. I'm not smart enough to weigh in on that. I will
ask, if they are looking out for the little guy though, why do they have a
special order type that insures that big investors don't trade with them (min.
qty orders)? They will respond that it is protection against predatory HFT. I
ask you though, if the huge hedge funds of the world don't want to trade in
small volume with the rest of the informed markets, at the lowest prices
conceivable, who do they want to trade with? The answer is large dumb funds,
who don't care about trading at inflated costs. I.E. pension funds.

~~~
harryh
As much as there are a lot of people in the world (many of them right here on
Hacker News!) who don't care about the mechanics of how liquidity is
provisioned in markets and consequently have kind of backwards views of HFT
most of these people aren't, you know, trading stocks.

So here's my question: since the people that are trading do tend to understand
these things (if for no other reason that they'll go bust if they don't),
won't liquidity providers run away from IEX as fast as they can? How do Brad
Katsuyama and his partners think they'll actually scare up enough liquidity to
get maintain a functioning market?

I'm a little befuddled by this.

~~~
kasey_junk
I've actually been thinking a lot about this. So, every other dark pool in
existence, has started with the same premise as Brad and his merry band. That
is, "man our big investors are getting killed due to good pricing in the
markets". So the first thing they do is come up with a variety of schemes to
obfuscate the order flow of these big investors. Invisible order books, ice
berg orders, preferential routing, min. qty. orders etc.

These schemes succumb to 1 of 2 problems

1) they are trivial to game by market makers. That is, the exchanges make
their money on fees, the market makers make their money on finding
inefficiencies in the markets, who is better positioned to find the places
that a market protection scheme falls down? Of course it is the market makers.
This is why you see stories of HFT "pinging" black pools, or creating routing
tables, or whatever other wild information advantage that they can come up
with. At the end of the day, big brokers/ibanks still get to eat if their
schemes don't work, market makers don't.

2) If an exchange actually does find a way to limit market maker profits, they
simply stop trading there. The liquidity dries up and the dark pool has to
figure out some way to justify it's existence. Usually by relaxing their rules
and allowing the tricks described in 1) or by negotiating a preferential deal
with a couple of HFT firms that have some sort of price protection involved
(which may be as shady as, only screw my clients I don't care about).

Brad, Lewis, and the IETX backers have figured out another strategy. Convince
enough of the "dumb" money to demand that their trades be routed through IEX
that they can create a self sustaining dark pool. They actually don't care
about retail investors. If a couple of thousand of them call up and demand
that their broker get on IETX that's fine. They've made the barrier to entry
cheap enough that it doesn't cause a lot of overhead. But what they are really
looking for is the uninformed institutional investor. The East Gary Fireman's
Booster Union, needs to unload 65k of GOOG that some shady Morgan broker sold
them. They think of IETX first. There sits Einhorn and his fund ready to hit
it for all he's worth. No intelligent liquidity provider there to take any of
his execution costs.

It's sort of brilliant and shows why I'm a dumb HFT market maker technologist
instead of a billionaire (or millionaire in Brad's case) Wall Street type.

~~~
harryh
You think they'll succeed with this third strategy? Are there enough gullible
East Gary Fireman's Booster Unions to make it work? It still seems a little
far fetched to me. How much will regulations protect Mr. East Gary from
shooting himself in the foot when the IEX price moves away from everyone else?

PS: You've probably already watched it, but if you haven't you should really
watch the YouTube video on the iextrading.com homepage. It's...really
something.

~~~
kasey_junk
I don't know what their success criteria is. Do I think that they will sweep
the markets and become the dominate exchange? Absolutely not. Do they have a
chance to drive enough volume to the dark pool to keep their backers execution
costs + investment less than their execution costs on other exchanges? Maybe.
If they do that though they may have another class of problem. Other investors
looking to back them. If broaden that pool it gets harder and harder to keep
their execution costs down.

------
nbouscal
An interesting study on the topic concluded that HFT helps retail investors
and hurts institutional investors:
[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)

------
blue11
You don't have to agree with Michael Lewis' views or buy into the story line
100% in order to enjoy the book. The fact is that this is a well-written book
that is full of mini-stories and anecdotes that present very realistic
descriptions of how electronic markets and Wall Street in general work.
Statements like "the market is rigged" are obviously over the top but that
doesn't mean that the book on average is not true to reality. Most books about
electronic trading suffer from extreme sensationalism, poor writing, and the
inability of the authors to understand the subject matter that they are
writing about. Michael Lewis does a better job than everyone else. He is a
great writer and he is a smart guy who has some financial background and has a
pretty good understanding of financial markets. Yes, there is some
sensationalism here (he has to sell a good story after all) and there are many
errors in the book, and, yes, the author's biases are quite evident, he's
picked a side and he's sticking to his story. On aggregate, though, this is
probably the best book about the world of electronic trading that I've read.

(Some people mentioned "Dark Pools" by Scott Patterson. Although also
interesting, that books was often quite painful to read because it was quite
clear that the author did not understand basic financial and programming
concepts. "Flash Boys" is much better, in my opinion. Although if you are
really interested in the subject, you should read both.)

~~~
harryh
You basically just said that people should read the book because, even though
it's mostly wrong, it's well written.

Isn't that kind of crazy?

~~~
blue11
I'm not saying that it's mostly wrong. I am saying that it's a biased
perspective, but most of the contents is factual. You can learn interesting
things about the markets, and about the individuals and the companies
involved. However, this is one side of the story. Michael Lewis' facts were
gathered from people that were close to him and the people that he could get
to speak to him. It's one circle of people with their own agenda. But there
are many other views out there. So he is presenting the facts that he knows
about and that he thinks are important. But there are things that he is
perhaps omitting on purpose, and things that perhaps he just doesn't know or
understand. The book is not the whole truth. As with any good book or article,
you can learn a lot without having to agree with the author's conclusions or
his personal views.

~~~
kasey_junk
I'd be happy with that outcome if that's what happened.

Instead I've spent the last week explaining to people (including my mom) why
the opinions of an exchange bought and sold by folks with a vested interest in
not allowing price discovery are painting me as evil.

Add to that the very real fact that for whatever reason, incompetence, bias,
or laziness, Lewis has literally misrepresented the way the markets work, and
the way participants thought it worked for many years and you can under stand
why some of us are upset.

~~~
tpeng
I've seen this argument advanced several times now, but it doesn't make sense
to me. Looking at the investors of IEX -- David Einhorn, Dan Loeb, Bill
Ackman, Capital Group -- these are some very, very smart people. They're not
idiots that were sold a bill of goods by a lying, bumbling team of Lewis and
Katsuyama. And while they may have a vested interest via their investments in
IEX, it's dwarfed by their interest in reducing slippage on their own trades.
IOW, it doesn't seem like they are talking their book. It seems like they are
really seeking a fairer market. (Obviously, what's "more fair" to one party
may be "less fair" to another)

~~~
harryh
If something is "more fair" for David Einhorn, Dan Loeb, Bill Ackman & Capital
Group, who do you think it's "less fair" for?

~~~
tpeng
I was simply pointing out that fairness is a matter of perspective, and in a
sense, arbitrary. If I were an HFT I would no doubt think that IEX would be
unfair to me.

I will claim that the proposed solution (IEX) creates a fairer market for the
vast majority of market participants.

------
001sky
If your ISP packet sniffed your network and traded against your positions in
advance of them coming to market would you have a problem with it? How about
if they put up an MITM to get your credntials and then installed a key-logger
to make it more effective and faster? One could argue that once you hit "sell"
or "buy" your electrons are public information. But others might consider them
NPI. I don't think that the issue is completely cut and dry, at least no just
yet.

------
stygiansonic
Seems like this book is causing quite the ruckus with certain brokerages:
[http://pressroom.aboutschwab.com/press-release/corporate-
and...](http://pressroom.aboutschwab.com/press-release/corporate-and-
financial-news/schwab-statement-high-frequency-trading)

Yet they are more than happy to sell their order flow to market makers who use
HFT. (To allow them to trade against it before going to the exchange - as is
customary - nothing wrong with that)
[http://www.schwab.com/public/schwab/nn/legal_compliance/impo...](http://www.schwab.com/public/schwab/nn/legal_compliance/important_notices/order_routing.html)

Seems like they are jumping on the populist bandwagon by claiming "HFT bad!"
but I think what they mean is "HFT bad - unless it's from one of the firms we
sold our order flow to!"

~~~
AustinScript
I would disagree that this would be considered jumping on the populous band
wagon, if you've read the article, you'll see that Schwab originally released
an Op-Ed in the summer of 2103 echoing similar concerns.

He took a public stance on HFT a full year before the book was released.

Taken directly from the release you linked-> As we noted in an opinion piece
in the Wall Street Journal last summer.

[http://blog.themistrading.com/talk-to-chuck-about-
hft/](http://blog.themistrading.com/talk-to-chuck-about-hft/)
[http://online.wsj.com/article/SB1000142412788732358290457848...](http://online.wsj.com/article/SB10001424127887323582904578484810838726222.html)

------
aasarava
Can someone explain how HFT would "provide liquidity", which seems to always
be the pro-HFT response? To use an analogy, if I want to buy a house and
someone is selling a house, how does a third-party buying the house first and
selling it to me a slightly higher price provide liquidity?

~~~
reverend_gonzo
Saying Alice wants to sell a house, but she needs to sell the house now, and
is willing to take slightly less money to get it sold. That's when the HFT
comes in says, "Okay we'll buy your house for slightly less than market value,
since we're taking the risk that we can resell it." That's Alice crossing the
bid-ask spread, and paying for liquidity.

Suppose Alice doesn't want to pay for liquidity. She can just as well say, I'm
going to wait for a buyer willing to pay the ask price. She doesn't trade with
an HFT and instead takes the risk that a buyer never shows up or that the
market moves against her. This is equivalent to an add-liquidity-only order.
She won't be crossing the spread, and she therefore she won't pay the bid-ask
spread.

It's the same thing if you're buying. If you don't want to pay for liquidity
you don't have to. You state your price, say you'll only add liquidity, and
when a seller comes along who's willing to give it to you at that price,
you'll be matched.

~~~
AnthonyMouse
Let's unpack that a little. For most publicly traded stocks, there are always
going to be willing buyers and willing sellers, for the right price. Those
prices, respectively, are the bid and ask prices. So for example, if you want
to trade shares of some stock, the bid might be $100.00 and the ask might be
$100.10, i.e. someone will buy from you at $100.00 and someone will sell to
you at $100.10.

Obviously if the buyers and sellers hold fast then no trades get made: The
buyers are offering less than the sellers are willing to accept. If you want
to make a trade then someone has to cross the spread -- either the buyer has
to pay $100.10 or the seller has to accept $100.00. This leaves room for
speculators: When a seller decides they want to trade right now and they cross
the spread, the speculator can buy the shares and then hold them until a buyer
comes who is willing to cross the spread, and then the speculator profits by
buying at the bid price and selling at the ask price. The speculator is taking
the risk that in the meantime the price of the stock may go down and they'll
lose money, and that risk is what earns the profit.

But HFT isn't that. HFT is having fast computers sitting in Chicago and New
York, so that when a buyer crosses the spread in Chicago at the same time as a
seller crosses the spread in New York, the HFTer can arbitrage the
transactions with the foreknowledge that both trades will clear immediately.
The HFTer is not taking a risk proportional to the profit but rather is
profiting from trading with superior information. Moreover, the HFTer is only
holding the shares for milliseconds. How does that provide any useful amount
of liquidity? Why can't we arrange the exchanges so that if a buyer and seller
both cross the spread at approximately the same time, they split the
difference and no third party takes anything?

~~~
hft_throwaway
The HFT is taking risk though. Like everything else in markets, nothing they
do happens at the same time either. They could miss on one side of the trade
if another player is faster, and then they're stuck in a position they might
not want.

Also think about this in terms of what happened, the two counterparties got to
interact without being in the same place or product. Yes, they could have
traded if they were both in the same place, but they weren't. Surely providing
that service is worth something. You could buy your meat wholesale, but the
grocery store isn't ripping you off by selling it for $1 more a pound
somewhere closer to home.

Think about what would happen to others if the HFT wasn't there, too. Prices
would diverge and traders on one of the exchanges would be trading away from
the real value. By keeping prices in line, information is transmitted from
market to market more efficiently. A trader who isn't concerned with cross-
market arbitrage doesn't need to connect to and watch multiple markets to get
a fair price.

HFTs are obviously motivated by profits, but the level of profit is extremely
low for the amount of service they provide. Virtu trades over 5% of the US
markets and made slightly over $100 million. They only have a couple hundred
employees. Think about how many people were required to make markets globally
before technology. Only a fool would argue that we should go back to that
system.

~~~
AnthonyMouse
> Think about how many people were required to make markets globally before
> technology. Only a fool would argue that we should go back to that system.

Who is even suggesting that?

Distinguish between the result and the method. Having prices be the same on
all exchanges is obviously desirable. But why do we have to reach that result
_in this way_? Why not instead have the exchanges talk to each other and have
trades on any exchange automatically go to all the other ones, so that prices
are always the same programmatically without having to pay any third party to
keep them that way?

~~~
harryh
Because
[http://en.wikipedia.org/wiki/CAP_theorem](http://en.wikipedia.org/wiki/CAP_theorem).

It's a distributed system. You want it to keep working (be available) all the
time right? Guess what, you're gonna have to lose some consistency.

~~~
AnthonyMouse
For extremely high availability systems like this it is generally better to
choose both consistency and availability at the expense of partition tolerance
and then mitigate the possibility of partitions with meshed multiply redundant
interconnects.

Moreover, you don't strictly need a distributed system. You could instead
elect one exchange at any given time as the primary and clear all inter-
exchange trades through that exchange.

~~~
harryh
It's really fun watching you turn into such a pretzel that you want to somehow
get around the CAP theorem and/or go back to the days of monopoly exchanges
all to get away from the horrible evil of a cost for liquidity of less than
0.1%.

Don't miss the forest for the trees.

~~~
AnthonyMouse
Citing the CAP theorem as a reason not to have a distributed system is like
citing Arrow's Impossibility Theorem as a reason not to have a representative
democracy. Proving the impossibility of a platonic ideal doesn't tell you
anything about whether one imperfect system is superior to another in
practice.

And you can't hand wave away the fact that the implications of the CAP theorem
are minimal on a distributed system with a high level of interconnect
redundancy. If you can ensure with high probability that there will not be a
partition in the network then you don't need partition tolerance. If against
all odds you have a partition anyway then you lose availability, but that
isn't a characteristic unique to the CAP theorem or distributed systems -- any
system will lose availability if enough redundant components fail
simultaneously.

~~~
hft_throwaway
Exchange gateways fail, network lines fail. This happens all the time. In the
current system I can still trade if NASDAQ goes down.

------
anonu
My concern is that Michael Lewis and his books have great popular appeal.
Furthermore, he is jumping on the popular bandwagon of bashing HFT. They lay
person will look at these facts and simply conclude that he's right. The
problem can easily extend to other buy-siders who dont really full understand
(or care to understand) how market microstructure works in the US.

------
JackFr
I suppose one could add this book to

The Blind Side -- the story of how one of Michael Lewis's classmates as an Ole
Miss booster, gave impermissible benefits to a high school recruit and got
away with it.

Moneyball -- the story of a GM with 0 World Series appearances and a .530 WP.

------
skywhopper
Always good to start out an article critiquing the argument in a new book by
showing a picture of the author and making a snide remark about his
appearance. Immediately gives you credibility.

------
lotsofmangos
I stopped reading at _' potato-wog'_.

~~~
tpeng
Why is this downvoted? There are multiple comments in the article based on
racial stereotypes which are not only completely unnecessary but reflect
negatively upon the author's judgment and credibility. Very ironic considering
the article seeks to suppress Mr Lewis's speech.

~~~
kasey_junk
I also found the racial commentaries problematic and unnecessary. That said,
the author is in no way trying to suppress Mr. Lewis's speech.

Disagreement is not censorship.

~~~
tpeng
Only by implication. Calling someone a shill could be considered "only" an
attack on credibility, but it's also an implied argument that the speaker
lacks the right to speak on that subject.

------
joosters
I wonder how many people commenting here have actually read the book? Or have
they just been reading articles about it?

~~~
kasey_junk
This is a very good point. I finished the book today. The most interesting
thing to me is that the book pretty clearly (from the perspective of an HFT
engineer) comes down on the side that HFT is not actually a villain and that
the large banks (especially Goldman Sachs & Credit Suisse) are pretty much the
devil (giving Goldman a pass for their last year of non-deviltry).

Yet all the interviews, press junkets, and face time on the Daily Show are
saying the exact opposite (to the point that Jon Stewart of all people is
extolling the virtues of Goldman).

It says way more about the book selling/exchange building business than it
does about HFT.

------
stevewilhelm
As an aside; I have been thinking it would be useful to have two new levels of
capital gains taxes.

In addition to long term capital gains, and short term capital gains, there
would be "intra-day" capital gains and "sub-second" capital gains.

I was thinking the intra-day gains Federal tax rate would be 50% and sub-
second capital gains Federal rate would be 90%, but these values are
arbitrary.

For both new types of capital gains, LIFO trade accounting would be used.

------
cwisecarver
It seems this guy isn't the intended audience for the book. I, for instance,
know that Netflix performance is bad on certain ISPs because of throttling and
peering agreements but if someone wrote a narrative about this I wouldn't
berate them for telling the public at large about it in words they would
understand.

~~~
fr0sty
There is a real and meaningful difference between popularizing and
fictionalizing though. Some amount of gloss is needed to keep things tidy but
if/when that crosses the line then the author is doing a disservice to his
audience. This is doubly bad when the book in question is an indictment of the
status quo with what amounts to a "call to action" in favor of some new
business venture.

If the book was presented as non-fiction "based on a true story" that's one
thing, but If the b

------
whyme
I haven't read the book, but I've followed the chatter and have been listening
to Lewis on Bloomberg. I get the impression that many justify HFT by comparing
current or past alternatives, however his argument is that HFT is corrupting
an otherwise fairer market place. In other words the market should improve and
lessen these side businesses that victimize participants and add to the
discredit of the exchanges.

If anyone thinks that these side business do not victimize participants you
should look back to examples like Knight Capitals glitch that most certainly
caused retail investors to lose trust and pull their money from the market,
taking a loss. The introduction of non-relevant code is an unnecessary risk
that does corrupt the system and does victimize your average investor.

1\.
[http://www.telegraph.co.uk/finance/newsbysector/banksandfina...](http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9475292/Knight-
Capitals-440m-trading-loss-caused-by-disused-software.html)

