In Sunday night’s 60 Minutes interview about his new book on high-frequency trading—Flash Boys—author Michael Lewis got right to the point. After a brief lead-in reminding us that despite the strongest bull market in years, American stock ownership is at a record low, reporter Steve Kroft asked Lewis for the headline: “Stock market’s rigged,” Lewis said nonchalantly. By whom? “A combination of stock exchanges, big Wall Street banks, and high-frequency traders.”
Flash Boys was published today. Digital versions went live at midnight, so presumably thousands of speed traders and industry players spent the night plowing through it. Although the book was announced last year, it’s been shrouded in secrecy. Its publisher, W. W. Norton, posted some excerpts briefly online before taking them down.
Despite a lack of concrete details, word started getting around a few months ago that Lewis had spent a lot of time with some of the HFT industry’s most vehement critics, such as Joe Saluzzi at Themis Trading. The 60 Minutes interview only confirmed what many people had suspected for months: Flash Boys is an unequivocal attack on computerized speed trading.
In the interview, Lewis adhered to the usual assaults: High-frequency traders have an unfair advantage; they manipulate markets; they get in front of bigger, slower investors and drive up the prices they pay to buy a stock. They are, in Lewis’s view, the consummate middlemen extracting unnecessary rents from a class of everyday investors who have never been at a bigger disadvantage. This has essentially been the nut of the HFT debate over the past five years.
The HFT community has been bracing for Lewis’s book for weeks, adopting an especially defensive crouch. Although that’s their natural way of engaging with the world, recent behavior borders on crisis mode.
The Modern Markets Initiative, a trade group that more or less serves as HFT’s messaging arm in Washington, spent the weekend tweeting a slew of “let’s correct the record” type of statements, including this one on Sunday:
— Modern Markets (@ModernMarkets) March 31, 2014
Peter Nabicht, a former executive at Allston Trading, a large HFT firm, is now a senior adviser to MMI. He says Lewis drastically simplified the narrative of HFT, focusing his full attention on how it’s hurt the market rather than how it’s helped. To paint speed traders as a band of insiders misses the whole point, says Nabicht, who insists they’ve actually helped kill the “insiders clubs” of specialists and brokers “where only a small group of people have access to the market.” In conversations with a number of HFT firms and industry players, Nabicht says he has yet to find one that Lewis reached out to.
The Futures Industry Association Principal Traders Group, an industry group that counts some of the biggest high-frequency trading firms as its members, put out a press release (PDF) an hour after the Lewis interview on Sunday night, first paying the author homage (he has a “lively and entertaining style”) before basically saying that he’s wrong: HFT has “contributed to substantial improvements in market quality that have benefitted all investors.”
In his critique, Lewis lumps stock exchanges in with the speed traders themselves as being complicit in rigging the stock market. This has people like William O’Brien, chief executive officer of BATS Global Markets, trying to knock down the big assertions that Lewis makes:
Michael Lewis could not be more wrong when he says the stock market is not a fair or safe place for investors #FlashBoys (1)
— William O’Brien (@obrienedge) March 30, 2014
The apparent heroes of Flash Boys are a group of former traders who started an exchange late last year called IEX, which seeks to reduce the advantage that speed traders enjoy by, among other methods, spooling miles and miles of extra fiber-optic cable between their matching engines and the other exchanges, such as BATS. It’s a good story, one that’s been told before, but the 60 Minutes piece comes across as a bit of an advertisement for the group.
Sunday wasn’t the first time the news program has waded into the world of speed traders. In 2010, Kroft reported a much more nuanced piece on the way HFT is changing the stock market. One of the primary sources for that story was Manoj Narang, founder of the trading and technology firm Tradeworx.
For years, Narang has been a critical voice in the debate over HFT and the arms race it has engendered. Mostly, though, he has tried to explain its benefits, while acknowledging its flaws and trying to make it a more transparent market. In 2012 the Securities and Exchange Commission paid Tradeworx $2.5 million to use the firm’s data collection system as the basic platform for a new surveillance operation. Code-named Midas (Market Information Data Analytics System), it scours the market for data from all 13 public exchanges.
Reached on Monday morning, Narang was furious over how one-sided the 60 Minutes story on Sunday was, calling it “a horrible piece of journalism”—both by Kroft and by Lewis. “In five years, when the definitive story is written about HFT, it’ll be seen as being hugely beneficial to the market,” Narang says. “Lewis’s book is not the definitive story.”