Michael Lewis: Nobody Understands the Stock Market

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April 2 (Bloomberg) -- “Flash Boys: A Wall Street Revolt” Author Michael Lewis discusses his book, trading and the stock market on Bloomberg Television's “Market Makers.” (Source: Bloomberg)

I had one other incident like this when i published "moneyball" but they were not going to -- threatening to throw old baseball scouts into jail, but it feels similar to this.

The instigator, there is a character that has taken a different view of the industry and has investigated -- the character in the book -- there is a similar feel to me.

The reaction reminds me of that.

Everybody has to have an opinion about the book right away, whether they have read it or not.

So that is similar.

Is the opinion about the book or about the claim that the market is rigged?

Well, it is rigged.

You read the book, i do not think you could put the book down and say that it is not rigged.

We can parse the word rigged.

Maybe we should.

Let me give you an analogy to the way the stock market is structured.

It is a casino analogy.

I have a casino.

I want to start a poker game in the casino, so i get three card sharks and i tell them to start the game.

Make it look like a good game is going on.

There are no 4's, 9's, and queens in the deck.

We will hire some dumb tour operator and bring them in here.

So is david einhorn and the like dumb tourists?

In this analogy.

David understood that whenever he tried to do something in the market, the market moved.

Like someone knew what he was up to.

In the same way that pension fund managers and mutual fund managers, when they tried to exit big orders, it is like somebody already knows that they want to buy.

But he did not understand high-frequency traders were putting machines and exchanges in so that they can get price information in two second before him.

Can i finish my analogy?


So the tourists get fleeced in the games, because they do not know the deck is rigged.

The poker players pay the casino a cut of what is made.

In this case, casinos are the exchange, the players are the high-frequency traders, and the tour group operators are the banks and others that handle the stock market.

I think the analogy is pretty close.

Is that a rigged game?

I think so.

Why are you so invested in the idea that this is fair, why are you arguing about this?


you seem to be.

It is interesting.

It is very clear that people are being run in the market.

20 of evidence in the book.

Their orders are being anticipated.

-- plenty of evidence in the book.

I do not have a stake in the proceedings here, certainly not like you as the author of the book, but there are some people who would say in order to front you need a client.

These entities do not have clients.

They buy the order flow.

They pay to execute the order.

They pay td ameritrade tens of million dollars a year.

Schwab, e trade.

They pay for the right to execute the orders at a delayed price.

Ask that question.

Why would anybody pay for the right to execute someone else's stock market order?

That in itself is curious.

I can understand, if i'm a stock market investor, why i would pay a commission to a broker to handle my order, but on top of that, why is the broker turn around and selling my order to some high-frequency trader for the right to execute?

The value in that is quite clear.

That order for the high-frequency trader is an opportunity to exploit.

It is an opportunity because he has advanced information about the pricing in the stock market.

He is also getting paid by the exchange to print.

You are getting into a consultative discussion because exchange pricing, sometimes you pay, sometimes you get paid.

That is almost a separate issue.

It is true that the exchanges create incentives to be on one side of the trade or the other.

When you look at it, at the bottom of this, it is a bit like the financial crisis.

The system is riddled with bad incentives.

It doesn't make a lot of sense for brokers to go exchanges, i think.

In fact, when the brokers own the exchanges, it will be essentially an intermediate instrument.

What the rating agencies were in "the big short," is that with the exchanges are here?

If they were not for profit, could we trust them more?

It is a similar role.

It occurred to me, that is sort of the role.

It is a utility role.

You need and to be an honest broker, create a fair experience or a customer that walks onto them.

Because they are for-profit, they are incentivized, and because the way the market works they way they have to work -- meeting quarterly earnings and so forth -- it is a very short-term view they are taking.

They are constantly subjected to temptation of taking money from one faction of their clientele to put the other factions in a bad place.

Would we like these hft's more if they were putting money in positions?

The fact that they are just taking a scrape, is that why we dislike them so much?

They are set up not to take risk.

If you have skin in the game and you can lose, i like it.

If you can have 4000 trading days without a loss, something is weird.

Yes, but let's rewind the clock to pre-1975 when there really were not market makers the way there are now.

Trading was large and -- largely an agency business.

His was all before goldman sachs and robert rubin.

They did not lose any money either.

That is not true.

I worked on wall street.

The salomon brothers traders would have down days and of days.

They would just hope that the update were better than the down days.

They were putting money at risk.

I'm not saying that that was pure and innocent either.

There were different problems on different days.

But the role they were playing was offering the market.

-- buffering the market.

If someone needs to sell a million shares of something -- i will close this as a question instead of making a statement.

Would you knowledge that perhaps your critics have one fair point, that it is hard to generalize?

Much of what you are talking about, the people whom you identify as the victims in the book, are, by and large, is to shuttle traders.

Some of them are fund managers.

I have to stop you there.

There is a long interview with a guy who sold the order forms for td ameritrade.

That is not an institutional investor.

That is you and me.

He says, what is the most valuable order for a high-frequency trader to exploit?

A market order from an individual because they have such a slow feed.

What is true, if the order is a 100-share order, not a good deal.

That is true.

A lot of orders are 100 shares.

But who manages the savings a lot of people in america?

It is mutual funds, pension funds -- be careful view you defend here.

Actively managed mutual funds, we could talk about that, but these mutual funds, on the whole, do a terrible job overseeing americans money.

It feel to be the market more than 50% of the time and they charge a fee on top of that.

How do you decide who to vote the white hat on -- put the white hat on?

I hope you do not think that i just did that, but it does not help, in addition to the ineptitude of mutual fund managers -- it is all a cost to the investor.

I am not an apologist of the mutual fund industry.

The point is, the people's money who they are managing is ultimately damaged by this, and there are lots of individual investors.

To say that this does not touch the individual investor is crazy.

The second thing, which gets to goldman sachs involvement, is that in order to preserve essentially a stock market system that enables the sort of activity, the level of conduct city has gone through the roof.

The reason i wrote about this, nobody understands the stock market.

He can describe a stock market that nobody understands.

David einhorn listens to it and says, oh my god, i did not know.

The complexity is a source of instability.

The people at goldman sachs that i spoke to said the main reason they did it was because the outages of the exchanges, the flash craft -- crash, the technical mishaps that seem to puncture the life of the stock market.

They see it as symptomatic of a much bigger problem.

There will be a massive crash,

This text has been automatically generated. It may not be 100% accurate.


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