‘Flash Boys’ Resonates as Survey Finds High-Frequency Worry

Call it the “Flash Boys” effect.

Michael Lewis’s recent book painted a picture of a U.S. stock market where insiders including exchanges, broker-dealers and high-frequency traders are conspiring to cheat investors. His argument may be resonating.

More than two-thirds of financial industry participants, 70 percent, say the U.S. equity markets aren’t fair for all, according to a survey conducted by ConvergEx Group LLC, which provides brokerage and trading-related services. Just over half, 51 percent, also said high-frequency trading is harmful or very harmful.

“Our customers, which are primarily large institutional investors who represent pension funds and mutual funds, view what they do as critical to the investor base,” Eric Noll, chief executive officer of ConvergEx, said by phone today.

In many cases, they believe “the markets have been designed in a way that diminishes their role as a market participant and hurts their ability to represent their clients in favor of proprietary trading and, quite frankly, sometimes individual investors at the cost of large institutional investors,” he said.

The survey results suggest agreement with Lewis’s view, expressed on Bloomberg Television earlier this month, that the $23 trillion U.S. stock market is rigged. In the same interview, Lewis likened large investors to tourists led to a casino where the card games are fixed.

Trading Debate

ConvergEx’s study had 357 respondents, 233 of whom work at money managers such as mutual funds or hedge funds and 73 at broker-dealers or banks. Conducted from April 16-21, the survey has a margin of error of plus or minus 10 percentage points.

The publication of Lewis’s book on March 31 sparked a debate about the fairness of stock trading. The furor came amid investigations by New York Attorney General Eric Schneiderman and the Federal Bureau of Investigation into high-speed strategies and practices. U.S. Securities and Exchange Commission Chairman Mary Jo White said on April 10 that high-frequency trades are an intense focus of the agency. White said the markets aren’t rigged.

Noll, who until November ran exchange operator Nasdaq OMX Group Inc.’s U.S. trading business, said that at a ConvergEx client event last night there was a lot of discussion about the maker-taker price model, which sees public exchanges charge investors for trades while paying brokers.

‘Flawed’ System

“There’s a very strong sense from the buy-side community that maker-taker in of itself is a flawed incentive system and that those flaws are at the root of everything else,” Noll said. The opinion is that it “causes people to behave in ways that are not conducive to good market structure.”

Brokerages often put their own self-interest in front of their clients under maker-taker, according to a recent study of stock orders by Robert Battalio and Shane Corwin of the University of Notre Dame and Robert Jennings of Indiana University.

Despite the negative rhetoric and the worries expressed in their replies, 71 percent of respondents to ConvergEx’s survey said they haven’t altered the way they interact with the stock market. Twenty percent said they have slightly changed their behavior, while only 2 percent said they have made “significant” changes.

Stocks Gain

The Standard & Poor’s 500 Index, the benchmark measure of U.S. stock prices, has gained 1 percent since the book came out. The index has risen 177 percent since the bear market low in March 2009.

In an interview yesterday with Bloomberg Television’s Trish Regan, TD Ameritrade Holding Corp. Chief Executive Officer Fred Tomczyk said that his brokerage’s clients are better off now versus previous years.

“There’s no question the retail investor’s getting a better deal today with lower transaction costs, lower spreads and quicker response time than any time in history,” he said, adding that the concern raised in Lewis’s book “is not an issue that the retail investor is particularly engaged in, for the most part.”

TD Ameritrade received 70 phone calls and 120 e-mails from its 6 million clients in connection to the book, Tomczyk said. While he said there are aspects of the market the SEC should look at, “high-frequency trading in general has been good for the retail investor,” he said.

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