I watched the presentation on 60 Minutes about Flash Boys, the new book by Michael Lewis. Lewis also wrote a relatively detailed piece in the NYT. I've got a copy of the book on order and presumably will have additional comments once digested. In the meantime, I thought I would offer a few observations.
Discussions of high frequency trading ("HTF") often involve an apples to oranges problem that sometimes makes the area difficult to follow. To some degree, HFT involves the use of technology to gain small but profitable advantages in the market. HFT is able to do so through the use of technology. As the discussion of IEX shows, the advantages of this technology can be reduced through other technological advances such as the institution of a speed bump. Thus, the market evolves and participants respond.
Those are the apples. The oranges are where HFT is based upon advance access to information before it is disseminated to the entire market. On example of advance access occurred when newsfeeds were distributed directly to HFT traders before the information was available to the public. This practice has ended as a resutl of pressure from the NY Attorney Generals Office. Eric Schneiderman, the NY AG, explained in a speech:
- What we learned was, these major services were selling subscriptions directly to high-frequency traders, who were seeing the information a split second earlier than investors relying on services like Bloomberg and Dow Jones – and that was enough, again, for them to move the markets. So, after discussion with our office’s Investor Protection Bureau, again, to their credit, Business Wire stepped up and changed its policies to stop selling direct subscriptions to high-frequency traders.
Yet this shut down only one source of information provided to traders before it reached the market. The stock exchanges sell proprietary data feeds to traders who obtain the information at the same time it is given to the securities information processors (SIP) for dissemination over the consolidated tape. Because the information takes a brief period of time to be consolidated and distributed through the SIP, those receiving the feed directly from the stock exchanges essentially get an advance peak at the direction of the market.
The response by IEX addresses the apples. It does not address the oranges associated with advance disclosure. To the extent there is an "unfairness" in the market, it comes from the ability to trade not because of genuine risk taking or the development of technology that facilitates profit making on information disclosed to the entire market, but because one can buy the information before anyone else learns about it.
The market seems able to handle the apples. The oranges look to require a regulatory response.