Traders Defend High-Speed Systems Against Charges Of Rigging
The FBI and the Securities and Exchange Commission revealed this week that they're both investigating the world of high-frequency stock trading. They did so at a time when a new book on the subject, Flash Boys by Michael Lewis, is causing an uproar on Wall Street.
To read Lewis' book is to be reminded of how drastically the stock market has changed in a decade — and how opaque it remains. Lewis says this opacity serves to cover up some disturbing developments.
"The stock market is rigged. It's rigged for the benefit of a handful of insiders," Lewis said on NPR's Fresh Air. "It's rigged to sort of maximize the take of Wall Street, of banks, the exchanges, and the high-frequency traders at the expense of ordinary investors."
Flash Boys is the story of Brad Katsuyama, a trader at the Royal Bank of Canada, who discovers something strange. Every time he enters a stock trade on his computer the price instantly changes and the earlier price is no longer available.
He assembles a team of technicians who gradually figure out that high-frequency trading firms are exploiting the system. Using ultra-fast computer networks, these firms have figured out a way to probe the stock exchanges for information about who's trading what.
"It's a way of dangling a carrot and drawing somebody to it," says Andy Brooks, vice president at T. Rowe Price. "Then profiting from it without ever having traded, without ever having stood up and actually bought that 100 shares."
By probing the market for information about who's buying or selling, these firms can get a small jump on trades and make a little money on each one. Lewis spoke on CNBC Tuesday.
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