Michael Lewis' Flash Noise

Michael Lewis is one of America’s most successful story-tellers. But in his new book, Flash Boys, a superficial one-sided discussion of “High Frequency Trading” (“HFT”) — and his repeated pronouncements  that the stock market is “rigged” and a “fraud” — Mr. Lewis’s bombastic conclusions are as harmful as they are overstated.

High Frequency Trading is a term widely used — and misused — by people who know little of financial markets. It can mean so many things as to be nearly meaningless since almost anything a trader can do with a computer is much faster than what traders (like me) did in pits in years past. Compared to even recent trading history, nearly everything seems “high frequency” these days.

Among the HFT strategies that can be implemented by computer are some that are unobjectionable, such as “stat arb,” and some that are more controversial such as using high-speed exchange data feeds to try to “front run” large orders in the stock market.

Even here, however, the terminology is misleading because it implies that a firm is trading based on knowledge of an existing large customer order (generally one of the firm’s own customers) whereas the HFT strategy so detested by Mr. Lewis and others involves no such knowledge, but rather using clever logic and fast computers to guess whether a large order exists, and then to try to profit from that guess. Other than the compressed time frame, this is no different from what has happened in markets throughout centuries of trading history.

Flash Boys skims HFT like a surfer, thrilled by the ocean’s waves but not understanding the depths or the currents that really define it.

Please read the entirety of my article for The American Spectator here:

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