U.S. stock markets are rigged, says author Michael Lewis

Sun Mar 30, 2014 10:41pm EDT
 
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By John McCrank

NEW YORK, March 30 (Reuters) - The U.S. stock market is rigged in favor of high-speed electronic trading firms, which use their advantages to extract billions from investors, according to Michael Lewis, author of a new book on the topic, "Flash Boys: A Wall Street Revolt."

High-frequency trading (HFT) is a practice carried out by many banks and proprietary trading firms using sophisticated computer programs to send gobs of orders into the market, executing a small portion of them when opportunities arise to capitalize on price imbalances, or to make markets. HFT makes up more than half of all U.S. trading volume.

The trading methods and technology that make HFT possible are all legal, and the stock exchanges HFT firms trade on are highly regulated. But Lewis said these firms are using their speed advantage to profit at the expense of other market participants to the tune of tens of billions of dollars.

"They are able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price," Lewis, whose book is available on Monday, said on the television program "60 Minutes" on Sunday.

"This speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds," said Lewis, whose books include "The Big Short" and "Moneyball."

Those milliseconds can be valuable, making it possible to send around 10,000 orders in the blink of an eye.

Darting in and out of trades, HFT firms make just fractions of a penny per trade, but the sheer speed and volume of their trading activity allows those that are successful to make significant profits.

Proponents of HFT argue that the presence of such firms makes it easier for all market participants to find buyers and sellers for their trades, and that the speed at which HFT firms can detect and take advantage of pricing imbalances between different markets and assets leads to smaller bid-ask spreads.   Continued...