Be First, Be Smarter, or Cheat.
make profits by buying it on the cheap
market and selling it on the expensive
market? On the other hand, does the
premium speed granted to high frequency
traders constitute a type of front-running,
an illegal practice where traders get to
trade ahead of the public and with faster
pricing information? In other words, is
trading with more up-to-date information
simply being first? Or is it cheating?
The on-air argument, although heated,
was not without substance. Each debater
scored some fair points. For example,
“Flash Boys” contends that the market
is “rigged” to unfairly benefit those
high frequency trading firms which
have paid additional premiums to the
market exchange. During the argument,
William O’Brien asserts that the “rigged”
accusation may be a needlessly provocative
term. Even if you assume the worst,
how “rigged” is the market: one penny
per trade? How much inefficiency can
a market reasonably accept? O’Brien
points out that using such incendiary
language is good for making headlines but
needlessly frightening to the overwhelming
majority of the investing public, which
does not directly compete with high
frequency traders. Perhaps, however,
O’Brien is a little aggressive to accuse
the author of corruption, by installing
fear of markets like BATS to promote
an alternative marketplace, namely
Katsuyama’s exchange.
To its credit, Michael Lewis’ book has
inspired a fresh and knowledgeable look
at a business practice which deserves
scrutiny. Under pressure from the
New York Attorney General’s office,
BATS has had to acknowledge incorrect
information O’Brien gave during the
on-air debate; specifically, O’Brien
did not acknowledge that some market
exchanges used slower information
feeds, which could be outpaced by high
frequency traders. In late June 2014, the
US Senate opened a hearing on “Conflicts
of Interest, Investor Loss of Confidence,
and High Speed Trading in U.S. Stock
Markets” to further analyze and discuss
these issues. The key players from the
on-air scuffle will be back to debate
how high frequency trading affects the
public – either through destabilizing
the market as a whole or by siphoning
returns from widely used investment
managers who aren’t paying extra for
premium access.
In short, this fight isn’t over. n
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