Saturday, 29 March 2014

Michael Lewis: "Flash Boys"

Michael Lewis, one of my favourite writers, has written a new book, "Flash Boys".

Some excerpts from the article "The Hero Of Michael Lewis’ New Book Is A Mysterious Stock Exchange That Goldman Sachs Loves", published on Business Insider:

Michael Lewis and his publisher have done an excellent job keeping the details of his new book, ‘Flash Boys: A Wall Street Revolt’, completely under wraps, but some details are leaking out.

The book is about high frequency trading, and a firm called IEX that has created a separate exchange where everyone — fast or super fast — is safe to trade.

Critics say that firms that trade at high speeds can harm other actors in the market, and even cheat them out profitable trades.

"We view IEX’s core mission as simplifying an overly complex market structure trough a transparent rule set, minimal number of order types, and most significantly, a speed buffer that intentionally slows down trading in their market, relative to other venues"

“The U.S. stock market now trades inside black boxes, in heavily guarded in New Jersey and Chicago,” he writes in the prologue. “What goes on inside those black boxes is hard to say.”

IEX was born at the Royal Bank of Canada in large part thanks to Brad Katsuyama, the man who ran the bank’s U.S. trading desk. Katsuyama has been outspoken about the problems with HFT before, and it was he who lead the defection from the firm.

The goal, Lewis writes, was to “restore fairness in the U.S. stock market.” Katsuyama had watched his clients get nickeled and dimes while trading for them.

“I started to realize that, day in and day out, I was getting screwed,” Katsuyama told the New York Times last year.

Other reviews of the book can be found here and here.

The above is highly relevant for Bursa Malaysia, which has introduced a trading engine powered by NASDAQ OMX. It would be good if Bursa Malaysia would take a public stand in the matter of High Frequency Trading: are they going for the short term (increased trading by HFT players at the expense of the other traders and investors), or are they aiming at the long term (a fair market for all, where clients do not get nickeled and dimed).

The SGX, unfortunately, seems to have made their choice already, according to this article "Singapore Exchange Seeks High-Frequency Traders".

I have been very critical about High Frequency Trading before, and don't intend to change that stand, unless proven otherwise.

High volume trading does not equate creating shareholders value or enhancing the economy of a country, it is simply creating profits for a very small number of market players and the exchange, at the expense of all other participants.

Berkshire Hathaway is an example of a company that created tremendous value for its shareholders:

Its average daily trading volume is however only 437 shares. I don't think any of it's shareholders mind.

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