"Flash Boys", a year after

I wrote before about "Flash Boys".

Michael Lewis wrote a follow-up on his book, one year after it's publication. One snippet:


His [the president of BATS, one of the exchanges] defining moment came when Katsuyama asked him a simple question: Did BATS sell a faster picture of the stock market to high-frequency traders while using a slower picture to price the trades of investors? That is, did it allow high-frequency traders, who knew current market prices, to trade unfairly against investors at old prices? The BATS president said it didn’t, which surprised me. On the other hand, he didn’t look happy to have been asked. Two days later it was clear why: it wasn’t true. The New York attorney general had called the BATS exchange to let them know it was a problem when its president went on TV and got it wrong about this very important aspect of its business. BATS issued a correction and, four months later, parted ways with its president.


My own opinion: I don't think that HFT (High Frequency Trading) is a real problem for long term investors. It might be though for short term traders who turn over their holdings very often.

HFT does not add anything to the economy, it merely transfers some wealth from some (the huge majority of the investors) to some others (the HFT players). Exchanges will profit from the higher turnover in the short term. Not sure if they profit in the longer term though, some investors might not like HFT and either abandon the exchange or lower their turnover.

Exchanges have an important role in growing the economy of a country. They should be non-profit organisations, focused on regulation an orderly market, fair to all participants. HFT clearly doesn't belong in that picture.

Exchanges could make HFT impossible or at least very difficult by certain implementations, like delaying orders and/or prices, increasing their commissions, randomly matching orders in a batch, making sure that HFT traders do not have more information then other market players, etc. I am sure that clever people in the industry can come up with some effective methods.

HFT traders could then focus on something more meaningful, like coming up with a cure for cancer, building new technology, etc.

Unfortunately, most exchanges are privatised and therefore are looking to maximize their profits, often with the focus on the short term.