There is a buzz lately about the new book by Michael Lewis called "Flash Boys." It's about a trader who learns about high frequency trading and instead of capitalizing on the knowledge he learns he uses it to expose what is going on. After listening to an interview with the author yesterday it seems that there is a potential of the SEC to actually make some moves to curtail some of this activity.
Mr. Lewis had some interesting points to make during the interview. He said that the main issue was trust in the market place and that trust is the oil that makes the whole market work. If investors do not have trust in the market then the whole system will come down.
High frequency trading is basically the act of brokers using super fast computers to get ahead of someone's trade to make money off of them. An example would be a retail investor placing a trade to buy Microsoft on their computer and that order going into their online broker's system. The online broker would notify high frequency traders of the trade for them to bid on the opportunity to front run the trade (making money in the process). The high frequency trader would make money on the difference in the trade and the retail investor would not know anything happened.
Albeit the amounts may be pennies on the dollar, when you are doing this across the whole market they add up to billions over the year. The morality of this practice is definitely questionable but more to the point there is the legal question of insider trading. Here is a link to Mr. Lewis's book:
No comments:
Post a Comment