The U.S. stock markets, the most iconic in global capitalism, are rigged. This time, the culprits are a combination of the stock exchanges, big Wall Street banks and high-frequency traders.
That, in a nutshell, is the premise and warning in a new book detailing how the fix is in on America's stock exchanges, the ones that transact and value vast sums of everyday people's pensions, 401(k)s, the worth of public companies and investments.
"The insiders," bestselling financial author Michael Lewis told CBS TV's 60 Minutes on Sunday, "are able to move faster than you and play it against orders in ways you don't understand."
The result? Stock market traders who use super-fast telecommunications systems can see what stocks you are about to buy or sell. They can then leverage that information to quickly execute their own trades before your orders even reach the market.
That millisecond difference in transaction time, says Lewis, lets high-speed traders buy a stock at the other exchanges and sell it back to a traditional stock buyer at a higher price. Multiply that small edge by thousands if not millions of trades, and the gaming of the stock markets is complete.
They win. We lose.
The new book by Lewis, Flash Boys: A Wall Street Revolt, hit stores Monday. And while general complaints about high-speed or high-frequency trading have been aired for years, Flash Boys details specifics about how certain stock traders spent hundreds of millions of dollars to build a faster telecommunications system to exploit mainstream stock market trades. The book's heroes are straight shooters who figured out this scam and tried to level the playing field for stock trades.
Lewis boasts a range of books exploring U.S. culture and finances. His Liar's Poker related time spent among Wall Street bond salesmen in the freewheeling 1980s. Moneyball told how the small-payroll Oakland Athletics tapped smarter baseball statistics to pick affordable players and stay competitive — as the Tampa Bay Rays do now. The Big Short revealed how Wall Street fed the U.S. housing and credit bubble, deepening the last recession.
Flash Boys warns us that the difference between market innovation and cheating is a growing gray area that the feds seem clueless to oversee.
Don't feel foolish learning part of your investing return was skimmed by high-speed traders. As Lewis writes: "The most sophisticated investors didn't know what was going on in their own market. Not the big mutual funds, Fidelity and Vanguard. Not the big money-management firms like T. Rowe Price and Capital Group. Not even the most sophisticated hedge funds."
Critics will claim markets have been rigged all along, and high-speed trading is old news in scamming investors.
But if investors and investment firms are getting fleeced, even by milliseconds, it's time sleepy regulators reforge and enforce the same rules for all.
Robert Trigaux can be reached at [email protected]