After the publication of Michael Lewis’ book “Flash Boys: A Wall Street Revolt” on March 31, the US financial sector began to look like a hive of disturbed bees. In one week, the topic of high-speed trading has attracted more attention than in the last few years.
A Lewis book describing the chronology of the development of high-frequency trading (HFT) in the US stock market was published on March 31. She immediately became a bestseller, like many works by a journalist.
The book provides a fairly critical assessment of how technological advances and increased trading speed have changed the US stock market. According to Lilyus, who he expressed in an interview with various media outlets, “the use of high-speed trading allows us to manipulate the US stock market.”
Companies that have the ability to quickly send orders to buy or sell shares have an advantage over other market participants. Financial companies are ready to pay huge sums of money to programmers writing trading codes for high-speed trading. At the same time, any slower market participant could become a victim – from an ordinary investor to a large hedge fund.
Immediately after the publication, which caused a noticeable resonance, statements appeared about inspections in the financial sector “for insider trading” when using high-speed trading. It turned out that the FBI has been investigating this issue for almost a year now. At the same time, the FBI “asked for help” traders in this investigation.
According to the Wall Street Journal (WSJ), the Securities and Exchange Commission (SEC) also said it was investigating possible cases of “illegal use of high-speed trading technology.” The new chairman of the Commodity Futures Trading Commission (CFTC), Mark Vetien, according to Reuters, said that the CFTC is also conducting an audit on this issue.
Exchanges have also been implicated in “high-speed manipulation”: they provide slow data transfer channels, allowing traders who use HFT to earn money against their slower competitors.
CNBC has invited Michael Lewis, the author of the book, Michael O’Brien, head of the BATS electronic exchange, and IEX exchange co-founder Bradley Katsuyama to participate in the discussion on high-speed trading. He acts as a “protagonist in the third person” in Lewis’s book, describing his familiarity with the situation that arose in the financial markets in 2007 with the start of the active use of high-speed trading.
As soon as they began, the discussion very quickly turned into a fierce debate. The head of BATS said critics should be “ashamed” of what they wrote. He began to poke his fingers at Lewis and Katsuyama, alternately accusing them of trying to denigrate the BATS exchange and himself.
O’Brien: I have not been able to recover for the past few days. First of all, Michael and Brad, you should be ashamed of the fact that you falsely accuse literally thousands of people and scare away millions of potential investors. This is a very, very old tactic; they want to denigrate this business, present it based on mistrust, fear and accusations. Do you really think that thanks to high-speed trading you can manipulate the market?
Katsuyama: It’s hard to find the exact words …
O’Brien: Don’t Dodge! You said so in the book: “Then I realized that there was manipulation in the markets.” Your words? It is disgusting that you are now trying to get away from the answer. Katsuyama: Don’t say that …
O’Brien: So do you believe it or not? Lewis quotes you in a book. Yes or no?
Katsuyama: Good. Yes, I believe that markets are being manipulated and you are participating in them.
Then the head of BATS “took up” the author of the book:
Lewis: I already spoke and wrote about this, Mr. O’Brien and the BATS exchange are actively involved in all this, he is part of the problem. His statements and behavior speak for themselves. By the way, you completely forgot – I was visiting you.
O’Brien: No, you were not with us. It’s a lie.
Lewis: It’s true, I looked at how you work.
O’Brien: That’s not true.
Lewis: What does “untruth” mean, I came to you.
O’Brien: When, what is the date?
Lewis: Fifth of February.
O’Brien: What year?
Lewis: 2013th …
According to a number of reports, a furious skirmish on the air led to a suspension of trading: many traders on the New York Stock Exchange closely watched the developing scandal.
Moreover, the situation was continued. After hearing all the accusations, Katsuyamu asked O’Brien if he could confirm that the BATS exchange and its units, EDGA and EGX, use a slower system for transmitting order data from market participants (the Securities Information Processor, SIP), which allows traders using high-speed algorithms, play against slower competitors.
O’Brien rejected this assumption, saying that data on securities orders are processed directly and that “no one has any advantages.” However, after the interview, the BATS exchange issued an official statement and thereby called into question the statement of the head of the company, confirming Katsuyama’s assumption. According to WSJ, under pressure from the New York State Attorney General, the BATS acknowledged the use of a slower order processing system.
Deferred IPO Virtu
The strong resonance caused by the Lewis book, his statements regarding market manipulations and the increased attention of regulators to high-speed trading – this negative background frightened Virtu Financial, which planned to conduct an initial public offering. Virtu is one of the largest companies that actively use high-frequency trading.
During the IPO, the company expected to raise up to $ 3 billion. However, according to the Financial Times (FT), Virtu considered that in this situation, the company would not be able to raise the desired amount of funds, so the placement should be postponed.
Victims and reaction
As already noted, Lewis claims that when using high-frequency trading, not only ordinary investors, but also large funds and banks suffered. We are talking about both financial and reputational losses.
In an interview with Bloomberg, Llius noted that when investors such as David Einhorn (head of Greenlight Capital) faced the active use of high-speed trading, they turned out to be “stupid tourists”, not understanding the essence of the problem.
It is also worth noting the official statement of Charles Schwab, one of the largest brokers in the United States. The head of the company Charles Schwab said:
“Using high-speed trading allows traders to exploit vulnerabilities in the financial system, brings them billions of dollars, but at the same time undermines investor confidence in the markets. This problem is similar to a growing cancerous formation; here it is high time to take serious measures. In the event of further loss of confidence, capital may begin to leave financial markets. ”