Filed Under:Life Insurance, Life Planning Strategies

High-frequency traders are ripping off investors

Lewis’s book can have a big impact on complex market-structure issues that have been simmering for years.
Lewis’s book can have a big impact on complex market-structure issues that have been simmering for years.

(Bloomberg) -- The U.S. stock market is a rigged game where high-frequency traders with advanced computers make tens of billions of dollars by jumping in front of investors, according to author Michael Lewis, who spent the past year researching the topic for his new book “Flash Boys.”

While speed traders’ strategies, developed over the past decade with help from exchanges, are legal, “it’s just nuts” that they’re allowed, Lewis said during an interview televised yesterday on CBS Corp.’s “60 Minutes.” The tactics are too complicated for individual investors to understand, he said.

His latest target, high-frequency trading, comprises a diverse set of software-driven strategies that have spread from U.S. equity markets to most developed countries as computer power grew and regulators tried to break the grip of centralized exchanges. While the tactics vary, they usually employ super- fast computers to post and cancel orders at rates measured in thousandths or even millionths of a second to capture price discrepancies on more than 50 public and private venues that make up the American equities market.

Dominating volume

During his own interview with “60 Minutes,” Katsuyama described how the stock market rips off investors. While still at Royal Bank, he noticed that prices seemed to move against him when he was trading.

“The best analogy I think is that your family wants to go to a concert,” he said. “You go onto StubHub, there’s four tickets all next to each other for 20 bucks each. You put in an order to buy four tickets, 20 bucks each and it says, ‘You’ve bought two tickets at 20 bucks each.’ And you go back and those same two seats that are sitting there have now gone up to $25.”

The investigation threatens to disrupt a model that market regulators have permitted for years as high-speed trading and concerns about its influence have grown. Trading firms pay to place their systems in the same data centers as the exchanges, a practice known as co-location that lets them directly plug in their companies’ servers and shave millionths of a second off transactions.

High-frequency-trader Virtu publicly released its initial public offering filing in March. The New York-based market maker, which provides quotes in more than 10,000 securities and contracts on more than 210 venues in 30 countries, said it had turned a profit every day except one for five years. The company uses IEX.

Encouraging trades

The practice of selling enhanced access to brokers accelerated as American exchanges evolved from member-owned firms amid a flurry of regulation and computer advances in the 1990s. Among other changes, the government-mandated compression of stock price increments to pennies from eighths and sixteenths of a dollar, a process known as decimalization, squeezed profits for market makers and specialists that had overseen stock trades.

Lower fees

That happened. Buying 1,000 shares of AT&T before 1975 would have cost $800 in commissions, Charles Schwab, who founded discount brokerage Charles Schwab Corp., told the U.S. Senate in February 2000. That’s roughly 100 times more than the fees paid by some retail stock-pickers today.

Copyright 2016 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Featured Video

Most Recent Videos

Prospects not listening to voice mail? Arrange a phone date

Provided by LIFEHEALTHPRO

Redesigning your phone life is more important than finding the “best words” for a voice mail in today’s culture.

Behind the scenes with Vicki Gunvalson [VIDEO]

Provided by LIFEHEALTHPRO

In this exclusive interview, Vicki Gunvalson shares how she built a $15 million a year annuity business by planning for...

Regulator: Market may need to reinvent LTCI

Provided by LIFEHEALTHPRO

Cioppa says Maine's governor wants to spur the creation of better products.

Dementia: It's more than Alzheimer's

Provided by LIFEHEALTHPRO

An association calls for policymakers to remember lesser-known neurodegenerative conditions.

Related resources

More Resources

Comments

Power your business with up-to-the-minute insurance news, analysis, and best practices from LifeHealthPro Daily eNewsletter – FREE.

Power your business with LifeHealthPro Daily eNewsletter – FREE.

Enter a valid email address.
Close
Nichole Morford

Nichole Morford
Managing Editor

Thank you for subscribing to LifeHealthPro Daily!

Check Out More eNewsletters Now! Close

Advertisement. Closing in 15 seconds.