(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.
“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.”
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.
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.
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 This material may not be published, broadcast, rewritten, or redistributed.