Rigged stock market 60 minutes
Michael Lewis gave an interview to "60 Minutes" ahead of the publication of his book, "Flash Boys. He alleges that the stock market is "rigged" by a cabal of high frequency traders, stock exchanges, and Wall Street firms.
He alleges that a lone fellow, a trader named Brad Katsuyama, figured this out and formed a new exchange, IEX, to combat abuses perpetrated against the investing community.
Read More Michael Lewis' 'Flash Boys and high-speed trading. He alleges that high frequency traders are able to front run orders, which means they are able to buy in front of you and sell them back to you when you want to buy. The problem, he says, is in the plumbing of the stock market. In the most interesting part of the interview, they showed a moving diagram of an order that leaves downtown New York and goes to the BATS exchange servers in Weehawken, N.
Because the exchanges all connect to each other, the order then goes to the servers of the New York Stock Exchange, which is a few miles away in Mahwah, N. According to Lewis, that's where the alleged front running occurs: Should they be allowed to do this? Lewis reluctantly admitted that this was perfectly legal, and so it wasn't front running, which was illegal. He then took to calling it "legal front running.
IEX has proposed that outgoing messages arrive at all exchanges at the same time and incoming messages go through a "speed box" that slows them down, so everything arrives everywhere at the same time. This is a simple solution to the problem.
Read More New York to probe high-frequency trading. And that was about it. High-speed traders have fiber-optic lines that get information to places faster, and I met a guy who has a solution to this problem. SEC spokesman John Nester declined to comment on the book, but told CNBC: The odd thing about the interview is that they did not bring up the hottest topic around high-speed trading: There is indeed a "proprietary feed" which has been provided to anyone willing to pay for it, with the blessing of the SEC, for many years.
The core argument is that those who access this proprietary feed can calculate the most current bids and offers known as the National Best Bid and Offer, or NBBO quicker than those who get the public feed known as the Securities Information Processor, or SIP.
That can indeed provide a trading advantage. Why do these proprietary feeds exist? Because they provide much more detailed trading activity than the public feed. This information is valuable to those who are the most active traders proprietary traders, institutional traders, certain hedge fund traders as it gives them a deeper look at the size and depth of the market, and exchanges charge accordingly for the information.
Let me give you an example of what the proprietary feed does. The public feed — the SIP — will only show the last price, and the bid and ask price, what is called "top of the book. Read More Michael Lewis targets high frequency trading. Obviously, this is dynamic and the prices change all the time, but you get the point: It's alleged that these public feeds allow traders to react more quickly because the public feed are sent to a central point for processing before they are sent out, whereas private feeds are not, and that this gives high-speed traders a small advantage, literally measured in milliseconds thousandths of a second.
Read More SEC official: What's hurting the 'little guy'. There was a widely discussed academic paper published in January of this year that looked carefully at this.
The authors studied Apple's stock on several days in and found a difference of 1. That is enough time for a trader with fast enough equipment to trade against someone with access to only the slower feed. Is there a significant price dislocation? The authors conclude that the median price dislocation is one cent, and the mean was 3.
A one-cent difference is not trivial, but it's not a huge amount either. But here's the kicker: Obviously, the costs for those trading more frequently will be higher, since their volume will be greater.
This is not a trivial amount but it is hardly an ocean of profits, given Apple's huge volume and high price. The study also notes that dislocations are higher on days with higher volatility. This is no surprise, since high volatility days are associated with wider spreads. There is another, closely connected argument made against high speed traders as well. That they can use this information to try to figure out what kind of trading strategies are being used at any one time and adjust their trading accordingly.
This can get close to being "abusive and manipulative" market practices as defined by the SEC, but it is hard to prove. Read More Speed trading firms get an edge over individual traders. I've said many times that I would support looking into charging some kind of excess message traffic for those who send in huge orders to buy and sell stock that are rapidly cancelled.
Such practices, if done on a large enough scale, can certainly have the smell of abusive practices, but the devil is in the details. What's the bottom line?
If you are a long-term buyer, under some circumstances — particularly during times of high volatility — high-speed traders are indeed trying to scalp a penny on your trade. Would I like to see fewer of these price dislocations? Do I think this is some outrageous act of highway robbery? What should be done about high-frequency trading?
Let's start with two basic principles. If that involves instituting some kind of "speed bump" as the IEX currently employs, that is worth looking at, but only in the way described at the IEX.
Is the U.S. stock market rigged? - CBS News
If there is simply a rule that says, "all incoming trades have to wait one second before they execute," than they guy with the fastest computer will still have an advantage, it will just be one second later. I'm afraid they don't have it now, but they are making progress.
The SEC recently unveiled a new system, dubbed MIDAS, designed partly to look for manipulative behavior. The SEC has put out bids for a deeper and more sophisticated tool, called the Consolidated Audit Trail, that would record every quote, every trade, every customer and would give the regulators a much clearer understanding of what is going on.
One final point about the 60 Minutes story: And, apparently, they were not even contacted. We didn't hear a single "we contacted the NASDAQ, and they refused to comment.
Not a single "we caught up with JPMorgan CEO Jamie Dimon and asked him about these activities, and he ran away. Check back on CNBC's "Power Lunch" on Tuesday at 1 p. MSCI is letting China into its indices, but it's holding out a carrot to Chinese regulators. Amazon's new 'Prime Wardrobe' service tanked department store shares days after the online company hit grocery stocks. The good news on IPOs for the first half of There are more than last year.
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60 Minutes Expose: U.S. stock market rigged?
Michael Lewis, 'Flash Boys,' and '60 Minutes' Bob Pisani BobPisani. Read More New York to probe high-frequency trading And that was about it. What's hurting the 'little guy' There may be something to this, but it's not clear how big a deal it is.
Michael Lewis: The Stock Market Is Rigged - Business Insider
Asia's approach more balanced: Read More Speed trading firms get an edge over individual traders I've said many times that I would support looking into charging some kind of excess message traffic for those who send in huge orders to buy and sell stock that are rapidly cancelled.
Bottom line What's the bottom line? Well, I'm not so sure. That will not come before , but it will be a welcome development.
Michael Lewis explains his book "Flash Boys" - CBS News
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