Michael Lewis is at best confused about high-speed trading and who it impacts, or he is just trying to make outrageous statements in an effort to sell books.
Let me explain.
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The high-speed trading Lewis is referring to in his book relates to sophisticated algorithmic- based computer trading that is initiated when an algorithm identifies an inefficiency that can be arbitraged by buying a position and simultaneously selling a corresponding position.
This is usually done in 40 milliseconds. This might be going long the S&P 500 contract and simultaneously shorting the S&P 500 mini-contract.
Let me make that point clear: a buy of one position and a sale of another position is done. No one is harmed.
The competitors in this type of transactions are other high-speed traders. And yes, the team with the faster pipes, the better technology -- if competing to put the same position on -- will win and get the trade.
This does not hurt any retail clients or any mutual funds.
The idea promulgated by Lewis that the market is rigged is baseless, and he has said nothing to support those comments. He is using the lack of knowledge that most people have about high- speed arbitrage trading to raise emotions and at the same time confuse and scare people, and that's irresponsible and dangerous.
As an owner of a side business that does HFT, I have first-hand knowledge of how this works. Our technology after a year wasn’t fast enough to keep up with others who were doing the same type of trading, and we had no choice but to shut our company down.
Our only competitors were other high-speed algorithmic trading platforms. We were not competing with individuals, or against mutual funds (by law traditional long-only funds cannot put on long/short positions).
This is why I am so outraged by Lewis and his ridiculous comments about the market being rigged and that individuals don’t have a chance to compete.
The type of trading that Lewis is referencing in his book is a competition between a small number of firms that are, generally speaking, what we call in the business doing statistical arbitrage. Some are large investment firms trading on their own behalf, and there are a few very sophisticated hedge funds doing this.
The reason I was inclined to write this article is because I wanted to point out that the assertion that individuals were being wronged is absent of any facts from what he has positioned. It is important for those of us with knowledge about this subject to speak out so people aren’t spooked.
Having said that, it is true that computer-generated buy and sell programs are problematic and those are initiated when support/resistance levels are breached on technical analysis charts. But these are two very different animals.
Lewis is trying to sell a lot of books.That’s great for him. But making up stories and scaring people shouldn’t be the way to accomplish it.