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Michael Lewis on HFT: “It’s All A Scam”; Here’s the Cause and Effect

Posted by Larry Doyle on March 30, 2014 8:42 PM |

Major props to renowned writer Michael Lewis for using his enormous platform to direct light on the scam that has come to define our equity markets under the construct of high frequency trading.

As Lewis states, the scam is not only restricted to HFT activity but rather the market as a whole has become a scam. Powerful words and worth the minute to listen to the video clip below.

But let’s go deeper than that.

I very much look forward to picking up a copy of Lewis’ book when it comes out tomorrow. Yet, based on what we learned this evening on 60 Minutes, the expose laid out has largely been known for the better part of the last 5 years thanks to industry insiders Joe Saluzzi and Sal Arnuk at Themis Trading, Eric Hunsader at Nanex, and the widely followed blog Zero Hedge.

While the scam within the markets is caused by high frequency trading, let’s make no mistake that the HFT activity itself is more an effect driven by other causes. I do not doubt that many individuals and firms both inside the industry and out might now look to take on the mantel of reformists so as to alleviate some pressure brought about by Lewis’ book. Yet, in my opinion, the effect of HFT very much stems from the following causes:

1. self-regulation on Wall Street as overseen by the meter maids at FINRA allowing the large Wall Street banks to answer to nobody but themselves
2. captured regulators both within the aforementioned self-regulator and the SEC
3. the Wall Street oligopoly that allows the banks and exchanges to hoard information (such as equity orders) if even for just milliseconds to generate profits in the multi-billions of dollars
4. equity exchanges that have adopted a for-profit model overseen by captured regulators

HFT is receiving current attention thanks to Lewis’ book and 60 Minutes, but other forms of market manipulation and investor abuse have been ongoing within the currency, commodity, interest rate markets, and elsewhere. What is the right way to go about addressing all of these scams? Certainly the large, powerful, well financed interests on Wall Street will fight tooth and nail to maintain the status quo. Real change never comes from addressing the effects or symptoms. To bring truly corrective measures so as to eradicate corruptible practices such as HFT, the causes need to be aggressively addressed and exposed. From there, the effects can be amended and corrected in due course.

So, how do we address the causes? Just as I lay out in Chapter 12 of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, we need to bring enormous public pressure on Congress by exposing the real corruption in the system (as I stated the other day on Bloomberg) so that we can pursue the following:

1. end the self-regulatory model on Wall Street
2. implement a Financial Regulatory Review Board to oversee a sole financial regulator housed within the SEC
3. BREAK UP THE ‘TBTF’ banks by reinstituting Glass-Stegall.

Thank you Michael Lewis and 60 Minutes. Get on board and let’s bring real transparency not just to HFT but to corrupted regulators and public officials who have ushered in this scam and so many more.

Larry Doyle

Please order a hard copy or Kindle version of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy.

For those reading this via a syndicated outlet or receiving it via e-mail or another delivery, please visit the blog to view this video clip and to comment on this piece of ‘sense on cents.’

Please subscribe to all my work via e-mail.

The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Peter Scannell

    “It’s 2009, Katsuyama says. This had been happening to me for almost two years. There’s no way I’m the first guy to have figured this out. So what happened to everyone else? The question seemed to answer itself: Anyone who understood the problem was making money off it.”

    There lies the ultimate concern – going along to get along, and unjustly profiting at the expense of the unwitting!

    • Peter,

      These HFT systems needed to be approved by the regulators before being implemented. The regulators are totally complicit in corrupting the system. That to me is THE story.

      • Peter Scannell

        LD, I’m hoping it is “the regulators WERE totally complicit in corrupting the system.”

        The regulation that allowed HFT to essentially front run (an illegal practice) was implemented
        in 2000.

        In 2004, the SEC adjusted the Net Capital Rule with big bank exemptions allowing for the dangerous leverage ratios that almost destroyed our financial markets.

        In 2007, the up-tick rule, which kept short sellers between the lines since 1938, was removed – adding unnecessary fuel to the financial fires in our market in 2008.

        “Keep it simple stupid” was favorite observation of a high school chemistry instructor of mine.
        When it comes to complex financial regulation, it seems the unintended consequences are in fact anticipated and profited by those who help craft the

        You gotta love the audacity and naivety of Brad Katsuyama, talk about grabbing a tiger by the tail.

  • Hawk

    I read half of his book today. None of it is news yet not one Wall Street senior executive has been indicted.

    Such bs

  • Jay

    FBI investigating high-frequency trading

    FBI investigating high-frequency trading for possible abuses involving violations of securities, wire fraud and insider trading laws.. Please check back for further updates. Click here for the latest on the markets.

    This proves your point regarding captured and corrupted regulators.

  • Joe

    Wow… Between LIBOR, derivatives and this HFT scam…. The magnitude and depth of Wall Street crime and fraud is beyond calculation!! Stupefying!

    The cops at SEC and FINRA have failed once again to protect the public interest. BUT we already knew that.

  • Barry

    Well said, Larry!

  • Andrew

    LD- I think the term ‘rigged’ is misused in this instance. To me, rigged implies that the price is held up or down at a level where it would not otherwise be in a ‘fair’ market. I think that the market is being ‘rigged’ as well, but not in the manner that is implied by the Lewis book.
    The Fed and its QE program are holding equity prices artificially high, and bond prices artificially low.
    HFT is not holding prices at any particular level, rather, trading ahead of legitimate orders in the marketplace. This, too, is a crime, but not in the way it is being defined in the 24 hour news frenzy since the 60 Minutes report.
    Frankly, I think the two can only succeed in conjunction with one another. Equity prices, as measured by the major averages, have been moving steadily higher in the last 5 years, except when the Fed has taken its foot off the pedal. HFT succeeds primarily on the buy side of the market. Remember the ‘flash crash’? You got a glimpse of how well selling in front of orders added liquidity there, right? So, to finish my point, HFT without QE is a loser. Sadly, only time will tell, as the inertia in Washington is too great.

  • KD

    60 minutes exposed the insider trading within congress to the general public & congress reacted by making it illegal…..and then 6 months later reversed course when nobody (or at least far fewer) was paying attention…. unfortunately I believe this too will pass and be out of the public spotlight by summer.

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