Are stock markets in the United States rigged? That is what Michael Lewis thinks, as the author of his new book "Flash Boys: A Wall Street Revolt." According to Lewis, high-speed electronic trading firms use their split-second advantages to capitalize on billions of dollars from ordinary investors. High-frequency trading (HFT) is a practice carried out by many banks and proprietary trading firms using sophisticated computer programs to send large numbers of orders into the market. When price imbalances occur, there arise opportunities for these programs to capitalize on. HFT makes up more than half of all United States trading volume.
The HFT strategies and technology that these firms use are all legal, and the stock exchanges HFT firms trade on are highly regulated. But Lewis said these firms are using their speed advantage to profit at the expense of other market participants, raking in tens of billions of dollars.
"This speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds," according to Lewis. Those milliseconds are valuable, making it possible to send around 10,000 orders in the blink of an eye. Firms that use HFT can make just fractions of a penny per trade, but it scales into billions of dollars of profits considering the speed and volume of the programs.
Orders travel hit the closest exchange first, where high frequency traders would get a glimpse of the details, and then use their speed advantage to beat the person or firm who originally placed the order to the other 12 U.S. public exchanges and 45 private trading venues. HFT algorithms then buy the shares the original person wanted, and then sell them to him at a slightly higher price. This is where the unfairness arises.
It is unlikely HFT would be outlawed in the future considering the liquidity it provides in the market. US regulators would not want a less liquid market.
In my opinion, I personally find HFT unfair. It seems unjust to me that computer programs can analyze vast amounts of data and use that to their advantage to end up selling me a stock for a higher price than I originally asked for. I cannot envision what a solution to this issue would be but I would agree with Lewis that the markets are rigged to the favor of those who have these resources.