The U.S. stock market has been rigged by advanced, high-speed, automated computer network trading firms and pulls billions from investors, according to financial journalist Michael Lewis.
“The United States stock market, the most iconic market in global capitalism, is rigged … by a combination of the stock exchanges, the big Wall Street banks and high-frequency traders,” Lewis said on “60 Minutes” Sunday.
According to Lewis’ latest book “Flash Boys: A Wall Street Revolt,” firms are using the speed advantage to make profits off the losses of fellow market participants in the range of tens of billions of dollars. The New York attorney general and the Commodities Futures Trading Commission in Washington have both launched investigations into the practice, which Lewis alleges now dominates more than half the market.
“The insiders are able to move faster than you and play it against orders in ways you don’t understand,” Lewis said, adding that victims include “everybody who has an investment in the stock market.”
High-frequency computerized stock trading has received very little scrutiny compared to the rest of the financial industry since the collapse of the housing market and the resulting financial crisis in 2008, but that may have begun to change in the two weeks since investigations were opened. The New York attorney general has already shut down paid subscription services for uploading financial results in real-time to traders’ computers.
“They are able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price,” Lewis said. “This speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds.”
Firms that employ the practice are able to send thousands of market orders instantly, allowing them to profit off of market imbalances and in essence make markets. The technology and methods themselves are technically legal — for now. The stock exchanges the firms trade on are regulated.
Supporters of the practice argue it allows market participants to have an easier and faster time finding buyers and sellers for trades, while opponents argue it gives high-speed firms the ability to see trades coming across the wire before they reach exchanges, which allows them to buy the intended shares and sell them to the buyer at a higher price.
“It almost felt like a sense of obligation to say we found a problem that is affecting millions and millions of people,” former New York head trader for the Royal Bank of Canada Brad Katsuyama said in a Guardian report. Katsuyama is one of the prominent sources in Lewis’ book.
“People are blindly losing money they didn’t even know they were entitled to. It’s a hole in the bottom of the bucket,” Katsuyama said.
Lewis is also the author of “The Big Short” and “Moneyball.” “Flash Boys” was released on Monday.