Book exposing ‘rigged’ markets sparks debate

In today’s “rigged” US stock market, large investors such as Greenlight Capital are like “dumb tourists” led to a casino where the card games are fixed, according to Michael Lewis, whose book Flash Boys has touched off a national debate about high-frequency trading.

“It’s very clear people are being front-run,” Mr Lewis said.

David Einhorn, whose Greenlight Capital hedge fund manages billions of dollars, didn’t initially understand what was going on, Mr Lewis said. Mr Einhorn’s reaction when he learned: “Oh my God. This I did not know,” Mr Lewis said. Mr Einhorn declined to comment on Lewis’s analogy.

Debate about whether equity exchanges are fair has raged for three days since Flash Boys was published.

While Mr Lewis sees exploitation rampant among the more than 50 public and private venues that make up the US stock market, his thesis has drawn rebuttals from executives such as Bill O’Brien, president of Bats Global Markets.

Regarding his book’s revelations about the stock market, Mr Lewis said: “I don’t think you can put it down and think it’s not rigged.”

High-frequency trading firms, however, aren’t all villains, Mr Lewis said. They’re simply profiting off loopholes in the system.

Blaming high-frequency trading firms is “like blaming the lion for eating the antelope,” he said. “They are wired that way. The system is screwed up.”

One of the heroes in the book, Brad Katsuyama, created market operator IEX Group that aims to curb the impact of the fastest trading firms and make trading more fair.

IEX, which has curbs that slow down the pace of buying and selling, aims to “surgically” remove the bad from the good services that high-frequency trading firms provide, chief executive Mr Katsuyama said.

“Not all high-frequency trading is bad,” he said.

Senator John McCain said the US Congress, as well the US Securities and Exchange Commission and Commodity Futures Trading Commission, should investigate high-frequency trading issues and “pursue proposals that can minimise systemic risk and bolster trust in our markets.”

Manoj Narang, CEO of high-speed trading firm Tradeworx, is critical of Flash Boys. “It’s a compelling narrative. But really it’s just fiction masquerading as journalist expose. I have major issues with virtually every assertion Lewis made.”

The book and IEX’s approach are “just a marketing gimmick,” said Mr Narang, whose firm helped the SEC build a system, called Midas, to track trading.

Mr Lewis said that the uproar caused by Flash Boys reminds him of the reaction among baseball insiders to Moneyball, his 2003 book that showed how statisticians had figured out a better way to evaluate players.

- Bloomberg