“The markets are rigged. … These firms make their money by front-running trades. They’re using their speed advantage to buy shares first and then selling them back at a higher price. The result is higher prices for investors in those shares. That’s rigged.” Michael Lewis
Based on the Federal Reserve Board’s actions of the past five years, you may have thought that “market rigging” was a good thing. After all, a great deal of wealth has been created from the Fed’s bond buying – although, granted, almost all of it went to those who were already wealthy.
But suddenly, high-frequency trading is being charged with rigging the markets and it’s creating a bit of a furor. Apparently the Fed is responsible for good rigging and HFT is responsible for bad rigging. Consider this week’s HFT-related news:
- Michael Lewis, author of Moneyball, was interviewed by “60 Minutes” in advance of publication of his book, Flash Boys, in which he makes the case that HFT rigs the markets against the small investor.
- There was the heavy backlash from those who disagree with his conclusion … that is, the people who make money off of high-frequency trading. Supporters contend that HFT has created liquidity and reduced the cost of trading for small investors. In other words, the market is rigged against small investors, but it costs them less to make a trade. Yippee!!
- Then there’s The Wall Street Journal’s announcement this week that HFT is being investigated by the FBI – not the Securities and Exchange Commission (although it is participating in the investigation), the FBI. You know, the guys who investigate bank robberies, money laundering, drug cartels and the Mafia. And now you can add high-frequency trading to that list. Apparently, insider trading was already taken. (more…)