Michael Lewis was in town Monday, talking to a sold-out crowd at Seattle’s Town Hall. With his new book Flash Boys in hand (free with the ticket), I braced for a lot of gloom-and-doom about high-frequency trading (HFT). But Lewis’ talk was surprisingly down-home and optimistic.
Down-home because: Lewis was interviewed by Seattle securities attorney Roger Mellem (Ryan, Swanson & Cleveland), who was Lewis’ Outward Bound instructor 34 years ago. They first met when the 19-year-old Lewis, a New Orleans native, came out to hike Oregon’s Three Sisters wilderness.
“Did that teach you to take reasonable risks?” teased Mellem. Definitely not, answered Lewis. In the audience was another hiker from the same 1980 outing – Brian Martinson, now a business professor in Texas, whose photos of Lewis et al. in short-shorts and backpacks (projected on the stage) stood in stark contrast to the subject at hand:
Is super-fast computerized trading giving some firms unfair advantages? Lewis’ answer: definitely.
However, Lewis indicated these advantages are likely to evaporate over time. Why? Because by now, big institutional investors are aware of the pricing tolls they may be paying to HFT firms. For years, these firms have said that their hyper short-term trading makes markets more efficient by lowering the spread between buy and sell prices, to the benefit of all investors. This intermediation, however, has a price – HFT firms are not charitable institutions.
Market Can Solve the Problem
Lewis said one of his major aims was to incite a “culture war in finance,” between investors and the middlemen who execute their trades. “Forcing a fight within the industry,” said Lewis, is likely to bring to light who’s doing what behind the scenes. The resulting transparency should help even out induced pricing differences and other unfair advantages that might have accrued to high-frequency trading firms, as enabled by the exchanges. “The market can solve the problem,” said Lewis, not regulators.
The war, as Lewis calls it, has already started. Virtu Financial, a major HFT firm that was to go public soon, has postponed its IPO. On April 3, Charles Schwab issued a press release decrying certain high-speed trading practices. The U.S. government and the industry are investigating HFT at the same time. And there have been shouting matches between the exchanges about which of them is truly protecting trades placed by longer-term investors from potential price manipulation by HFTs.
How is LNWM affected by high-frequency trading? The response from LNWM Chief Investment Office Bob Benson: “HFTs are traders with an extremely short-term focus, and their impact on stock prices is minimal from the perspective of long-term investors, such as ourselves. LNWM strives to minimize client expenses in part by trading only when necessary.”
BTW: Lewis is doing quite well for himself, despite having majored in Art History (at Princeton): Flash Boys sold 130,000 its first week out (double his best-selling book in the past), and he has a profit-sharing arrangement with the publisher, not the typical advance/royalties structure. Lewis even had a spin for his profit-sharing deal; he said this ensured he had “skin the game.”