Lewis strikes out

Reader comment on: Flash Boys

Submitted by Richard Campbell (United States), Apr 1, 2014 18:58

Haven't read the book, but it seems Michael Lewis's descriptions of how trading works (and how it should work) are plain wrong. "Front-running" is when your broker buys against you before submitting your trades; High-Frequence Traders are your trading peers who are able to see new orders (the public "order book" for the instrument) and can make decisions as fast as they care too.

The scenario quoted seems odd - The hedge fund manager was startled to note that when submitting a large order he wasn't getting the price he thought he would get. That must be a Lewisian simplification - that's how markets work; you put in a buy/sell order and the market tends to move against you. Something people in the market have known for about a hundred years. The fact that the HFT guys are good at it is irrelevent.

Good for the IEX founders to have invented an order routing system that gets better prices by picking different exchanges. Building order routing systems (something which I've done) is a normal part of business. And same for any business really; If you're printing a newspaper, you'll put bids in to different paper companies to get the best price and keep juggling the sellers around as you see fit.

Again, just from the excerpts I've read, this seems to be a bit of IEX Trading puffing itself up, some version of Baptists and Bootleggers for HFT trading. They are putting a lot of effort into painting the traditional markets as "rigged" at worst or just inefficient. Miraculously, they just happen to have a product that solves that problem.

Of course, the proof is in the actual price improvement that IEX Trading will produce. That's a big question to be determined only in time. If after a few years, people are getting better prices, then all the other exchanges will dry up. I'd bet not though - you may seem some average price betterment in the market (just as you would when there's any increase in demand and functionality) but determining the actual value of that betterment could be almost impossible to figure.

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