Michael Lewis' new book, "Flash Boys: A Wall Street Revolt," recently caused quite a stir. Unlike the media frenzy surrounding the recent Martin Scorsese film "The Wolf of Wall Street," the reaction was confined mainly to the investment community. The book explains how an ingenious group of entrepreneurs and technology geeks figured out a way for common-stock buy-and-sell orders to arrive slightly faster at an electronic stock exchange so they could gain advantages measured in milliseconds and fractions of a cent.
This high-frequency "flash" trading, or HFT, involves high-speed networks and dedicated fiber-optic cables that bypass traditional exchanges, allowing traders a brief inside look at large-volume stock orders from the likes of Vanguard, Fidelity and American Funds. The HFT buys the stock ahead of the fund, then immediately sells it to them, usually at a higher price of a penny or two per share. High-frequency traders have no intention of investing in the stock, only in gaining advantage over large institutional investors. According to Lewis, this practice is highly profitable and offers very low risk, because HFTs have almost no losing trade days. They always finish "flat," meaning no HFT capital is exposed to risk beyond the day's trading.
Lewis then proceeds to tar and feather the practice, using terms like "rigged," "predatory" and "illegal," as if individual investors need another reason not to save and invest, or even trust financial markets. The so-called "spread," or difference between the buy and sell price of a security, has narrowed significantly since May Day, May 1, 1975, the advent of deregulated commissions. Individual investors have saved billions of dollars ever since in reduced markups and lower commissions. Spreads have narrowed from dollars, to pennies, to fractions of pennies.
During the 1970s, Trus Joist Corp. (TJCO), a former Boise-based supplier of engineered wood products, often traded at $23 bid/$24 offered - a $1 spread between the buy and sell price. If you bought the shares at the offer, you experienced an immediate loss. The 4 percent markup was profit taken by the broker or middleman. Intel recently traded at a one-cent difference between the bid/ask price, or a four-hundredths of a percent spread - a huge cost advantage for today's buyers and sellers. Markups are by no means exclusive to the securities business. Many industries utilize a similar pricing structure to make a profit. There has always been somebody between the wall and the wallpaper.
Whether your fund company pays $30 or $30.01 for a share of Microsoft has little or nothing to do with attaining financial goals. If HFT is a problem, the regulators will get to it, but Mr. Lewis does a disservice to investors by painting with such a broad brush. Most U.S. citizens are under-owned in stocks and largely unprepared for retirement. The last thing we need is a scare campaign to generate book sales for Mr. Lewis.
Mark Daly: 333-1433