Michael Lewis’ Repeat Omission: No Crimes Were Committed

In Flash Boys, Michael Lewis has again launched a book that hews to his established formula: colorful outsiders take on a big bad entrenched establishment and win. Even though Lewis seems assured of having yet another best-seller, this book is getting more criticism than his works usually do. Put it this way: when commentators as diverse as Felix Salmon, Matt Levine, and Pam Martens feel compelled to object, it looks like Lewis has overfitted this tale to his blockbuster formula.

I must confess I have yet to read his book, but the accounts of it are so similar that I don’t think I’m doing readers a disservice by relying on them. Virtually all of the objections key off of a remarkable defect: that Lewis fundamentally misrepresents the relationships and operations of the high-frequency trading ecosystem.

Lewis focuses on a team of merry outsiders (a Lewis trope) from the Royal Bank of Canada who take on what Lewis presents as big Wall Street insiders of the HFT world, and beat them by forming their own exchange that offers fairer prices and thus helps combat “rigging” that hurts ordinary investors. But this story, though appealing, is wrong in a stunning number of ways. As Felix points out, HFT firms target institutional orders; retail orders are too small to move the market (as in they have no informational value) and many firms “cross” orders in house. Now small investors who trade through mutual funds can suffer, since the funds are institutional players but that wasn’t the point Lewis was making (and as much as no ripoff should go unpunished, abuses by many 401 (k) providers make the clipping by HFT look like chump change).

Lewis also presents the HFT traders as The Establishment and the his disruptors as the brave newbies. But the reality is this is more like the freshest immigrants off the boat fighting to displace the ones that arrived a few years back. As Bloomberg points out:

….Lewis misses the much bigger tale of disruption that speed-trading firms themselves brought about over the past 15 years. Hardly a group of typical Wall Street old-boy, big-bank types, many HFT ventures are the consummate outsiders. Such firms as Tower, Hudson River Trading, and ATD were started by tech geeks who figured out a better, more efficient way to trade. Their first victims weren’t mom-and-pop traders but big, established, market-making firms that made up the clubby insiders’ group of floor specialists.

Moreover, Lewis presents the HFT cohort as highly profitable, when by all accounts, the fierce competition among them has severely eroded their returns. I doubt that they are hurting, but this isn’t the “shoot fish in a barrel” business that it once was.

But their are even more serious lapses. Pam Martens lambastes Lewis for barely mentioning the role of the exchanges in enabling HFT, which was highly profitable to them. If there are any Wall Street insiders to attack, it’s the like of the New York Stock Exchange, not the behemoth brokerages. Key sections of Pam Marten’s must-read account, which is based on the 60 Minutes feature on Lewis’ book:

Two of the chief culprits of aiding and abetting high frequency traders, the New York Stock Exchange and the Nasdaq stock exchange, failed to come under scrutiny in the much heralded 60 Minutes broadcast on how the stock market is rigged…

Lewis responds that it’s a “combination of these stock exchanges, the big Wall Street banks and high-frequency traders.” We never hear a word more about “the big Wall Street banks” and no hint anywhere in the program that the New York Stock Exchange and Nasdaq are involved.

60 Minutes pulls a very subtle bait and switch that most likely went unnoticed by the majority of viewers. In something akin to its own “Flash Boys” maneuver, it flashes a photo of the floor of the New York Stock Exchange as [60 Minutes producer] Kroft says to the public that: “Michael Lewis is not talking about the stock market that you see on television every day. That ceased to be the center of U.S. financial activity years ago, and exists today mostly as a photo op.”

That statement stands in stark contrast to the harsh reality that the New York Stock Exchange is one of the key facilitators of high frequency trading and making big bucks at it.

Martens goes through New York Stock Exchange promotional materials for co-location services (which raises another issue: co-location of servers at the exchanges to gain a speed advantage is so well known that Martens doesn’t have to unpack it. Lewis’ account, which promised fresh revelations, is largely stale news, since the business press ramped up coverage of HFT after the May 2010 “flash crash”). She also points out how both the SEC and Congress are well aware of these practices and have chosen to be complacent (it’s hard to take the SEC piping up and saying it’s investigating HFT seriously given the long period since the May 2010 meltdown).

And the 2010 meltdown, and the declining volumes of trading despite frenetic activity raises a less obvious, but no less important issue: that of market structure. That old club of insiders did stand ready to provide liquidity. Mind you, they might not always be there, but they understood that making a market was the price they paid for their advantaged position.

By contrast, HFT traders are about as healthy to trading as sugar is to the ordinary American’s diet. Most studies of their activities have found that they provide junk liquidity. It’s there when markets are working fine, when more liquidity isn’t beneficial and could even be detrimental (by given traders a false impression of market depth, by lower spread, which are already super-cheap, with the net effect of encouraging even more short-term trading, as opposed to investment). But worse, it vanishes when markets are roiled, which quite a few academics have found makes the market disruption even more severe.

I have an additional beef about Lewis, and it extends across all of his major books on finance: Liar’s Poker, The Big Short, and from what I can infer from Lewis’ interviews, Flash Boys. It is part of the Lewis shtick not to challenge the social order. And it says a lot that someone about the times we live in that America’s most powerful and popular business journalist is dedicated to telling, again and again, the story of outsiders who butt heads with the status quo, yet he manages never to find anything seriously wrong with the settled order. Again and again, the people who are part of his bad status quo are never guilty of anything more than being lazy, or greedy, or (in the case of Liar’s Poker) being schlubs.

Yet the very same bond trading operation that Lewis mocked but simultaneously lauded as a huge profit engine led to the firm’s demise. Its head Treasury trader Paul Mozer was so poorly controlled that he got in pig fights with the Fed twice over his efforts to corner Treasury auctions. After Mozer was reprimanded by the firm but again resumed a more covert, and far less kosher version of his strategy (it involved records falsification), when he was caught out by Salomon management, they not only failed to inform the Fed promptly, but CEO John Gutfreund brazenly argued that Salomon should keep Mozer’s ill-gotten profits. Mozer was indicted and eventually entered into a plea bargain. Gutfreund, the vice chairman, the general counsel, and Mozer’s boss John Merriwether all were forced to resign four days after Gutfreund tried defying the Fed.

As we discussed long form in earlier posts, Lewis in The Big Short failed to tell readers that the subprime shorts that he lauded were the reason that what otherwise would have been a mere housing bubble and S&L level crisis instead became a global financial crisis. The shorts provided the raw material for synthetic and heavily synthetic CDOs that allowed BBB subprime risk to be sold mainly at AAA prices. That in turn distorted market signals, created demand for the very worst mortgages, and allowed for risky synthetic mortgage exposures to be created that greatly exceed real economy activity. But you never heard from Lewis that his intrepid band of misfits was a huge crisis amplifier. And the idea that any of the activity in this area might be an abuse, or even criminal, passed Lewis by. It is true that all the SEC did was file one civil “cost of doing business” CDO suit against each large player. We’ve long believed that the lack of vigor here wasn’t just part of the general pattern of Administration “little to see here” on crisis-related fraud. The SEC’s head of enforcement, Robert Khuzami, was general counsel for the Americas for Deutsche Bank from 2004 to 2009. And who did Lewis reveal to be one of the biggest instigators of the subprime short and related CDO sales? Gregg Lippmann of Deutsche Bank, patient zero of this strategy. Any serious investigation of CDO malfeasance would implicate Khuzami.

And for Lewis’ current book? As soon as the 60 Minutes story ran, the FBI cleared its throat and said they were investigating HFT, including front running. That means they are on the trail of what they believe is criminal behavior. Yet Lewis’ posture, as always, is that the bad boys are simply exploiting the system, as opposed to engaging in possible criminal conduct. It’s one thing to acknowledge that enforcement has become a joke, another to refuse to consider that the misconduct might indeed be serious.

But Lewis, like it or not, is simply a mirror of our times. Just as we get the politicians we deserve, it also appears we get the journalists we deserve.

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  1. OMF

    It is obvious that the HFT firms are new entrants to the big money game, coming neither from establish money or known dynasties. The biggest evidence of this is the speed and co-ordination with which the society classes have turned on them.

    Now, I do believe that HFT firms were at best an elaborate shell game, and at worst probably constituted mass insider trading. They were “clever young men” min-maxing with the letter but not the spirit of the existing rules, and making the rest of us pay for it.

    However, their downfall appears to be that they believed that the stated rules, and only the stated rules, governed the financial game. This is a classic pitfall that all geeks fall into. They have no social radar.

    In reality, it is the unstated rules and exisiting relationships which are the true arbiter and moving force in any social, financial, or economic enterprise. The HFTs started as outsiders, and remained so. They do not appear to have developed relationships, and it would appear never even hired PR companies to prepare for the inevitable backlash to their money making operations. As such, they were easy prey of the establish banks, socialites, Vanity Fair readers and associated government officals. Once blood was scented, the sharks moved in all at once, and the only surprising thing is that the HFT firms would be so surprised about it.

    Two things are clear: 1) HFT firms were a problem, and 2) HFT firms are being set up as the fall guy for _all_ of the problem. All of the problems created by the ascendancy classes, and which they must now seek scapegoats for. HFTs, geeks with talent, money, capital, but fatally no influence or relationships, presented the perfect target. And who better than the upper crust’s favourite author, Lewis, to sound the call to dig in.

    The HFTs will be dismanted, but their assets will be slurped up and dolled out. This problem will not go away, but will only re–emerge under a more established, monied, priviliged and secure wing.

    1. Jim

      All true, but the real point is being missed. The old money, used to being the predator, is now the prey, of the techies. That’s the real reason this is going to stop.

  2. Thorstein

    So, do you think market-neutral HFT strategies are fabricating a false sense of liquidity in stock, bond and currency markets, or just in stock markets?

    1. Yves Smith Post author

      Over my pay grade, but HFT has definitely moved into currencies.

      Corporate bonds are not liquid enough for HFT to work there. That’s why so many people use CDS.

      1. spooz

        Tyler Durden over at Zerohedge, who’s been on the HFT corruption beat since 2009, , says that human FX manipulators are leaving as HFT algos take their place.

        ” However, just like in equities where the HFT parasites merely facilitated the Fed in its relentless pursuit to send asset prices to new unseen bubble levels, for the most part HFTs also help central banks in ramping FX pairs in whatever the required FX manipulation by the G-7 central planners du jour may be. In other words, the regulators will turn a blind eye to all the FX rigging now conducted almost exclusively by algos as longas it goes in their favor.

        However, once the market crashes and/or FX begins trading abnormally broken, watch as the full wrath of the same economists and corrupt regulators turns on HFT, which will be scapegoated as the biggest market villain in history. None other than Goldman has already set the stage for the public lynching of the vacuum tubes.

        But for now, as long as the dancing continues, we must all “trade” in a world in which the now standard US and Japan market open results in a spike in the USDJPY, in which any good or bad news results in a spike in the USDJPY, and when every downturn in stocks is promptly offset with, you guessed it, another HFT momentum-ignition surge in the USDJPY, promptly offsetting the asset weakness.”


        1. Stelios Theoharidis

          While I generally understand HFT, I am curious about one of its after effects. I know their share of volume has declined in the recent past down to its present state of approximately 50%. I would assume their business practices would translate into artificially distorted equities prices on both the positive and negative side. In this current bullish market that would suggest on the positive side. Is that a correct assumption to make? Or do they not have a lasting effect on equities prices? If that was the case, would that not have an effect on all market participants and not just the bigger players that are the direct targets? I am not defending Lewis on the criminal side, I think the bigger banks, brokerages, and exchanges are working with or have their own HFT shops (in the case of the banks) to the determinant of their customers. Here is an article concerning the move into currency.


    2. Peter L.

      There was a very interesting piece published by Nanex (“HFT is Killing the EMini, 2 April 2012), on HFT reducing liquidity. The more I read about HTF the less I understand, but for what it is worth, the Nanex discussion sounds reasonable enough to me. Here is an important quote, and link follows:

      “HFT is sucking the life blood out of the markets: liquidity. It is almost comical, because this is what they claim to supply. No one with any sense wants to post a bid or ask, because they know it will only get hit when it’s at their disadvantage. Some give in, and join the arms race. Others leave.

      Take the electronic S&P 500 futures contract, known as the emini, for example. This is, or used to be, a very liquid market. The cumulative size in the 10 levels in the depth of book was often 20,000 contracts on each side. That means a trader could buy or sell 20,000 contracts “instantly” and only move the market 10 ticks or price levels. Even during the flash crash, before the CME halt, when hot potatoes were flying everywhere, the depth would still accommodate an instant sale of 2,000 contracts.

      Not anymore. On Friday, 2,000 contracts would have sliced right through the entire book. …”

      HFT is Killing the EMini

      And I notice that if you search NC for “Nanex” a number of posts come up, with the founder of Nanex trying to make the same point, that HTF can harm liquidity. (For example, http://www.nakedcapitalism.com/2013/03/yes-virginia-hft-and-liquidity-are-not-all-they-are-cracked-up-to-be.html)

  3. trish

    Handful of greedy bad guys vs intrepid hero-outsiders (the picture accompanying the NYT magazine piece was nauseating).
    Feds go after a few minor bad guys (fall guys) in get-tough show.
    Next infotainment story? Public moves on.
    Nothing changes, no meaningful reform (hey, how about that transaction tax idea?).

    so agree…good post.

    (typo: “But their are even more serious lapses.” there.)

  4. skippy

    How time fly’s…. or which way will the bird turn… Doyne Farmer.

    “Farmer confessed to a private gathering of business CEOs, “Predicting markets is not my long-term goal. Frankly, I’m the kind of guy who has a hard time opening to the financial page of the Wall Street Journal. “For an unrepentant ex-hippie, that’s no surprise. Farmer sees himself working for five years on the problem of predicting the stock market, scoring big time, and then moving on to more interesting problems — such as real artificial life, artificial evolution, and artificial intelligence. Financial forecasting, like roulette, is just another hard problem. “We are interested in this because our dream is to produce prediction machinery that will allow us to predict lots of different things” — weather, global climate, epidemics — “anything generating a lot of data we don’t understand well.”


    skippy… market starlings wheeling or a murder crows…. ummm…. Brownian cartoons help me [!!!]~

      1. paul

        Holden: The tortoise lays on its back, its belly baking in the hot sun beating its legs trying to turn itself over but it can’t, not without your help, but you’re not helping.
        Leon: What do you mean I’m not helping?
        Holden: I mean, you’re not helping. Why is that Leon? — They’re just questions, Leon. In answer to your query, they’re written down for me. It’s a test, designed to provoke an emotional response. — Shall we continue? Describe in single words, only the good things that come in to your mind about… your mother.
        Leon: My mother?
        Holden: Yeah.
        Leon: Let me tell you about my mother…
        [Leon shoots Holden]

        1. optimader

          The sweet irony is that a VK machines algorithm would have to validate the inverse result. The artificial intelligence of a replicant as represented by Leon presumably has more empathy than a HFT.

          “…In the film two replicants take the test: Leon… and Rachael…. In Blade Runner, Deckard tells Tyrell that it usually takes 20 to 30 cross-referenced questions to distinguish a replicant. With Rachael it takes more than a hundred. Tyrell said Rachael was “special”…”

          1. paul

            Stop right where you are. You know the score pal. If you’re not cop, you’re little people.
            Deckard: No choice, huh?
            Bryant: No choice pal.


  5. Cocomaan

    Lewis responds that it’s a “combination of these stock exchanges, the big Wall Street banks and high-frequency traders.” We never hear a word more about “the big Wall Street banks” and no hint anywhere in the program that the New York Stock Exchange and Nasdaq are involved.

    He specifically mentioned NYSE in the Fresh Air interview on NPR, if I recall correctly.

    60 Minutes is the same outlet that published that fluff piece on the NSA not long ago. It’s a crappy outlet.

  6. Chad

    but CEO John Gutfreund brazenly argued that Salomon should keep Mozer’s ill-gotten profits

    Sounds like he was a gut Freund to Mozer. Eh? Eh?

  7. YankeeFrank

    I don’t get it. Don’t the big banks engage in HFT as well as these “scrappy geek startups”? From what I understand, they are big into co-location and HFT. Am I imagining this?

  8. Dan

    I haven’t read the book either, so it sounds as though all of us are a bunch of blowhards obviating the need to actually read the book or understand it in its context.

    How does what 60 minutes cut and pasted together become a criticism of Michael Lewis and his book? Is the implication he produced the episode?

    Seems to me there are a bunch of jealous people covering a topic and missing the obvious story for 5 years who are watching a storm of discussion created by a guy living in Berkeley CA and writing books and stories about athletes (and finance).

    To say that HFT is somehow “ok” because they only steal from institutional traders is just wrong. Are those institutional trades disregarded in arriving at the “market Price”? Do institutional traders invest for retail customers?

    Yes, the markets are intimately involved as they have prostituted their exchanges for short term cash, while damaging their long term value.

    So these great purveyors of “liquidity” in an elevating stock market can be counted on to provide liquidity – real liquidity, when the drawdown happens?

    Face it the Slow Boys (and Girls) complaining are the ones who repeatedly ignored the story and now they are pouting.

    1. Yves Smith Post author

      Yes, because the segment was all about Lewis’ book and he was quoted extensively. This was intended to represent his book and he has not taken exception to the 60 Minutes report.

      There are plenty of other books that people opine about that virtually no one has read: The Wealth of Nations, Das Kapital, and Keynes’ General Theory (even at the time, as I mention in ECONNED, it was considered to be so difficult that certain students of Keynes became informal interpreters).

      Lewis is on a massive marketing push and the messaging is very deliberate and consistent. If this were a newbie author, your concern would have some validity, that he might not have presented the most important messages of his book, or had said something inept and was thus being misrepresented. But Lewis is an old hand at this, and he and his publisher (and no doubt his PR agent) have put a lot of time into buffing what the key messages are.

      1. elboku

        All I can say is that last night on The Daily Show, he was unequivocally harsh on all those involved in HFT. I haven’t read the book either but if the book echoes his public comments last night…

      2. Optimader

        I saw he was going to be on charlie rose (who is of course courtier to the elite) last night “talking his book”, So i watched his interview.

        Lewis said he deferred to 60 minutes before shilling his book in earnest because 60m could get the conceptual story out making his own pitch job easier, so ok that makes sense if you’re hustling a book for mass consumption.

        Actually it was an interesting interview whether or not one likes his presentation of the story. Interestingly he said HFT were very critical of him for presenting a one-sided story, (one might ask how many paragraphs one could devote in a book in their “side of the story”? Yeah they create liquidity be being a parasitic load between every trade? Yaaa BS)

        From a perspective of liable i don’t see it to be in Lewis’s interest offer the claim
        HFTaders engaged in illegal activity, thats for a fed/state attny, isnt it? He does frame it as immoral behavior. Sweet Irony is his claim That a team in GS is turning on HFT because allegedy they feel when it really blows up the market , GS will be blamed for it wether or not they are responsible (read: they have concluded it is the game of smaller nimbler trading firms so they would just as soon prefer HFT gets neutered).

        Btw, Haven’t read this book or any by lewis and likely wont, i do get the impression he is an establishment story teller for the mass consumption. Kinda like Woodward but no where near as primitive.

        1. Yves Smith Post author

          I suggest you read Charles Ferguson’s Predator Nation. He clearly demonstrates how various firms could have been prosecuted under existing statutes. He took a very strong position. Bill Black and your humble blogger say people (specific people) should go to jail and no one has gone after us.

          Do you seriously think anyone is going to sue Michael Lewis, of all people, if he said that some of the conduct in HFT could be criminal? He’d not be naming specific names, there’d be no basis for a suit.

          And even if he DID (assuming he’d unearthed something that supported that point of view), in general, it’s insane to sue a journalist if they have their facts right. They get the right to do discovery. Do you think anyone would dare let Lewis near them with the ability to subpoena records and witnesses?

          1. optimader


            1.) No haven’t read Predator Nation yet but I see I can get it in audio format
            2.) No, haven’t read Econned, I did buy a copy that I added to a stack of unread books that mock me. I gave it to a friend last summer to put in his reading stack as it’s up his alley as a frmr Fed LEO with a criminal fraud investigation background.

            Have you considered releasing Econned in an audio format version?Truth be told, due to my current “lifestyle eccentricities”, my book consumption is mostly limited to ~1 book/week in audio format

            3.) RE: Michael Lewis, I actually know very little about him, but from what ive read he’s has an ivy league trustfund kid background w/ an art history degree and a follow on economics degree, who was then ushered into a bond sales job.
            In other words Lewis’s actual qualifications to state which HFT engaged in criminal activity and which didn’t are probably about as valid as mine or some other guy off the street.
            Bill Black and presumably your qualifications due to professional background –credible. Lewis’s? not so much.
            To be fair, I don’t believe Lewis claimed no criminal activity occurred, more like he said as a minimum immoral activity occurred and criminal “inquiries” are being pursued. Maybe thats pussy footing or maybe thats being candid about his depth of expertise?
            Or maybe he was told not to go there?
            The impression I was left with was that he was given this story and maybe a list of people that would be interested in talking to him — a list provided by interested parties who want HFT firms eliminated. If they never fully integrated into the establishment and are therefore considered to be the equivalent of idiot savant loose cannons that can inadvertently kill the host rather than just bleed it? I can understand the motivation for big financial firms to crush them.

            Very coincidentally, last week a vendor was describing to me his son burning out due to his work at the Chicago branch of a HFT firm. On call 24/7, his only job is minimize information transfer latency bottlenecks. He said in a surprise move, the NYC partner in the firm punched out and they are closing the office. The son describes the partners as creepy, greedy, narrowly scoped traders, not tech geeks per se. The tech geeks (like him) that keep the gears spinning are merely well paid hired hands.

            1. Yves Smith Post author

              I asked my publisher repeatedly about an audio book and they won’t do it. Thanks for asking.

              Interesting insight into the social order at the HFT firms. Makes sense.

            2. Mark P

              ‘The tech geeks (like him) that keep the gears spinning are merely well paid hired hands.’

              Sure that’s consonant with, forex, everything we know about Aleynikov’s treatment by GS. And indeed it’s how you’d expect things to be at the bigger institutions and companies.

              But it’s not the whole story. Some of the smaller companies seems to be purer technology plays .

      3. Paul Tioxon


        I saw the 60 minutes report and what appeared to be his side kick in Lewis narrative is Brad Katsuyama. Brad appeared on CNBC and was denounced as a shameless self promoter of a business model who say anything to anyone and hurt the good people of Wall St and all of the decent salt of the earth that labor in vineyards of fiance. Woe to ye Katsuyama! CNBC posed this as the fight that stopped stock market trading. Well, did it? Any traders out there that put their gizmos down to see the fisticuffs, metaphorically speaking?



        a day ago

        What we didn’t know: William O’Brien, chief executive of BATS, and Brad Katsuayama, CEO and president of IEX, would get into a heated debate on high-frequency trading.

        “Shame on both of you for falsely accusing literally thousands of people and possibly scaring millions of investors in an effort to promote a business model,” O’Brien said to Lewis and Katsuayama.

        “Do you believe [the markets] are rigged?” O’Brien asked Katsuayama, “because you said it.”

        “I believe the markets are rigged,” he answered, “and I also think you are a part of the rigging.”

        Katsuayama continued:

      4. Michael Warhurst

        Morality is comprised of three things: human, social and spiritual values. None of which are denominated in nor can be measured in terms of dollars. Therefore those for whom dollars are the only value considered before decision or action are by nature amoral. Morality has three positions. Moral – one knows what it is and does it. Immoral – one knows what it is and doesn’t do it. And amoral – one never considers morality at any time for any reason.
        The social damage from the amoral classes for whom dollars are the only value considered before decision or action (some of whom proudly relegate their morality to a once a week visit to their local church, synagogue, mosque or temple) is both inevitable and enormous.
        Regrettably, almost all of those who would call out these amoral individuals who are social destroyers attempt to do it on the basis immorality, which can never be done for many reasons; not the least of which is they are not immoral – they are amoral. This somewhat slight ephemeral difference is enough to create and sustain in the compliant major media a curtain of confusion behind which the victimization of the majority by the wealthiest minority can continue and accelerate until it destroys the real economy, families and individuals. At which time the major corporate media propagates the notion that the victims are in fact culpable and are being righteously punished for their sins. This ball was set to rolling by Reagan and was set in stone, by the corporate media, in the minds of a significant number of the middle and lower economic classes who seem to be content to accept this right agenda Republican lie. Corporations, unlike individuals, have zero capability for morality except as neutered window dressing. Unless Plato was an idiot, it is impossible to have a “democratic republic” as he purposely designed “republic” to be the antithesis of democracy. Every single thing that a democracy is a republic is not and vice-versa. Plato’s lover and teacher, Socrates, was forced to swallow hemlock by Greek “Democrats” because he refused to retract a statement he had made in public that “Not all positions in government should be elected because some require special skills which cannot necessarily be acquired through democratic election.” A republic is run by and for (wealthy) elites while a democracy is run by and for the majority. The USA is a republic with a lot of votes (in which accurate ballot counting and solid citizen franchise is simply vacant) NOT a democracy. This fact makes the USA specially vulnerable to out of control amoral elites who control the (through the un-elected, and according to Mussolini’s definition, fascist Federal Reserve) money supply and Wall Street. President Jackson characterized Wall Street and the big banks as like a “pit of vipers” and the result was that they attempted to assassinate him. Lincoln and Kennedy were assassinated by this “pit of vipers” because they ordered the Treasury to create debt free money for government spending into the economy. The “greenback” (debt free U.S. Treasury created money) was the reason that the Northern army was so much better equipped and larger than the southern army which is why the North won the war and the South was bankrupt. God Bless, M.W.

    2. @BobbyGvegas

      “Seems to me there are a bunch of jealous people covering a topic and missing the obvious story for 5 years who are watching a storm of discussion created by a guy living in Berkeley CA and writing books and stories about athletes (and finance).”

      When I repeatedly see “I haven’t read the book,” my reflexive reaction is “well, GET a copy and do so. THEN criticize away.” I got the Kindle edition immediately, and then the hardcover edition arrive the next day. I’ve read it all (close on the heels of Bob Ivry’s “Seven Sins of Wall Street).

      Lotta this stuff is in fact really just jealousy. Michael Lewis is incredibly popular and profitable (btw, Brad Pitt will reportedly be bankrolling “The Big Short” big screen adaptation), ergo he can’t be any good.

  9. JGordon

    “The shorts provided the raw material for synthetic and heavily synthetic CDOs that allowed BBB subprime risk to be sold mainly at AAA prices. That in turn distorted market signals, created demand for the very worst mortgages, and allowed for risky synthetic mortgage exposures to be created that greatly exceed real economy activity…”

    I read this in shorthand as “corruption” and “systemic decay”. You all at NC are very well versed on the particulars of why our system is going down the drain, although stepping back a bit for a bit for a wider view, it seems to me that the failing of our own civilization mimics the systemic failures of the past that lead to (often horrible) societal collapse.

    I believe that people who come to recognize this pattern and learn to go with the flow of history instead of trying to fight it will come out much better for themselves and their communities. Although I do hope you have some luck in getting synthetic CDOs banned; reading about this stuff is an interesting diversion in between my modern-civilization dependent bouts of debauchery and planting of avocado trees. 2 Chainz is now my favorite musical artist, and I often think about how historians in the post-civilization (mostly) agrarian future will regard his wonderful music.

    1. Thisson

      Well it’s not really fair to blame the shorts here. Once someone decides to set up a market in the synthetics, by *definition* that market will move to some price at which shorts are compelled to participate. So what you’ve got here is a chicken and egg situation. And who created the market for the synthetics? The same bunch of bad apples that was looking for more low-grade stuff to mill through their securitization sausage factory. So while Yves is technically correct that the synethetics magnified the magnitude of the disaster, casting the blame upon the shorts is, I think, misplaced. The blame should be cast upon those who set up the mechanisms, on those who made misrepresentations about the quality of the underlying loan portfolio, and upon the ratings agencies who have effectively taken the position that with enough credit support, ANY pool of securities can earn a AAA rating.

      1. optimader

        Agreed. Shorts are an easy target, If I were a stock trader of I would more likely be a short not a long. Naked shorts maybe are a corruption, but theirs is a riskier game as well

        1. Yves Smith Post author

          You clearly have not read ECONNED. This is not “demonizing shorts’. I demonstrate DIRECTLY how hybrid CDOs were the reason we had a global financial crisis. If you think it’s just fine for an astonishingly small number of shorts (I demonstrate the leverage in the CDOs was massive) to blow up the global economy and leave the world mired in unemployment and borderline inflation just out of your attachment to investor rights, you have your priories backwards. Financial markets should support the real economy, not be used to wreck it.

  10. ex-PFC Chuck

    Lewis was pitching his book on The Daily Show yesterday. Jon Stewart can be a tough interrogator when he wants to, but he wasn’t last evening. He could have used some input from Yves, Pam Martens, et al, during his prep. I’d link the clip but it’s not up yet at the show’s website.

    1. backwardsevolution

      ex-PFC Chuck – from Wiki:

      “He [Jon Stewart] and his older brother, Lawrence Leibowitz, who is currently Chief Operating Officer of NYSE Euronext (parent company of the New York Stock Exchange)…..”

      Maybe that’s why.

    2. optimader

      Jon Stewart is an infotainment courtier to the establishment for consumption by a younger generation. Just not as blatant as Charlie Rose perhaps. Rock the boat a bit for effect but don’t cause the bilge pump to have to run.

      Lewis is hustling a book about neutering HFTing, it’s not Stewart’s role in this drama to shoot him down. I think the present HFT model for skimming has a Contract out on its head, so more likely Stewart’s marching orders are to give him creds w/ a superficially critical interview.

      1. NotTimothyGeithner

        And TDS is still a comedy show where he has to write a current and humorous monologue every night. I bet tomorrow nights intro on the fort hood shooting redux will be hilarious.

        Given the variety of guests, he still does stand up, and he is the boss of the show not just a performer, I think the absurdity is expecting Stewart to have it every night.

        Stewart does get through quite a bit of material and information despite a staff of comedy writers, not researchers. The man was in Half-baked and an Adam Sandler movie. Cut him some slack, maybe not for the Adam Sandler movie.

  11. Cheese

    I don’t really see how you blame Lewis’ “Big Short” heroes. As a market participant, one acts on a security of poor value/quality by shorting it. The blame, thus, should square firmly on the banks who made that market (i.e. Lippman), along with Congress who enabled the egregious exploitation of then-inadequate capital requirements. If we’re just talking junky CDO’s…

    1. Yves Smith Post author

      Please read the link I provided:


      . I set the case forth long form. And in the post I linked to on The Big Short, I describe how Eisman is culpable. After he meets Wing Chau, he understands EXACTLY the role the CDOs play and the systemic consequences. But he says after that IIRC dinner that he wants to short everything Chau does site unseen.

      This is why insurance (and CDS is insurance, not a typical short) from the 1700s has required the parties who buy policies to have an insurable interest. Otherwise, if you buy insurance on someone else’s house, your incentive is to burn it down.

      This is the short form version of the effect of the subprime short strategy, which massively distorted market signals:

      A critical element of how this new system operated was by sending false signals to market participants. Imagine you are a doctor. You have a well established patient with a known heart problem and high cholesterol. He comes to his regular checkup looking simply wretched, with bad color, low energy, and complains of not feeling well. You immediately run all of your regular (thorough) tests, plus some additional ones related to his new symptoms. Yet all the results come back within normal bounds, save his known problems, and there you see no meaningful change from his previous history. You ask him to come in quarterly, rather than annually. He continues to look even worse, yet his test results continue to show nothing more amiss than before he started to look so awful. He drops dead of massive coronary blockage.

      Now in our little fable, what happened was that someone saw the patient on the street and recognized he was a prime candidate for heart failure. He takes out ten life insurance policies on the patient and finds a way to alter the test results so everything looked normal. The doctor, conditioned to trust the tests, believes them rather than his lyin’ eyes, and fails to take action.

      Tom Adams, who has spent his career in the mortgage business, and was an executive at one of the major monoline insurers during the subprime mania, explains:

      Starting in 2005, following the introduction of credit defaults swaps on mortgages, the spread for lending to risky borrowers fell. Normally, when risk becomes mispriced like this, the right approach is to step back and wait for sanity to return. And many cash investors did just that.

      The problem this time was the market didn’t correct.

      By 2006, many companies in the risk business received pressure, in one form or another (investors, rating agencies, etc.), about how they were missing out on revenue opportunities. The market was booming, yet they were on the sidelines. No one I encountered wanted to take subprime mortgage risk (or Alt A mortgage) risk directly because the risks were considered too high and the premiums were way too low.

      In a normal environment, this should have led to the mortgage market grinding to a halt – since no one wanted the BBB portions of any subprime or Alt A deal. Hundreds of people at conferences, in meetings and over the phone lines argued that the market for subprime was acting irrationally. Refusing to participate in the market at all would, in retrospect, have been the only solution, but this is easier said than done. A lot of people were told: “You’re the expert in this area, find a way to make money in it – everyone else is.”

      How did this happen? By 2005, “cash” or traditional investors, were leery of subprime risk. Yet the interaction of increasingly synthetic CDO issuance, credit default swap spreads, and the resulting artificially low yields on BBB subprime bonds sent a powerful signal that the subprime patient was somehow still healthy. Presumably, a lot of someones were highly confident they could find gold within what looked to most like certain subprime dreck.

      1. Thisson

        Sure, in insurance there’s the concept of insurable risk and it makes sense. But what about in the options market? Sellers of options are functioning as insurers, and we don’t require them to have an insurable risk. What we do require is for them to have capital posted. So I’m not sure we always need an insurable interest. I’d like to hear more reasoning on the point.

        I think one of the biggest causal factors was that the ratings agencies were allowed to give AAA ratings to such low quality bond portfolios, justifying their ratings based upon credit enhancement.

        1. Yves Smith Post author

          You need to read ECONNED. Chapter 9.

          And it wan’t the credit enhancement as much as the bad correlation assumptions.

  12. Kevin

    The exchange has to put a matching engine somewhere. What are you going to do, get rid of the matching engine? Go back to the floor with honest pit traders snorting blow in the toilet while the specialist dimes every order? Are you going to ban arbitrage? Force every order to stay on the screen for 10 seconds on every market in every country? And when they rush in and out at the end of the ten seconds, then what? Let everyone see the algos? Of whom? Only HFT’s? What is an HFT? Goldman? DRW? EBay Snipers?

    1. OMF

      Five second tick. Orders filled on the tick. Buzz off if that’s not fast enough, because it’s plenty fast for all reasonable transactions.

      1. Kevin

        And what do you think happens as the 5 second timer winds down? Or do you propose that no one can see the order book? Or what do you suppose happens when everyone gets their fills, or not. -You can’t believe that there won’t be a race to the very next facility, right? Really think about it.

        1. OMF

          Thought about it.

          No-one sees the order book until the 5 seconds are up. No-one knows if their orders have been filled until the 5 seconds are up. No-one knows if someone else has posted new orders in the meantime. New but/sell orders are taken in from 0.0s to 4.9s. The orders are tallied and filled at 4.9s in, the results are posted at 5.0s, the cycle begins again.

          This is effectively happening anyway, simply at a <5 ms tick right now. I see no reason the tick should be so low, as it only encourages a race to the bottom and scalping.

          Stock markets used to run on people running backwards and forwards, writing up prices on a board with chalk. I see no reason why a 5 second ticks would cause any fundamental problems.

          1. ChrisPacific

            Thought about it myself and came up with the same idea. Took about 30 seconds.

            This is an eminently solvable problem. Even Mankiw agrees that it should be fixed, and when you have Mankiw in opposition you know you are pretty far out there.

            1. Kevin

              I don’t want to offend you, but maybe you should spend more than 30 seconds thinking about it.

              Even if you don’t display any of the orders in the book, you will still have people trying to arb the tick as soon as you display the book at the end of the 5 seconds.

              Maybe your next thought, 30 seconds from now, is that orders will be filled randomly within the 5 second window. That is problematic in and of itself. First, how does price discovery work when no one can see what is happening when it really matters? Second, given the randomness you inject, there will be participants with very large orders will have to keep coming back every 5 seconds hoping to randomly unload or load their position. Assuming there is some method in this randomization to match orders and generate a “tick”, you can bet at start of the next time all of the offers will move and usually not in a very large buyer or sellers favor.

              You could of course do this in a ‘fair’ way where those who sent their order to the market first get their match first. But then, again, at the start of every timer there’s a rush to be first.

              And then there’s the markets with fungible products who don’t use your 5 second timer. How do you control the information leaving your 5 second timer market isn’t used to move the bid/ask somewhere else? Maybe you say make it a national law. OK, a lot of this stuff occurs between different countries. What then?

              Raising the offer when demand for a product increases isn’t a crime. That it now happens with computers, and happens very fast, is what frightens and scares people. You don’t understand how it all works, and it’s difficult for human beings to think on such timescales. But just because we fail to understand what is happening, doesn’t make it criminal. Instead of going around telling people they are criminals, I suggest you first really read and understand what these alleged criminals are doing. I think you will find that most of them are just engaging in fairly simple market making and arbitrage activities.

        1. Kevin

          A Financial Transaction tax is a good way to raise revenues for the government. I think it’s a great idea. The money collected could be used to fund a better regulatory regime for one.

          A financial transaction tax won’t stop “HFT”. All market participants, including those engaging in HFT, will only widen the spread between the bid and the ask in order to cover their costs on the transaction tax.

    2. Thisson

      The open outcry markets worked pretty well. I was on the NYMEX/COMEX etc. There were problems but nothing’s perfect.

      1. Kevin

        The move from the pit to the screen was to ensure a level playing field, to break the good old boy network.. But mostly it was to handle the increasing amount of transactions.. Human traders couldn’t possibly handle the volumes that were coming onto the floor. The screen was partly there to facilitate more volume. The old CME floor was massive. How big would it be today? Would you need 4 football fields of sweaty coke heads screaming at each other all day in order for you to achieve the illusion of ‘fairness’?

        People forget the machinations of the pit very quickly!

  13. Steven

    As a fan of Lewis (and tangentially hated of Malcom Gladwell), I have to ask… why the personal attack on him? Your last comment blows me away. I FREAKING respect the hell out of you Yves (circa all your work on Le Show and what I find time to read). Why pick a fight with the only other person in the room who has the ear of the public. He’s not a bad guy and I don’t see his behavior as adjusting the nomenclature so we can accept the new normal. What I think he’s doing is protecting himself in print from something like Libel… he paints a story and we all talk about the crimes, he points the direction.

    1. Yves Smith Post author

      I hate beating up on you, but are you serious? Go read Charles Ferguson’s Predator Nation, where he says long form how various firms and individuals could and should have been prosecuted in the crisis. By contrast, Lewis’ posture is that his bad guys are just doing what rogues do, but he’ll never suggest it’s anything more than exploiting loopholes, as opposed to rulebreaking.

      You seem to be suffering from halo effect, which is a cognitive bias. It means at tendency to see people as all good or all bad. Because you like Lewis, and you like the spotlight he’s put on HFT, you don’t want to see how he’s actually not helping stop bad behavior. He literally said in a CNBC interview today that “government needs to get out of the way” and touted Katsuyama’s firm as a “market solution”. He’s ideologically opposed to regulations, when all it would take would be some rule changes at the SEC to put this to a stop in equity markets.


      1. ian

        ” Because you like Lewis, and you like the spotlight he’s put on HFT, you don’t want to see how he’s actually not helping stop bad behavior. ”

        Then what? Is he somehow abetting this bad behavior?

        1. H. Alexander Ivey

          Yes, yes he is. Lewis is making a classic dodge, admitting to a “small” crime to keep attention off the big one. Then he relies on the (correct) adage: let the punishment fit the crime. Because, in Lewis’ argument, the crime is small or non-existent, so the punishment should be small or ignored entirely. Thus Lewis is abetting this behaviour.

          And for those who argue that Lewis is “just” a journalist, a journalist’s role is not to tell a story and let it go at that, they are to tell a story that illuminates and clearly explains the subject of their story, else wise they are propagandists. So Lewis fails at being a journalist too.

          1. ian

            So, what kind of book would you write – if your goal were to engage the masses on the subject of HFT abuses? Some erudite tome, full of nuance that would only be of interest to those who hang out on economics blogs?
            Personally, I think Lewis has struck a good balance.

            1. John Mc

              Lewis’ narrative is a simplistic answer to a complex problem.

              He hits on several important aspects that many will identify with, but when it comes time to discuss how each of the systems behave and what needs to be done. He is vacant. The best liars use 75% of a recognized truth to paint the remainder in a direction that obscures how power really works.

              1. NotTimothyGeithner

                If the pro Lewis crowd aren’t plants, it’s important to remember people don’t like to be conned, but more importantly, they don’t want to recognize a con if they fell for it especially when the con should have been exposed.

                Exhibit 1. Obots
                Exhibit 2. Do you remember Oprah and the media’s rampage around 2005 over that book about the recovering alcoholic? Their real anger was that they fell for something which was easily disproven. Oprah made money.
                Exhibit 3. Supporters of criminal religious figures. They just can’t let go.

  14. Thure Meyer

    Yes – its the intrepid self entitled band of rebels (hero’s) vs. the Empire (evil monsters). How often has this scenario played out in every aspect of American culture. Noble pirates, honorable gangsters, Luke vs. Darth, its one of the deep recurring mythical undercurrents of our lives.

    But as you wrote, the Empire is never really reformed and ultimately they are all part of the same “Wall Street” game. If Lewis had made a serious attempt to address exchange and trading reform, i.e. analyzed the purpose of the financial system (in a commons context), maybe he could be taken seriously. As it is, the introduction of IEX has no measurable impact on 99.9% of the people. Its kind of what Taleb calls the difference between x and f(x). The media spends all of its time looking at surface actions and never bothers with consequences.

    I’m happy you wrote about this though, because it is another meta-glorification of Wall St. criminal behavior.

    1. Percy

      A bit unfair, Yves. The guy is a writer, not a lawyer, not an economist. Sure, he’s a citizen, too, but his failures to point out what you have do not merit “It is part of the Lewis shtick not to challenge the social order.” What do you mean by this? You do not think what he says “challenges to social order”? Want to invite the people he writes about over for dinner? Go out with your daughter?

      1. MLS

        While Yves is more than capable of defending her position, I will say this:

        Michael Lewis should know better. Prior to his career as a journalist, he sold bonds to institutions for Salomon Brothers, one of the largest firms on Wall Street at the time (his book Liar’s Poker is about his experiences there). As such, he has an “inside baseball” view of the inner workings of Wall Street, certainly moreso than most journalists who cover the topic.

        Based on his actions, he is more interested in selling books than calling out wrongdoers, even if fraud or criminal acts are concerned. It’s his right to take this stand, of course, but it appears that his initial position inside the Wall Street machine softens his view. It’s reasonable to argue that since he knows so much, he is duty-bound to say something, and it’s reasonable to argue that it’s not his job to perform a public lynching in the press, even if the criminals at the top deserve it. A matter for authorities to take up, not him. And it’s further not his fault the SEC et al are incapable or incompetent at doing so. Besides, he stands to profit handsomely writing books about the very acts he is criticizing (and I say this as a fan of Lewis’ writing).

        1. H. Alexander Ivey

          “Besides, he stands to profit handsomely writing books about the very acts he is criticizing”

          No, he stands (and is standing) to profit handsomely by writing about (not just a few books), and talking about (seminars, workshops, TV appearances, etc.) the very acts he is criticizing. (And his criticism is, as Yves, et.al., point out, is only a superficial criticism, not the kind that cuts to the bone.)

      2. Yves Smith Post author

        No he is America’s most prominent business journalist. He does journalistic pieces regularly for Vanity Fair on financial topics.

        I’m not an economist either, and I like him was on Wall Street for only a few years in the 1980s.

        The role of journalists traditionally has been to comfort the afflicted and to afflict the comfortable. He seeks to play a journalistic role, but via having a blockbuster book formula, he has to cherry pick his stories to make them fit. Journalists were concerned when Truman Capote’s In Cold Blood came out, that the blending of novelistic storytelling with journalism would compromise journalism.

        See this for more detail on how Lewis’ frame compromised his work on subprime shorts:


  15. P FitzSimon

    I saw Lewis interviewed on Charlie Rose and he did emphasize the major complicity of the exchanges. The HFTs pay a premium to the exchanges to get fast access. In effect they pay for a first look at trade information on who’s buying and selling what. He also said that the Goldmans and other big financial companies are internally at war on this and other issues which are destroying customer trust in Wall Street, if there is any left. One faction says, we do anything legal that makes money, another faction wants to re-build trust. When CR asked Lewis about the legality, he said the HFTs claim it’s legal, and tthe SEC backs them up.
    Lewis does make it seem that this scheme is new. It ‘s not. I worked on the development of optical telecom equipment for many years and Wall Street was a customer 15 years ago. Fast access for trading has always been a priority. When the telegraph system first deployed in the 1840s financiers were the first users. The stock ticker became available in the 1850s. Before the telegraph stock and commodity manipulators used a private pony express system to gain advantage, before that they built an optical telegraph system (semaphores) between Boston and NY. Interestingly, the general public had a very good understanding of how they were being had and complained forcefully.

    1. McMike

      Seems to me that declaring the markets thoroughly rigged is a decent amount of sticking ones neck out.

      As he elaborated on charlie rose, he put it in the institutional customers lap to stand up to the banks, which he stated was not happening due to intertwined interests and a lack of information sharing.

      The thing that raised eyebrows for me was the idea that there is a struggle for the heart and soul of goldman. Sounds like spin to me.

    2. Thisson

      Yes but the special order types that retail customers dont have access to, and the ability to “sub-penny” are new. We have a 2-tiered market.

  16. PTRio

    Criticizing what the book isn’t, instead of what it is, just seems unfair to me. The book is about what the book is about, and to have written about everything that is wrong with the US financial system would require an encyclopedia instead of just a book. Lewis is a writer seeking to reach the masses, not just those who have intimate knowledge of the inside workings of the stock markets. Most retail investors participate in the stock markets through mutual funds or index funds, or ETF products, and those funds get scalped and front run by HFT as much as any large market participant. But, if this book had been written with a level of technological jargon which only full time market participants could understand, it would certainly not accomplish what he appears to have intended, which is to alert the public as to how they are being robbed a penny at a time by firms which earn billions by taking those pennies. Those billions do not go back into the markets, they go into the pockets of the HFT traders themselves, and reduce what is available to everyone else. One thing is certain, Michael Lewis has scared the living daylights out of the HFT traders and created a national discussion of the markets and their shortcomings. With the book having been out only 24 hours as of yesterday, that is huge.

    1. Yves Smith Post author

      I disagree.

      Lewis’ stories are above all morality tales. He creates heroes and bad guys, that’s a driving part of his narrative and critical to his appeal. Picking dubious good guys, mischaracterizing who the bad guys are and leaving out entire classes of bad guys gives readers an emotionally satifying tales, which makes it far more persuasive and memorable than a normal, drier account, that is fundamentally misleading at best.

      He excises too much important detail to understand what is really going on to fit his Manichean frame. Carl Levin cited The Big Short as the best book on the crisis. We wrote long from why believing The Big Short’s tidy narrative let critically important bad actors off the hook. Any reader of The Big Short would see perps like Magnetar and Paulson, who were destructive and smart enough to understand the bigger ramifications of what they were doing, as similar to Lewis’s heros and therefore good, not bad guys.

      If you care about accountability, getting who is responsible for dubious conduct and why is critical. Lewis has consistently chosen to punt on that issue. And he’s repeatedly made the argument that there was no criminal conduct in the crisis, just Wall Street pushing the rules. That’s an apology for predatory behavior and looting that you are willing to give a free pass.

      1. Ptup

        Sorry, but, agree here with PTRio’s point that this is important for a national discussion. For the 99.5% of people who really don’t know squat about this HFT thing (or, the picky little details), the publishing of this book is huge, because it started the debate, and I have learned more about this phenomenon within the last few days than I ever could if Lewis didn’t write it. The internet is ablaze with the debate.
        You really have to lighten up on this whole morality/right or wrong thing. Sure, Lewis wants to sell books, but I hardly see him as a propagandist or purveyor of sensationalized crap that 90% of MSM is filled with most of the time. He’s fun to read, and all of us out of the business learned a lot by reading him and following the controversy around those writings. What’s wrong with that?

        btw, maybe all conversation should end until some of us actually read this thing. I heard him getting abused on CNBC a little about reactions to it, and he almost fell off his seat, because the book and only been out for 24 hours. Deep breaths…….

        1. Lou T.

          Picking dubious good guys, mischaracterizing who the bad guys are and leaving out entire classes of bad guys gives readers an emotionally satifying tales, which makes it far more persuasive and memorable than a normal, drier account, that is fundamentally misleading at best.

          So what exactly is bad in what Brad Katsuyama is doing and what exactly is good about what HFT people are doing? Sadly, in this infantilized nation bad guys/good guys metaphor seems appropriate.

          1. Yves Smith Post author

            This comment is across Lewis’ opus. The reason Brad Katsuyama is a dubious good guy is that Lewis repeatedly uses him as the device for arguing, as he did on 60 Minutes and on CNBC, that “the markets” can solve this problem. Kastymama isn’t a solution. The solution is regulation, but Lewis is not a fan of regulation, he takes the line that the banks will get around regulations. When I was a kid on Wall Street, while that may have happened, it was so inconsequential as to not make much difference.

            That is why Lewis fails to give other than cursory mention of the role the SEC and Congress have played. The SEC is seen in DC as being the weakest Federal regulator, not merely the weakest financial regulator. The SEC has allowed the 1934 Act, which John Hempton has described as the single best piece of legislation ever written, to be made meaningless by institutionalized HFT front running.

      2. John Mc

        “I have an additional beef about Lewis, and it extends across all of his major books on finance: Liar’s Poker, The Big Short, and from what I can infer from Lewis’ interviews, Flash Boys. It is part of the Lewis shtick not to challenge the social order. And it says a lot that someone about the times we live in that America’s most powerful and popular business journalist is dedicated to telling, again and again, the story of outsiders who butt heads with the status quo, yet he manages never to find anything seriously wrong with the settled order. Again and again, the people who are part of his bad status quo are never guilty of anything more than being lazy, or greedy, or (in the case of Liar’s Poker) being schlubs.”

        It is akin to Clinton running as democrat and selling out the left on financial deregulation. The worst damage that one can do is represent the hero and play the part of the complicit and simplistic explanations that reinforce neoliberal policies. Could not agree more with Yves here.

        Why now, would be one question I would ask him. This information has been known for sometime (although, I have also not read this book yet), what is the immediate purpose of the timing? It makes my backside twinge to consider that this topic is now palatable for public consumption on Viacom’s airwaves. Why? What are they doing now with Game theory, which stands to be more profitable than HFT?

      3. Klassy

        It is a nifty trick that he plays. It seems that he is speaking truth to power when he focuses exclusively on those (at least near) the top (and I’m talking Big Short here which I half read), when to tell the story, a story that would be credible to the general population, you have to start on the bottom and work your way up.
        I find Yves statement “But Lewis, like it or not, is simply a mirror of our times. Just as we get the politicians we deserve, it also appears we get the journalists we deserve.” depressingly true. I just finished up a memoir of the 30’s by Malcom Cowley. He tells the story of a meeting of writers called by Theodore Dreiser when there was a sense that the government was going to keep prolonging the misery of the depression (more than a few times I thought how right the epithet Barack Obama Hoover is when reading the measures taken by the Hoover administration), the press was failing miserably, and it would be up to them to tell the story of what was going on (and hopefully hasten the end of capitalism).
        They went to Harlan County and reported on the absolute lawlessness of the law. They were chased out of town and feared for their lives, but they got their report written. One memorable quote from a resident: “The law is a gun thug in a big car”.

          1. NotTimothyGeithner

            Obama isn’t a new kind of Republican. The GOP has become so racist that except for a few tokens who are usually cartoonish in nature the vaguely serious politico types who are not white or often not men just had to find a new home. The Democrats had taken up the mantle of a color blind society.

      4. backwardsevolution

        Yves – certainly agree with you. “If you care about accountability, getting who is responsible for dubious conduct and why is critical. Lewis has consistently chosen to punt on that issue.”

        Lewis’ books and articles, although highly entertaining, lack seriousness. He sits on the fence, can’t decide whether he supports lawfulness or not. How does that help society move ahead? It doesn’t. What’s the good of painting only half a picture? Perhaps he never thinks of the other side? The harm done to others? Maybe his life has been and is now too privileged to see it?

        I think he likes the game too much; no doubt he benefits greatly from it. His books are about games and gaming and they’re made into Hollywood movies, and in the end Cinderella is happy and the wicked step-mother is seen as just a buffoon, misguided, but certainly not evil.

        Or perhaps maybe he just views life as “luck”, that nothing has to be done to correct wrongs. It’s all just fate.


      5. ian

        “That’s an apology for predatory behavior and looting that you are willing to give a free pass.”

        And yet, the books are “morality tales”?

        1. Yves Smith Post author

          Yes, he creates good and bad guys. You can use a moral frame to draw wrong or misleading lessons.

          1. ian

            I honestly don’t understand why you are so hard on him.
            He is trying to reach a mass audience (and make money), not a bunch of economists.
            Is the subject dumbed down? Of course it is.
            Is it sensationalized? Of course.
            Personally, I think the real outrage is how silent (read:complicit) the more mainstream financial press has been in all kinds of recent wrongdoing. I am amazed at how few reporters there are out there asking the really tough questions.

  17. John

    I saw some of the video of Lewis with Obama when he got the access for his puff and suck piece on the oresident. Just a little puppy with the big dog. It was clear from the submissive and obsequious body language that he was well vetted and would not write anything unpleasant about Obama. Why would he write anything threatening about the big dogs on Wall Street? Dude just want to sell books and get write ups in Vanity Fair. Just working his angle on the grift.

  18. PD

    Yves, you say, “Now small investors who trade through mutual funds can suffer, since the funds are institutional players but that wasn’t the point Lewis was making … ”

    I just read the book this week. Lewis makes that point again and again and again in it. You can’t miss it, if you read the actual book.

    Lewis most definitely does not cast HFT guys as “The Establishment,” in relation to the big banks, and has a lot of interesting material about that dynamic. As far as HFT failing to provide useful liquidity, well, Lewis makes that exact point, lucidly, on pages 107-111.

    Honestly, people should read the actual book before commenting on it. No, it’s not perfect, but it’s a whole lot more substantive and thoughtful than some of these “critiques” would have us believe.

    Similarly, Felix Salmon’s post on the book, written by Salmon’s own admission as he is halfway through the book, takes Lewis to task for not providing enough data post-2009. Meanwhile I’m sitting here looking at numbers from 2010-2013 in the book itself. But hey, whatever.

    1. tree frog

      I’ve also read the book. The exchanges and sell-side firms come off worse than the HFT shops.

  19. Jeff N

    and This American Life is probably tripping over itself to do a story on any BS that Lewis puts out

  20. Maude

    Perhaps it’s good to post (repost) this excellent Demos article from 2013 “Crack in the Pipeline – High Frequency Trading” (sorry I couldn’t get it to post as a link-I don’t speak ‘tags’ very well)


    Wallace C. Turbeville

    “This is the second of a series of articles, entitled “The Financial Pipeline Series”, examining the underlying validity of the assertion that regulation of the financial markets reduces their efficiency. These articles assert that the value of the financial markets is often mis-measured. The efficiency of the market in intermediating flows between capital investors and capital users (like manufacturing and service businesses, individuals and governments) is the proper measure. Unregulated markets are found to be chronically inefficient using this standard. This costs the economy enormous amounts each year. In addition, the inefficiencies create stresses to the system that make systemic crises inevitable. Only prudent regulation that moderates trading behavior can reduce these inefficiencies.”

  21. Joe Buck

    Oh, come on. The kind of HFT Lewis describes is frontrunning, and it is not a tactic for outsiders. It can only be executed by people wealthy enough to put their computers physically at the exchanges, with a very short length of fiber optic cable between their machines and the exchange’s servers. The exchanges are charging millions of dollars for the privilege to do this, because it is basically a license to print money.

    Yes, Lewis uses his classic formula of the brave little guys taking on the establishment, but you are damaging your credibility if you defend this stuff. It steals a few pennies from every investor who makes a trade on the exchange and it adds new value.

    Where Lewis goes wrong is that he should be advocating something like a Tobin tax (a small tax on each transaction) to eliminate this kind of abuse, rather than urging everyone to do their trades with his new friends at IEX.

    1. John Mc

      Not sure how Yves is damaging her credibility since she has a much greater understanding of insider/outsider than a typical poster here on her website. I do not see her defending HFT abuses. What I do see her doing is:

      1) Providing history and context (techies versus insiders)
      2) Making a valuable case Lewis is not the best author for this work
      3) There are diversity of views which contextualize HFT that need to be present
      A) Martens
      B) Salmon
      C) Levine
      4) The most salient topic not discussed involves an Predatory Intermediary Scalping System (PISS) that implicates exchanges, but there is very little interrogation of them. In other words, if you are going to be bull (Michael Lewis we are talking to you), then you better use your horns. What Lewis has done might actually set back holding power accountable and displacing blame onto knowing or unknowing parties.

      And if you really are Joe Buck (St.L), then I want to know your pledge number. Fee?

  22. Cal

    I’m with Yves on this one. After watching the video of “stuart” screaming about what a great writer Lewis is and his multiple exhortations “You have to buy this book!” , I get kind of suspicious.

    Bottom line; financial parasites run Wall Street and now probably do more harm than good for the economy that is rigged in their favor. I wish my retirement money weren’t forced there by the IRS rules.

  23. Thure Meyer

    What’s wrong with morality and right and wrong? Isn’t that the bedrock of democratic institutions and judicial process? The implication that morality is just another road side attraction on the highway of life is kind of repugnant.

    Maybe we should lighten up on honesty as well. The book is basically a shiny white-wash clothed in shocking mock relevance, but ultimately acts as a prop for Wall St.

  24. Ptup

    “What’s wrong with morality and right and wrong? Isn’t that the bedrock of democratic institutions and judicial process? The implication that morality is just another road side attraction on the highway of life is kind of repugnant.”

    The “bedrock”? Sir, have you ever studied history? How naive. Good luck with your dealing with all of this. I would suggest unplugging and paying it all no heed. It will kill you if you don’t.

    1. backwardsevolution

      Ptup – yes, throughout history the parasites have been eating the hosts. Stupid hosts! Just roll on your backs, everyone, and let them eat you! (sarc)

      “I would suggest unplugging and paying it all no heed. It will kill you if you don’t”? It will kill you if you do. The hosts are ever so slowly beginning to glimpse the psychopaths dressed in leaders’ clothes. Perhaps the psychopaths will be unplugged.

    2. Thure Meyer

      Interesting response – quick, cynical and condescending with a splash of ad hominem insult.

      Well – what is the bedrock of democratic institutions then – or maybe you don’t believe in any of that either because its too naive.

      1. PTup

        Well, sir, I just point to today’s Supreme Court ruling allowing even more money in campaigns. That, from the most open and free “democracies” in the developed world. I mean, my first reaction should have been, if I was younger, to yell, “well, we are truly fucked now”, but, hey, now, it’s what we deserve, I guess. Democracy in action.

        It’s been worse, but, we’re getting back to there.

          1. Peter Pan

            Thanks for the laugh. I needed that after yesterday’s SCOTUS decision on McCutcheon v. Federal Election Commission.

  25. TimmyB

    HFT is a crime. Our federal securities laws already prohibit HFT. It is merely insider trading, where an insider has nonpublic knowledge of of facts affecting a stock’s price and sells that information to another so the purchaser of the information can profit. Our criminal securities laws are so broadly written and interpreted that prosecuting the NYSE and NASDAQ for selling insider information (here stock orders) would be a piece of cake. However, this will be another crime that the Obama Administration fails to do anything about.

    1. Kevin

      Do you believe that any form of Arbitrage is a criminal act?
      What information is not public?
      If it’s in the order book, it’s public information. If it hits the public trade ticker, it’s public information. If I see it on my TV before you hear it on the radio, and I buy ahead of you, am I committing a crime?

      1. TimmyB


        If you research “insider trading” cases, you will find the US Government has successfully prosecuted numerous people for insider trading on weaker facts than those presented by HFT. For example, a printer’s employee was convicted when he traded on information he learned via a print job he handled that a company would soon be bought by another.

        Additionally, the use of HFT to inflate the price of stocks via soon to be cancelled trades that were never intended to be executed is securities fraud in itself. Issuing soon to be cancelled trades with the intent to inflate the price of stock is not substantively different than issuing any other type of false information with the intent to inflate the price of a stock. This is garden variety securities fraud.

        However, as we no longer have a functioning justice system, I expect nothing to be done to prosecute these criminals.

        1. LucyLulu

          Yes, and as I posted upstream, this is what the FBI is allegedly investigating the HFT traders for: Making the appearance of trades (then cancelled) in order to influence pricing. This seems to be specifically prohibited by the SEC Act of 1934, and has been upheld in court cases, although AFAIK, not specifically relating to HFT.

          “Section 9(a)(2) of the Securities Exchange Act, 15 U.S.C. 78i(a)(2), It is unlawful [t]o effect … a series of transactions in any security registered on a national securities exchange creating actual or apparent active trading in such security or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.”

          1. TimmyB

            Great point. However, it seems a pretty safe bet that neither the FBI nor the SEC will do anything to prosecute anyone involved with these crimes.

    2. H. Alexander Ivey

      I quite agree, HFT is a crime, pure and simple. Arbitrage is not a crime, Kevin, but it is not HFT either.

      1. Kevin

        While I won’t disagree that persons at some point, somewhere, haven’t abused, bended, and broken the rules and the law, I take issue with nearly everyone hear repeating the mantra that HFT is a crime. It is not a crime. It is simply not a crime to configure a computer in a way that it can trade instruments between different sites, or within the same site, and compete for order flow. Whether you are a floor trader who sees a lot of sells coming to the floor and you start to lower your offer, or you are a computer doing the electronic version of that, it is not a crime. It is not a violation of SEC 9a2.

        Painting the tape is painting the tape. It can be done by a computer, or it can be done by a person. To conflate HFT and painting the tape is folly. HFT isn’t arbitrage, but certainly it is used in arbitrage, and a vast majority of transactions are completed legally without criminal wrongdoing.

  26. rich

    Moral Blindness Syndrome (MBS)

    This moral blindness is tolerated because there is very big money
    involved, and the potential for very negative career consequences. As
    they say, it is the bribe or the bullet. It is easy to excuse
    because it involves ‘white collar’ crimes that engage wide swaths of
    the most influential voices in our society.

    They retreat into blaming the victims, silencing the critics, repressing
    even peaceful protests, praising their own exceptionalism, and coercing
    the outliers, others, and dissidents. The system is the lie, and so
    the lie must be protected for the sake of the system.

    I wonder if there is a need to have news people, and economists,
    and politicians to take some basic courses in ethical behavior. They
    are certainly doing a wonderful job of suppressing their moral
    sensibilities when it comes to financial fraud, even if the laws do not
    overtly define and indict these abuses as ‘crimes.’

    And when someone points out the hypocrisy and fraud, they first ignore
    them, and then panic and attack. How dare they undermine the confidence
    of the system! For they have become creatures of the system, and that
    is a big part of the problem in the credibility trap.

    They do not get it. They are suffering from a severe case of moral
    blindness as described by Upton Sinclair when he said, ‘It is hard to
    get a man to see something when his paycheck depends on his not seeing

    And the example they give as public figures, from Wall Street to the
    Beltway, is rotting the future of our country, down to the bone.


  27. Mike

    Lewis has pointed out to a wide audience what everyone in finance already knows: HFT firms front run the whole market. Compared to this your criticism of the way he tells the story is bizarre.

    You would think ANY writer would find it weird that a lot of different writers are writing very similar articles (I have found other articles too with remarkable similarity). Hopefully you are aware that “sample” articles get sent to many writers from lobbyists with cautions on re-writing in the authors natural voice? This is profitable work and works best when used infrequently. Felix Salmon’s writing has strongly exhibited hints of this over the years.

    Your contention that these shops are outsiders is simply laughable. Outsiders can buy the entire market supply of MSFT because they sniff a huge institutional order? Who do you think is funding these “outsiders”. The more politically astute firms have been taking pains since 2008 to avoid the appearance of ownership across a vast array of businesses.

    Defending HFT in any way is to defend the most predatory behavior that exists outside of actual violence. HFT is dangerous and provides no value. The “liquidity” argument means the person saying it works in the industry or is a fool.

    1. Yves Smith Post author

      This is a reading comprehension failure. Apparently you looked only at the headline and intro paragraphs.

      If you’ve read this blog at all, you know we care about accurate diagnosis, since in the absence of that, you get poor policy solutions. One of the big reasons we got durable and successful securities regulations in the 1930s was the Pecora Commission, which spent nearly four years exposing how the market abuses of the 1920s worked and got widespread attention.

      Did you miss the headline, that we charged Lewis with failing to even acknowledge the possibility that the HFT conduct was CRIMINAL? Please tell me how suggesting that the front-running is so widespread as to rise to the level of criminal conduct is an endorsement of HFT. We point out the the FBI is investigating, among other things, front running, which is a slam dunk 1934 Act violation and can rise to the level of criminal conduct.

      We also criticize him for not saying that the exchanges (NYSE and NASDAQ) are in bed with the HFT operators, and the SEC has chosen to give them a free pass. Unless you put heat on the SEC to change exchange trading rules (which they have the power to do) nothing will change.

      Lewis, as you can see in this interview, literally says “government needs to get out of the way” and calls for a “market solution”. No way is that gonna happen. So despite his highlighting this issue, he’s ideologicially opposed to doing anything about it.

      And I do not understand your point about the HFT people being outsiders. They ARE outsiders relative to the oligarchic TBTF banks. That does not mean they aren’t influential. We never said that. Mike Milken was also an outsider at Drexel in the 1980s, and he had a huge (and very damaging) impact. And he really was a criminal. There is no way his empire could have become as big as it was if he wasn’t controlling the trades of many of the firms in his network, like Executive Life. Drexel clients would be required to overfund by 15% or so when they borrowed to make acquisitions, and then Drexel would tell them what to buy in their future deals. Some firms like Executive would get an end of day fax telling them what they owned, Drexel would execute trades for them (which was flat out impermissible the way they did it). The success of the raiders that Milken financed led to the rise of the “shareholder democracy” myth and the Michael Jensen “paying CEOs like entreprenurs,” which led to much more equity-linked pay and rampant short-termism in the executive suite.

  28. Johann Sebastian Schminson

    So — is this a good thing, or a bad thing?


    This is but one small aspect of a system — of a culture, actually — that is fragile with corruption.

    It doesn’t matter that the law is wantonly broken — there is no one in power who will enforce the law, anyway.

  29. M Raymond Torres

    Michael Lewis isn’t obliged to write the book you wish he wrote. What nonsense! And his failure to tell the whole story as you see it is no failure at all. His book only fails if it fails to tell the story he set out to tell. This seems obvious to me and I’m surprised that so many of the comments don’t reflect a grasp of this. But maybe that’s because nobody has read the book. Meaning that comments seem to be almost entirely ideological about the subject matter the book treats rather than about the book itself.

    Not to pick on Yves, but since her comments have been quite vociferous, let’s talk about “Econned”. Now I haven’t read it, but I have certainly read much about it and much of Yves, and that seems to be enough in this forum to qualify me to opine as to its merits. There’s a lot that it doesn’t include about its subject. It makes an argument, makes it well, as I understand it, but doesn’t cover every angle of its subject matter. It leads the reader in the direction of its conclusions. It has a point to make.

    Well, I happen to agree with the point it makes, if it has been accurately represented. And from reading much of Yves, I would tend to believe that it has been. But would it be correct for me to say that her book is essentially intellectually dishonest if I believe there is a larger point to be made about its subject that the book does not make?

    Lewis is leading the horses to water and getting them to drink. Is it his job to also make sure their thirst is quenched?

    1. Yves Smith Post author

      This is a straw man. Unlike ECONNED, Lewis has presented the key arguments of his book in numerous forums: TV interviews (multiple), 60 Minutes, and a long extract in the New York Times. And there are detailed reviews of his book, and I am citing the criticisms of those reviewers, who cover a wide ideological spectrum (pro bank Matt Levine to bank critic Pam Martens).

      So since Lewis has controlled the packing of his thesis, has presented in in multiple venues, and they are all consistent (he has not contradicted himself) it is not unreasonable to work from them and from media reviews, PARTICULARLY on the big issue, that his ideological bias (demonstrated in a CNBC interview) means he won’t consider that anyone in the ecosystems he investigates engaged in criminal conduct.

  30. Chauncey Gardiner

    There is another take on this that I feel has been largely missed, and it has to do with the timing of this HFT narrative.

    These HFT issues have been ‘out there’ since the “Flash Crash” on the afternoon of May 6, 2010, and arguably much longer. So why are we suddenly being concurrently treated to the “60 Minutes investigation”, the extensive and intensive coverage of Lewis’ new book, and even an FBI ‘HFT whistleblowers hotline’ from an administration that has demonstrated little but contempt for and abuse of whistleblowers?

    I agree with Russ Winter, who penned the linked article below, that it could also have to do with minimizing the possibility that HFT firms could act as a catalyst for a market correction, at least until desired distribution has been completed.

    As Russ states: …. “with the usefulness of HFT used up for the Pump, it becomes imperative to head off at the pass the amplified effect HFT will have on the Dump.” — See: http://winteractionables.com/?p=10517

    Just a thought.

    1. NotTimothyGeithner

      It might just be the John Murtha phenomenon (I’m sure it has a more common name), but you might remember the coverage of the Iraq War became far more balanced after Murtha announced his stance in 2006. Once a person of sufficient standing in the middle school that is D.C. says something it becomes an issue. Critics of the Iraq War were no longer branded as traitors immediately except at Fox but thats a clown show. Murtha presented nothing new when he voiced his opposition, and the conditions on the ground were the same muddle the way they were two years earlier (thats not quite accurate; Sunni militias were getting antsy, but this was predictable).

      Yves Smith, Zero Hedge (they have been on this), Rolling Stone (Taibbi has been on HFT), and other alternative news sources lack the street cred to be noticed for one reason or another. In the case of Michael Lewis, he has developed street cred among the appropriate groups, and when he speaks, the DC establishment listens.

      Look at John McCain. The guy is a clown and is now the most unpopular United States Senator, but the DC establishment rushes to bend their knees whenever he needs to burp. John McCain and Michael Lewis are simply cool kids who are nice to reporters. Everything else is irrelevant.

    2. Mark P

      ” …with the usefulness of HFT used up for the Pump, it becomes imperative to head off at the pass the amplified effect HFT will have on the Dump.”


  31. judabomber

    Lewis is a great writer, who has a knack for being able to put complex subject matter into a succinct and appealing narrative that mainstream audiences can easily grasp. Full disclosure: I’ve read Moneyball, The Big Short and Boomerang but have not read Flash Boys.

    Economic theory would say that he wants to promote his book in most expeditious way possible (after all he pays the bills through book sales, no?). Based on the both positive and negative attention he has received in the last 24 to 48 hours, I would say he has been quite successful.

    I watched his Bloomberg interview, and he talked a bit about how he came about deciding to write Flash Boys…and it turns out it was chance, more than anything which incidentally Lewis says was the same process for Moneyball. It started back when he did the Vanity Fair article on the former GS HFT programmer Sergey Aleynikov and he stumbled on the “question” he wanted to answer about HFTs (the Vanity Fair article was memorable as I recall it had some fun math questions from the GS interview process, like 3599 a prime number).

    Make no mistake Lewis is no crusader for reform like Charles Ferguson. After reading Predator Nation I found myself boiling with rage trying to figure out who runs the show. In my mind, Ferguson laid out some solid arguments for prosecution…but haven’t seen him making big waves since then.

    The unfortunate thing in my mind is the masses may actually get their hopes up that the some of the Goliaths of The Street are beginning to quake in their boots by all this attention from Lewis’ book. Maybe a big fish will actually take a fall….wait….not in this lifetime. If you’ve been paying attention since the crisis, you know this is a very unlikely outcome. But it will help Mr. Lewis sell books.

  32. David

    What is being discussed is a failure of the process of law.
    Call it a failure of Good Governance from all the cities, counties, states in the country from bottom to top and top to bottom. A failure of to observe and maintain regulations, laws, statutes, ordinances and charters that maintain our Government we describe as a Representative Democracy.

    Where do you start to untangle this corruption? I believe some of the government attorney’s failures are at the heart of these corrupt processes. Some are in positions to bless and say the politicians have clothes on when they are necked and standing on the foundations bought by money. They are not acting to uphold our Democratic form of Self-Government.

    It is bad to steal our money but what do you call it
    when our government is stolen?
    Do you call Subversion?
    Do you call it Sedition?

  33. kimsarah

    From a little peon’s perspective, I see similarities between the bashing Lewis is getting with what Greenwald has had to endure with the Snowden revelations. Rather than looking at the content of what is presented, it seems like a full-blown assault on the messenger. To this day Greenwald and Snowden’s motives are questioned as if they have some hidden agenda or get-rich scheme afoot. How about accepting that there are a few people in the world who actually want to see a better world for the rest of us. Hard to believe, isn’t it.
    Particularly in this case, the HFTs are squealing like the sky is falling. Must have hit a nerve.
    How about a little sympathy for the average investors. The $10 billion to $20 billion a year being pocketed by the HFTs is coming out of someone else’s pocket. Any effort to fix a rigged system so that capitalism can truly work the way it should, ought to be appreciated.

  34. junkyardwillie

    Just my two cents but on the topic of why didn’t Michael Lewis state that this was criminal, I think it was better that he did not. If he said that the HFT activity either was or should be criminal then he opens himself up to a huge strawman argument against his whole book.

    Each interview would have focused solely on that aspect saying “well what exactly is criminal?”, “what actual crimes are committed?”, etc. Its better to leave the opinion as to whether its criminal or not to both the readers and actual law enforcement.

    You already see in his interviews on Bloomberg and such when they have HFT people on as well that they will claim that “speed doesn’t matter in today’s markets” which try to disprove the rest of the book by saying the ultimate argument that the HFT’s have an advantage because they are faster is false because speed doesn’t matter. That is a flimsy argument but its being made.

    Michael Lewis also made the mistake in some early interviews by saying that it creates distrust in the market because the individual investor is affected. If you watch all his interviews now he is constantly battling back this point by trying to state its not individual investors but when people have money in mutual funds and such. Which then opens up the questions to do you think Mutual Funds are the best investment ever because they tend to do worst than the market so aren’t they already doing a disservice to investors.
    Long story short, when you have a topic that is meant to disrupt an established and powerful industry you want to try to leave your opinion out of it as much as possible and present facts. Anything that he states will be heavily scrutinized to discredit the book. I plan on reading the book soon because my initial thoughts are I don’t agree with Lewis based on his interviews but I want a fuller understanding as to what he is really saying is going on and I don’t think I can parse that from interviews, I need the book to do that.

    1. Yves Smith Post author

      This is as straw man. We did not say he should say it was criminal. We said he should be wiling to acknowledge that as a possibility. The reason I mentioned books where the author did accuse specific firms and players that made the case that some firms and individuals could/should have been prosecuted in the crisis is that several readers saids, “Oh no, Lewis could NEVER say that, too much liability.” Those books went much further than I’m suggesting Lewis should have gone.

      But he’s flat out rejected the idea that it is, when he does not have subpoena power and hasn’t seen the internal records of these firms, so he’s in no position to say confidently that that’s not what is going on. That is what I object to, that his position is “the market can solve the problem” (Lewis has been explicit about that view in 60 Minutes and a widely-watched CNBC interview this week) when it was ignoring regulations that got us in this situation in the first place. HFT is front running under the 1934 Act, but the SEC has quietly enabled it.

      1. junkyardwillie

        I see what you are saying now and I’d pretty much agree with that. I’ll admit I haven’t read through all the comments on this post so I missed some of the back and forth on it.

        Yes I don’t quite agree with his idea of the market can solve the problem, I’ve heard him say that on a number of interviews (I’ve watched like 3 or 4 trying to understand what his fuller argument was but he kind of makes the same statements over and over). His idea of the “market can solve this” rubbed me the wrong way because it seems like he’s just promoting the IEX versus saying there is something wrong in the market and someone (regulators) should be looking into this. I don’t want to put words in his mouth especially since I haven’t read the book, maybe he discusses the potential criminal nature in there.

        I think I read the last two paragraphs in the wrong tone, I was reading it as if you were stating that he should state that there is definitely something criminal versus there is a possibility. From the little that I know on this topic, which is very very little, it does seem like there is some sort of front running loophole that has been found and rather than the “market” closing it, regulators should. There will always be some team of lawyers that finds a loophole for a company to exploit but like Apple and the iPhone Jailbreakers, someone that regulates the market should be closing these loopholes once they see people exploiting it. It may not be “illegal” right now because of a loophole but regulators should be making it illegal as soon as people start using it.

  35. rur42

    Criminal activity? I wish someone would cite chapter and verse what this criminal activity is (was). Are the HFT algos illegal? Was it illegal to quietly (think Manhattan Project) spend $300 million lay 827 miles of fiber to gain a few milliseconds advantage? Is the kind of frontrunning & skimming described by Lewis illegal? Was it illegal to co-locate? Or was this all just a sophisticated form of “cheating” which was available to anyone who paid the price of admission to the hi-speed fiber. (Cheating in the sense that an athlete might be using some form of chemical enhancement that is not detectable because not strictly proscribed.)

    Now the AG and the FBI are said to be “interested”. (Surely Lewis must be given some credit for making this an issue that might require further investigation by …. someone.) But this phenom is not new — just the slimey details that Lewis painstaking exposed. Apparently there’s been quite a bit written on HFT, but Lewis seems to be the only one who ferretted out the details and spelled out exactly how it worked. “The system is rigged, and this is how….and here’s some folks who are part of the rigging.” Shine a light and watch the rats scurry.

    BTW, Doesn’t anyone read books anymore?

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