It’s easy to bash Wall Street as the root cause of all financial problems (and some non-financial ones), which is why Michael Lewis is getting away with blowing so much smoke about the latest supposed ripoff of the “little guy.”
Easy, but completely and utterly disingenuous.
The “scandal” Lewis points to in a new book (and in his high-profile publicity campaign) is something called high-frequency trading, or HFT. In a scam of epic proportions, we’re told, smart Wall Street fellows can miraculously figure out when, where and how much stock you, the individual investor, want to buy — and then rip you off.
The HFT guys supposedly do this by jumping in front of your order at the speed of light and forcing you to pay more for a stock than you would’ve if the high-speed computer never existed. Even as the market hits record highs, Lewis wants you to believe the system is rigged.
The book is a fast read — as long as you suspend your disbelief over Lewis’ thesis: These evil traders are screwing the American people once again, just as they did during the financial crisis.
But, as with that easy lefty interpretation of the 2008 crisis, Lewis conveniently leaves out some important facts — the biggest being that, if anyone’s ripped off by HFT, it’s not small investors. (More on that later.)
And, to the extent ripoffs are going down, the vast majority of them are perfectly legal, aided and abetted by government policy.
Yes, government. Conspicuously missing from the high-frequency debate is that government policy is at the heart of the problem (if there even is a problem with high-speed trading).
Most investors think that when they buy or sell a stock, the order is routed to the New York Stock Exchange or the Nasdaq. Not so: The Securities and Exchange Commission thought two exchanges weren’t enough, so it opened up what it considered competition starting in 2005, allowing almost anyone with a computer terminal to create an exchange.
These exchanges are known derisively as “dark pools,” because, even as it gave them the green light, the SEC also took a largely hands-off approach to regulating them. The “transparency” of pricing you see at the NYSE and Nasdaq doesn’t exist with the dark pools.
The big Wall Street firms and their clients such as Blackrock and other money managers liked it that way. They could hide their orders, and trade without alerting the rest of the markets — which was great for them.
Until, that is, some smart guy wrote a computer program that could largely figure out how the big guys were trading, then jump ahead of those orders lightning-fast (hence “high-frequency”) to make quick profits.
Nefarious? Not for anyone but the big guys. What Lewis doesn’t tell anyone (and what Steve Kroft in his “60 Minutes” interview wasn’t smart enough to ask) is how this hurts the small investor.
Because it doesn’t. This isn’t traders vs. the little guy, it’s “Alien vs. Predator” — one set of financial insiders outsmarting another bunch.
The guy who buys Apple on an online-brokerage account gets the price he sees on his screen; that’s how the E*trades of the world fill orders. And if you have a mutual fund, your money manager should be smart enough to figure out (as many have) how not to be gamed by the HFT guys.
Another thing Lewis doesn’t tell you is that HFT has also reduced the cost of trading: These guys trade so much, they’ve driven down the cost of buying or selling stocks. So whatever game they’re playing might be a net plus for investors.
None of which is stopping the usual headline-hunters from riding to the “rescue.” As the Fox Business Network was first to report, Manhattan US Attorney Preet Bharara is investigating the HTF “scandal,” and even butting heads with the New York office of the FBI over who’ll get credit for the first scalp.
Keep in mind, our law-enforcement officials have a lousy record of nailing the true culprits in the financial world. All those insider-trading convictions they tout have nothing to do with the 2008 collapse.
The myth is that, fueled by computers and excessive greed, MBAs pushed the limits of rationality and created investments tied to housing bonds that tanked the financial system and the economy in 2008 — just as they’re doing now with high-speed trading.
What this leaves out, of course, is that those MBAs were reacting to a multitude of government incentives and mandates that allowed the housing-related securities to be created in the first place and to be regulator-classified as “safe” investments, just as new government rules allow HFT guys to game other traders in the market Uncle Sam created.
To recap: Any ripoff here is of the rich, by the rich — and it’s in a government-created system, with the “watchdogs” as much to blame as the traders.
None of which is going to stop people like Lewis from fighting on in their endless quest to expose evil on Wall Street — and sell books at the same time. Don’t be fooled.
Charles Gasparino is a Fox Business Network senior correspondent.