Michael Lewis’ “revelation” that the stock market is rigged by high-frequency traders who jump in front of other bidders to drive up the price of stocks dominated the discussion last week as his p.r. tour for “Flash Boys” rolled out.
Lewis, a storyteller extraordinaire, vilifies these speed demons for their superfast computers, fiber-optic networks and algorithmic trading strategies, while neglecting to mention their chief cohorts in this operation.
These traders who use the HOV lane to get ahead of investors could not do their trades without the full knowledge and complicity of the New York Stock Exchange and Nasdaq.
What is clearly unfair and unethical — and, frankly, ought to be outlawed — is how the exchanges have essentially taken on the role of running a high-priced, high-frequency brothel.
Yes, a brothel, one in which Client No. 9 is apparently none other than the HFT community, which will pay anything to get a nanosecond’s advantage in New Jersey over firms in Manhattan
If you have enough money, you can have the data before the general public. This is one of the most tawdry practices on Wall Street, ever.
It is the exchange’s responsibility to supervise and see to it that stock-price data delivery is done fairly, without favoring certain investors over others, and to sound the alarm on order front-running or any other illicit activity — not to enable it, and certainly not to profit from it!
For the right price, a high-frequency firm can pay the NYSE and Nasdaq tens of thousands of dollars a month for a server “rackspace” right next to, or even at, the exchange.
Think of it as one’s own seat on the most important trading floor — not in Manhattan, but in the exchange’s real nerve centers, in facilities in Weehawken or Mahwah, NJ.
Duncan Niederauer CEO of the NYSE charges “a one-time cabinet upgrade fee of $9,200” when a high-frequency server needs additional power above the 11 kilowatts allocated to it.
The savants over at Nasdaq, led by Robert Greifeld, charge high-frequency firms an additional “premium installation fee” of $7,000 for a “super high density cabinet” with power ranging between 10 kilowatts and 17.3 kilowatts.
So this must be an important revenue stream for these public companies and their shareholders.
The markets themselves are not rigged. However, there are indeed some bad actors. Some you chose to mention, some you chose to omit.
But by not highlighting the enablement of advance data reception by the NYSE and Nasdaq, you have cast a tremendous shadow over who are the bad actors.
You see, if the exchange server locations and power upgrades at the NYSE and Nasdaq were not a meaningful advantage over traditional delivery methods, high-frequency firms would not pay hundreds of thousands of dollars a year for them.
And exchange CEOs Greifeld and Niederauer wouldn’t be reaping millions for their public companies and shareholders by running a revolving data brothel out of their server space.
The University of Michigan and Warren Buffett’s Business Wire stopped selling their market-moving data in advance to the high-frequency community, The exchanges need to tell their Client No. 9s they are no longer offering that service at their establishments.
At the end of the day, fundamentals rule, but when exchanges that are in charge of oversight enable and are aiding, abetting and profiting by giving share pricing data early to preferred customers, the game really is rigged.
The exchanges are the real “Flash Boys.” It’s time to clean them up.