When I found out Chris Hayes was interviewing Michael Lewis on his show tonight, and they were going to talk about Lewis’s controversial new book Flash Boys, I was jazzed – I was ready to unleash hell on them for peddling alarmist rubbish and scaring people away from equity markets. (It’s a slow Wednesday night, what else am I going to do?)
But no. The interview was sensible (though can we stop using the word “rigging”?). They even managed to agree that the real target of HFT is large investors – mutual funds, hedge funds, pension funds – rather than “the guy in his underpants e-trading”. If you’re the guy in your underpants e-trading, you’re probably being net helped by HFT, as Felix Salmon explains, and also please put pants on.
Lewis took exception to Felix Salmon’s claim that he “queered the narrative”, creating heroes and villains – but if you think the heroes and villains of HFT are as clear-cut as Lewis makes them out to be, go read Matt Levine’s alternate take on the Flash Boys story (and then come back).
There was only one part of the interview that really struck me as overtly wrong:
Michael Lewis: “As the market went into computers and went off the floor of the NYSE, built into it was this scalping activity.” #inners
— All In w/Chris Hayes (@allinwithchris) April 24, 2014
Scalping – trying to jump in front of big flows to get ahead of them, or in front of small orders to preferentially trade with them – has been around since financial markets were a bunch of dudes punting rice futures in 18th-century Osaka. (Here it is back in the day-trading days of 1995.)
For that matter, so has proximity arbitrage. Open-outcry futures traders fight for positions closer to the top step of the pit, where they can see more activity and be closer to the top step where the big brokers traditionally stand; HFT firms colocating their servers next to the exchange’s matching engines is the electronic equivalent of standing on the second-top step in the futures pit. If you bar the exchanges from offering colo space in their datacenters, the HFT firms will just bid up space in the datacenters next door instead.
Flash Boys is a great read, an exciting story of plucky outsiders bringing down the old regime (like The New New Thing, like Moneyball, like The Blind Side, like The Big Short, you might notice a pattern here). But it seems to have turned into a policy paper for financial regulators, and if we ran the government by who can write the most interesting narrative then we’d have David Simon running the justice system and Teju Cole or Chimamanda Ngozi Adichie running immigration policy wait that might not actually be so bad.
Here’s the video. It’s worth a watch.