I will admit that Lewis has rustled my jimmies. But if he's interpreting this "punching in the balls" as a good guy punching the bad guys, he's mixed up. Electronic trading is the present, and it should be the future. In fact, every market that still exists as a network of people calling one-another or standing in a pit would be made many factors better by opening them up to the public and allowing trades to take place on electronic exchanges.
I get scared of what Lewis is saying in the same way it scares me when I hear of school districts banning the teaching of evolution. I'm not scared that Lewis is right. I'm scared that his misinformed screed will actually gain traction.
Electronic trading is the present, and it should be the future.
You know HFT isn't identical to any electronic exchange, right. I haven't evaluated in great depth whether Lewis is correct or not. But I'm pretty sure you can't defend HFT solely on the basis of "this is inevitable" (after all exchanges makes elaborate and special allowances for HFT, it's not a strategy you can sit at home and do). Any market is based on rules. If, for example, every transaction, no matter how quick or small, involved a small fee, I don't think HFT could exist as it does now.
Again, the point isn't that I've prove HFT should be banned but rather that like any other construct, it needs to justify it's existence rather than talk about inevitability - sort of like you defend patents if you want but you can't defend based on property rights.
Every transaction does have a small fee. In US equities, there is an SEC fee of 22.1 dollars per million dollars sold, and for most (all?) futures exchanges, where HFT is just as prevalent, there is a fee both for both sides of a trade (unlike the maker/taker model in US equities).
I have not seen any reasonable way to decouple having a speed advantage from electronic trading. IEX is a large step backwards towards closed networks of non-public markets.
That was a rather transparent straw man argument you came up with there. Lewis is not against electronic trading. And he is certainly not trying to bring back the pits. He is against high frequency trading, or the ability of some insiders to obtain an advantage over the ordinary investor.
> Big investor. If you are a retail investor, the HFTs don't know about you until after your 2 lot trade is finished.
Doesn't that obfuscate the fact that most retail investors interact with the market via various funds and intermediaries - which in turn collectively makes them a "big" investor?
Big investors = agents of little guys + rich people.
Little investors = all little guys.
Lewis is shilling for a group which is disproportionately not the little guy.
Further, skewing the market in favor of the big guy is just a way to ensure that the big guys can rip off the little guy. Once the little guy is forced to subsidize liquidity for the big guys (as Lewis wants), he might as well just pay a mutual fund the 50bps management fee rather than managing his own 401k.
Many big investors, e.g. mutual funds, trade on behalf of retail investors, so everyone is screwed. That was one of Lewis's core arguments in the book.
> the ability of some insiders to obtain an advantage over the ordinary investor.
What are you talking about? Who are these 'insiders'? Anyone is free to build a trading system that uses speed as an asset if they have the will and ability to. Speed of information used to be considered a noble thing for traders to invest in.
You're the one misinformed here. He never said he's against electronic trading. In fact, IEX, the very firm he champions, is an electronic trading firm. He's against he practice of exchanges like BATS getting kickbacks from HFT firms for sending orders to them at inferior prices, screwing over institutional investors in the process.
Did you even read the book? The entire point is that some HFTs are given priority fills on orders that no one else has access to, even when the HFT quotes are worse, in return for kickbacks to the exchanges.
Everyone on that exchange has the same access to the same types of orders. HFTs only get priority if someone gives them priority. If these order types are so powerful, why aren't everyone using them?
Also, I will reiterate: HFTs NEVER get fills on quotes that are worse than any other participant on the same exchange. That violates RegNMS, and is straight up illegal.
> If these order types are so powerful, why aren't everyone using them?
An allegation made in Dark Pools was that the existence of the order types was initially deliberately concealed from most actors in the market. The claim was well substantiated, from what I could tell.
When the orders were added, there was a modification to the FIX specification for the exchange. For example: http://www.directedge.com/Portals/0/docs/Direct%20Edge%20Nex.... It is everyone who trades on that exchange's responsibility to stay up to date with what's available, and how it interacts with their trading strategy.
"concealed", in this context, just means "too lazy to carefully read the documentation".
I get scared of what Lewis is saying in the same way it scares me when I hear of school districts banning the teaching of evolution. I'm not scared that Lewis is right. I'm scared that his misinformed screed will actually gain traction.