In “Flash Boys: A Wall Street Revolt,” Michael Lewis contends that High Frequency Traders (HFT) have created a stock market that is rigged. He argues that they pick off large buy-side orders, effectively front-running retail customers. Lewis also claims HFTs use technology to get unfair speed advantages. These charges have led to investigations by both the market regulators—the Securities and Exchange Commission and the Commodity Futures Trading Commission—as well as the Federal Bureau of Investigation, the U.S. Department of Justice and the Office of the New York Attorney General.
In our view, Lewis’s book focuses on the wrong things. Charges of a rigged market and front-running sell books, but they do not square with a market where execution is arguably cheaper than it has ever been, particularly for Lewis’ supposed victims—retail customers. Similarly, “revelations” of innovations to increase trading speed are less potent when you realize that they’re largely about HFTs gaining an advantage over other HFTs.
