Day traders and those individuals heavily invested in the stock market never shy away when it comes to receiving trading tips from the experts. However, the stock market is wonderful at sparking debate and casting doubt on even the most expert of opinions. Such is the case with the recent wisdom dispensed to the world by Micheal Lewis. He appeared on NBC in order to promote his latest publication on the subject of high-frequency trading. Later the same day, he appeared on CNBC where he defended his views on the practice and how it impacts the market as a whole. His book, Flash Boys, is bringing some old debates back to life concerning just what the impact of high frequency trading is on the market at large.
The book itself outlines the topic beautifully, making the content accessible to both the layperson and the experienced trader alike. He covers everything from the upgrade of the hardware driving the stock market to the arrest Goldman Sachs employees back in 2009. Through opinion and storytelling, Lewis paints a vivid picture of the evolution of the stock market over the past 10 years. Where the book falls short is in its attempt to tackle some extremely complex ideas by characterizing some institutions and stock market practices as either villainous or heroic. The issues simply are not that black and white. In some cases, according to other market experts, the information is downright inaccurate.
Some parts of his arguments characterize high-frequency trading as a practice that preys on small, “mom and pop” investors. He makes this assertion by claiming that many of the powers that exist behind the most influential speed traders have inside information or some sort of natural advantage that ultimately costs middle-class investors money. However, conventional wisdom in the financial sector has accepted the idea that high-frequency traders are actually competing against each other for profits in order to fulfill the expectations of average, retail investors.
Lewis also gives the distinct impression that speed traders make exorbitant amounts of money on a regular basis. Again, this assertion is not completely accurate. In reality, firms working with this strategy are operating just above breaking even in most cases. When the numbers are evaluated, it turns out that the entire high-frequency trading industry made only $1 billion dollars over 2012. The number sounds large. However, it is small-time earnings when compared to the $5 billion in profits that were made in the same year by JP Morgan Chase alone.