Best-selling author Michael Lewis appeared last night on 60 Minutes to promote his book “Flash Boys”, and to finally expose how “rigged” the stock market really is.
In the short clip below, Lewis explains how high-frequency traders [HFTs] legally front-run the trades of small traders by exploiting computerized trading in the U.S. stock market which gives them the advantage of a millisecond to inflate the pps you have to pay for a stock. Lewis explains the mechanism by which HFTs are able to hit the ‘bid’ in front of you and ‘ask’ the shares back to you at a higher price when you want to buy.
“Is it a scam?”, CBS’ Steve Kroft asked Lewis about the fact that billions of dollars have been spent by Wall Street firms and stock exchanges to gain the advantage of a millisecond. “Bigger”, Lewis says. Keep in mind, high-frequency computerized stock trading currently controls more than half the market. So, while some may try to paint the practice as just ‘scalping’, if you blast the bid with block trades and then cancel them to create the false appearance of market activity, then this is ‘gap & trap’ on a massive scale.
Lewis talks also about the effects of high-frequency trading on traditional investors, who truth be told – have never had a chance against sophisticated Street firms anyway:
“Michael Lewis: Brad realizes, “Oh my God, that’s how I’m being front-runned. I’m being front-runned because my signal gets to the BATS Exchange first and they can beat me to all the, all the other exchanges.” It only took a tiny fraction of a second for Brad’s trade to reach the next exchanges on the network, but the high-speed traders were able to jump in front of him, buy the same stock and drive the price up before his order arrived, producing a small profit of just one or two pennies. But it was happening to everyone’s trades millions of times a day.
Ronan Ryan: That adds up.
Steve Kroft: You make it sound like a skim.
Ronan Ryan: What else would you call it?”