That’s the title of Michael Lewis’ new book about high frequency trading on Wall Street.
We’ve always known that early access to information means money on Wall Street. It’s called insider trading, and it’s illegal.
But computers aren’t people so they don’t go to prison. That’s right. It’s apparently legal if computers are doing it. Last summer, I wrote a post about early access to an important monthly economic report that often moves the market. For a fee, you can get the report two seconds before it’s released publicly. Those two seconds are an eternity for the computers that now do the trading on Wall Street which means the early access can make you big money.
But the phenomenon of high frequency trading is much more wide spread. The computers used for high frequency trading are so fast, and their connections to the market computers that actually complete the trades are so fast, that they only need a few milliseconds to see your order, then check the asking price of the stock, then buy the stock and finally sell it to you for a fraction of a cent more. When you add up the millions of trades affected, you’re talking serious money. High frequency trading is so profitable that one firm spent $300 million to install its own private fiber optic network.
The Wall Street insiders like the Wall Street Journal, CNBC and Fox Business, along with any number of “experts” were quick to point out that high frequency trading has virtually no effect on small investors, like me. They’re right. I dutifully designate some of my pay every two weeks for my 401k and I’d be surprised if high frequency trading cost me even a dollar over the past two years. It’s the big Wall Street firms and hedge funds that are taking the hit.
But that’s not the point. Anything that distorts a level playing field to give one person an unfair advantage over another is cheating and should be illegal. (Thankfully, New York’s Attorney General has begun an investigation of high frequency trading.) It’s also another black mark on Wall Street, and only confirms the middle class perception that the game is rigged in favor of the rich and powerful. It also confirms the Wall Street ethos that you can never make enough money, and you’re a fool if you don’t at least bend every rule as far as you can to do just that.