An entertaining
CNBC clip currently rocketing through social media networks shows William O’Brien, president of
BATS Global Markets, having conniptions over Michael Lewis’s claim (in his new book,
Flash Boys)
that the markets are rigged. Now that O’Brien has finished reading
Lewis’s book, I recommend that he pick up David W. Maurer’s 1940
classic,
The Big Con.
The Big Con (not to be confused with a
2007 book with the same title
by journalist Jonathan Chait) is an affectionate catalog of the
elaborate confidence games played during the golden age of the grift – a
period that began in the late 19th century and ended with the Great
Depression. In the book, Maurer describes a big con called “the wire”
that will be familiar to anyone who’s ever watched the 1973 movie
The Sting (which drew heavily on Maurer’s research):
It was a racing swindle in which the con men convinced the victim
that with the connivance of a corrupt Western Union official they could
delay the race results long enough for him to place a bet after the race
had been run, but before the bookmakers received the results.
In essence, the mark was invited to profit by receiving, illegally,
information a few minutes before it was available to anyone else. (What
the victim didn’t know was that the Western union office and the
gambling den were both fakes.) This is, more or less, what Wall Street’s
high-frequency traders and the proliferating exchanges that serve them
do: they manipulate the speed at which market information travels so
that a lucky few can benefit financially from privileged early access at
the expense of everybody else.
They do this not by slowing down the
rate at which the information travels, but by speeding it up. In this
instance, the acquisition of privileged information is perfectly legal.
Also, the privileged access is real, making the dupe not the trader who
seeks it but anybody who lacks it.
The
rap
against Lewis’s book is that he exaggerates the degree to which any of
this affects the ordinary investor. And it’s true that any lone day
trader who logs onto his E*Trade account expecting to outperform the big
institutional investors should have his head examined. But Lewis makes
clear in Flash Boys that it took many very intelligent bankers (and
consequently many investors) several years to figure out why their
computer terminals went blooey when they attempted futures trades.
Prices were changing in mid-transaction, seemingly in response to orders
they were still keying in. If that isn’t a rigged market, what is?
Lewis’s book describes an insane competition to provide the shortest
fiber-optic link to market information (and therefore shave off a few
crucial millionths of a second). The process leads to, among other
travesties, the drilling of dedicated tunnels through mountains and
under rivers in rural Pennsylvania. In Lewis’s view, this arms race
can’t be regulated away. His book’s hero, Brad Katsuyama, fights it by
creating a new exchange,
IEX Group,
that slows down all trades sufficiently to put all buyers and sellers
on a level playing field.
Perhaps Lewis is right that the market is
better-positioned than the government to solve this particular problem,
in which case good luck to Katsuyama and anyone who might set up a
similarly un-rigged shop. The advent of a market-based “slow investment”
movement comparable to the “slow food” movement advocated by Berkeley
restaurateur Alice Waters and writer Michael Pollan would certainly be
welcome. (Something like it seems to have worked out pretty well
for Warren Buffett.)
But Flash Boys, along with Lewis’s previous The Big Short, conveys a larger message that the financial markets, with their “
dark pools”
and ever-more-abstruse financial instruments, are rapidly losing the
transparency necessary for them to work properly – a problem the 2010
Dodd-Frank
financial reform legislation only partially addresses. As enthralling
as Lewis’s new narrative is, his message that the markets are rigged
won’t surprise anyone (except, apparently, the enraged William O’Brien).
Financial regulators’ foremost task right now is to drag American
finance into the sunlight in every way that it can.
That Wall Street will fight them every step of the way merely confirms how rigged the game really is.
Read more: Yes, the stock market is rigged | MSNBC
