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Articles by Donald E. L. Johnson

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Michael Lewis’ ‘Flash Boys’ shows SEC must revise high frequency trading rules

High frequencty trading on the stock exchanges has become a very controversial issue for Wall Street and speculators. Last week, Michael Lewis published his new book, Flash Boys, and took the debate to a new level. I've watched CNBC and Fox Business TV interviews and discussions and read stories about the debate and the book, but I haven't read the book yet. In response to a story on this morning, I thought about the issue and decided the market is probably more manipulated than rigged. And I see the deals the exchanges give HFT funds as the same as the volume discounts Walmart and the Federal government get from their vendors. But the Securities and Exchange Commission, which wrote the rules that guide HFT funds, needs to update them. My thoughts:

As a stock and options speculator who is a retired commodities, equities and money market reporter and columnist, I enjoy the Lewis books and respect the hard work and analysis that goes into them. For me, they have a lot more credibility than CNBC, Fox Business, Reuters, Bloomberg and the Wall Street Journal, which all are highly dependent on their Wall Street customers.

Is the market rigged? I probably would use the word "manipulated" and would call the arrangements among the exchanges and high frequency traders volume discounts. In any industry, whether it is Walmart or the Federal Government, he who spends millions or billions gets better deals than the little guys.

Even online brokers give lower commissions to their best individual traders, and everyone knows it. So what is wrong about giving high frequency traders the right to invest in people and technology that gives them an edge over the little speculators?

My long time feeling about HFT and my initial and continuing reaction to Flash Boys is that high frequency traders have an unfair edge and are allowed to manipulate prices. Now that I've given it a little more thought, I still feel that way but I think I better understand the market dynamics and what's really going on.

Do I, a small trader, like it. No.

Can I do anything about it? Yes.

I don't day trade, which makes HFT less of a factor for me. I use limit orders, which prevents front running, I hope. And I don't trade often in the stock market, but I sometimes trade monthly in covered calls, which generally are one-month trades.

And I don't own mutual funds or exchange traded funds, which are the biggest victims of high frequency trading and pass those costs on to their investors.

What Lewis has done, as many have pointed out, is bring the debate over HFT to a higher level of public debate. That's good.

I don't like that the government's leading extortionists of banks and other businesses, Eric Holder and NY's attorney general, are getting into the act, however.

The grandstanding attorneys general will only make things worse for all investors.

Posted by Donald E. L. Johnson on 04/05/2014 at 09:43 AM

EthicsTrustMediaFinancial MediaMutual FundsSpeculationTrading StylesStocksTechnology

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