Just in time for the release of Michael Lewis’s new book, Flash Boys, news came down this week that several high frequency trading firms have been subpoenaed by New York’s attorney general.
As Lewis writes about, HFT is a new variation on one of the oldest scams in the money management game: front-running. In simple terms, high frequency traders use sophisticated methods to detect and profit from tiny fluctuations in stock prices. They usually earn pennies a share or less on individual trades, but they execute huge numbers of transactions to earn huge (and largely risk-free) returns. One New York HFT shop recently acknowledged that it had made money on over 1000 consecutive trading days using this strategy.
Like all front runners, HFTs exploit advance information about a security that is unavailable to the wider markets. The losers in this and all other forms of front-running are Jane and John Q. Public–the poor schmoes who play by the rules and wind up paying more when they buy stocks and earning less when they sell them. In other words, HFT is yet another example of Wall Street insiders turning our financial markets into the equivalent of the 1919 World Series–a rigged game.
Something extraordinary happened last week: a politician went against the dogma of his own party and proposed something that might actually boost our economy and improve our country’s long-term fiscal health.
Of course, the plan has no chance of getting a vote, let alone passing congress. And even if it did manage to pass, President Obama would veto it before his first morning cigarette. But just because Representative Dave Camp’s tax reform bill is a lost cause doesn’t mean it’s not a worthy one.
In 1984, when I was a fresh MBA working at the largest bank in Texas, I was browsing through the now-defunct magazine Investment Decisions and I came across an article titled, “Do Stock Splits Help Stock Prices?” It was written by a man I had never heard of. His name was Warren Buffett.
I generally find the public’s fascination with would-be financial messiahs puzzling, even pathetic. All my life, I’ve watched one market “guru” after another tout some secret formula for beating the street, only to fade into obscurity. But “The Wizard of Omaha” is an exception. He definitely deserves the fame he’s acquired. He’s delivered more helpful investment advice than any other living American. (Vanguard founder John Bogle is a close second in that regard.) Believe it or not, I have kept Buffett’s Investment Decisions article with me for the last 30 years. I’m looking at it right now as I type, and Buffett’s insights are as apt today as they were back in the days of Swatch watches and New Coke.