“The United States stock market is rigged!”
That was the opening line from author Michael Lewis on America’s 60 Minutes last week.
As the author of financial books Liar’s Poker and The Big Short, and sports books The Blind Side and Moneyball, Lewis is a well-researched writer.
That research has now led him to write his new book “Flash Boys: A Wall Street Revolt”.
Flash Boys documents the rise of high frequency trading in the US, how one trader, Brad Katsuyama, figured out a lot of people were being legally fleeced and how he started his own exchange to combat it.
Brad Katsuyama was a Canadian working for the Royal Bank of Canada’s trading desk on Wall Street.
In 2007 Katsuyama started noticing the way he traded was changing.
Previously, if 10,000 shares of a stock were available to buy at $20 a share, he’d always be able to place the order and he’d have the shares at $20.
But in 2007, Katsuyama would place the order and suddenly those shares offered would disappear and he’d have to buy at a higher price.
After some investigation he found out his orders were being front run by computers running algorithms that sensed his order, bought ahead of him and then sold to him at the higher price.
This all happened in a fraction of a second and in the US it makes up 70% of the volume on the stock exchanges, in Australia it’s about 10%.
Yet, despite the initial headline, for the conservative investor it shouldn’t be a huge concern.
As Michael Lewis himself says, “I own index funds, and I don’t time the market. I put it away and I don’t look at it very much. It doesn’t follow from the story that you should flee the market.”
However, after five years of calls for the practice to be better regulated, the FBI has now announced it’s looking into abuses of high frequency trading.
Amazing what some publicity can do.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances. Looking to reach your goals with one of Australia’s highly rated financial advisors?
