Is the American stock market rigged?

The US stock market is rigged, said renowned financial writer Michael Lewis this week. The author of Liar’s Poker, as well as a compelling account of the subprime debacle, has shone the spotlight on high-frequency trading (HFT) with his latest book.

HFT is stock trading done by computers that are so fast that they can spot an opportunity and execute a trade in a thousandth of a second.

In essence, says Lewis, the supercomputers can see which stocks retail investors or funds are about to buy, then scoop them up and sell them back to investors for a higher price. This front-running has cheated people out of billions, he says.

America’s Securities and Exchange Commission and Federal Bureau of Investigation are both looking into HFT. The row has prompted Virtu, a high-speed trading group, to delay listing.

What the commentators said

HFT “has obsessed the securities industry for almost a decade”, noted Sam Mamudi on Bloomberg.com. Firms using speed tactics account for about half the share volume in the US.

With more frequent buying and selling, liquidity has improved, but high-speed computers were also blamed for the ‘flash crash’ in May 2010, when the Dow Jones Index plunged by 1,000 points in minutes.

One thing Lewis doesn’t mention, however, is that HFT isn’t as significant as it was, said Reuters.com’s Felix Salmon. The number of trades per day has fallen sharply in the past few years and the amount of money being made by the HFT industry is “in sharp decline”.

Lewis also “reserves blame for the wrong villains”, added Andrew Ross Sorkin in The New York Times. He fingers the hedge funds and investment banks engaged in HFT.

But while they “are complicit”, the “real black hats” are the big stock exchanges, who cash in on HFT by charging more for faster trading through their infrastructure. “The exchanges have a financial incentive to create an uneven playing field.”

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