Is the American stock market rigged?

Financial writer Michael Lewis has cast a critical eye over the world of high-frequency trading.

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

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" arethe big stock exchanges, who cash inon HFT by charging more for faster trading through their infrastructure. "The exchanges have a financial incentive to create an uneven playing field."

Recommended

Think Tesla is a bubble? This might be the best way to bet on it bursting
Oil

Think Tesla is a bubble? This might be the best way to bet on it bursting

The huge rise in Tesla’s share price means that, by market value, it’s now the sixth-largest company in the US and and the world’s biggest car-maker. …
25 Jan 2021
Three clean energy stocks for your portfolio
Share tips

Three clean energy stocks for your portfolio

Professional investor Christian Roessing of the Pictet Clean Energy Fund highlights of his three favourite stocks at the forefront of the clean energy…
25 Jan 2021
The MoneyWeek Podcast: let's talk about bubbles
Stockmarkets

The MoneyWeek Podcast: let's talk about bubbles

Merryn and John talk about the many obvious signs of a bubble in certain assets, including tech stocks, TikTok, and stock-trading 12-year olds. It's c…
22 Jan 2021
Eternal growth: how to invest in the future of the drinks industry
Share tips

Eternal growth: how to invest in the future of the drinks industry

Humans have been dabbling in tasty beverages for millennia. Jonathan Compton assesses the key trends in the sector and recommends seven hard- and soft…
22 Jan 2021

Most Popular

The FTSE 100 is set for a makeover with an influx of new tech stocks
UK stockmarkets

The FTSE 100 is set for a makeover with an influx of new tech stocks

The FTSE 100 – the dullest index in the world – is about to reinvent itself as a host of new firms list on the market. The change is long overdue, say…
24 Jan 2021
Think Tesla is a bubble? This might be the best way to bet on it bursting
Oil

Think Tesla is a bubble? This might be the best way to bet on it bursting

The huge rise in Tesla’s share price means that, by market value, it’s now the sixth-largest company in the US and and the world’s biggest car-maker. …
25 Jan 2021
Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021