Is the American stock market rigged?

published 3 April 2014

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.

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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."

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.