Everyone’s still a little confused about “Flash Boys,” Michael Lewis’ new book about the obscure world of high frequency trading.
On 60 Minutes and a bunch of other media outlets, Lewis has been arguing to the world that his book shows how the stock market is rigged. And without actually understanding or reading the story, many people on main street were quick to express their outrage.
But for those who are looking for an understanding that’s slightly better than no understanding, hedge fund manager David Einhorn distills the whole debate in one sentence.
“These problems fall into the classic dilemma of concentrated benefit and diffuse harm,” wrote Einhorn in his new letter to clients.
High frequency traders offer tons of liquidity to the markets which is actually great for investors. But in that process, they’re able to skim tiny amounts of money for themselves.
It’s kind of like what Richard Pryor’s character does in “Superman 3.”
But for the most part, experts seem to agree that high frequency traders may actually be bringing more good than harm.
The only people who might be losing out in a material way are large investors like the hedge funds.Einhorn addresses this:
Lots of investors lose pennies and as a result don’t care too much about market structure; the firms who have based their business around picking up those pennies care a lot about shaping the structure. To overcome this imbalance of interests, the issue needs attention and discussion so that the many who are losing pennies can organise a response. In this regard, Flash Boys has provided a great service.
Although we believe that the abuses identified in Flash Boys don’t significantly impact us, our traders Bruce, John and Alex are incredibly aware of how market structure imperfections can add to our trading costs, and are vigilant about minimising their impact on the Partnerships. One such countermeasure has been to support a new trading venue called IEX, which was the central focus of Flash Boys. We believe that the best response for any investors that are worried about fast computers taking advantage of them is to ask that their orders be routed to IEX, a company in which we hold a small stake.
Lewis recently characterised investors like Einhorn as dumb tourists in a casino.
Indeed, we can’t help but speculate that some of this sensationalizing has something to do with selling books.
“Again, look to interests,” said AQR Capital Management’s Cliff Asness. “Making mountains out of molehills sells more books than a study of molehills.”