Michael Lewis is getting tons of attention for his new book, “Flash Boys,” which questions the murky world of high-frequency trading.
Lewis concludes that the stock market is rigged, and that, he argues, hurts both amateur and professional investors.
Appearing on Bloomberg TV this morning, Lewis and anchors Stephanie Ruhle and Erik Schatzker lassos in famed hedge-fund manager David Einhorn.
Here’s the exchange (emphasis added):
LEWIS: Let me give you an analogy and I think is a very close analogy to the way the stock market is structured. It’s a casino analogy. So I have a casino and I want to start a poker game in the casino, so I get three card sharks and I tell them, go sit there and start the game. Make it look like a good game’s going on. There are no 4s, 9s, there are no queens in the deck. Only you will know that. And we will pay some tour group operators to bring like a bunch of dumb tourists in to pay with you. They won’t know. You’ll —
RUHLE: Hold on, a bunch of dumb tourists? So is David Einhorn is a dumb tourist?
RUHLE: Come on now.
LEWIS: In this analogy. Hold on. In this analogy, every investor — David Einhorn did not know; he did not understand. He understood that whenever he tried to do something in the market, the market moved like someone knew what he was up to. In the same way that big pension fund managers and mutual fund managers saw when they tried to execute big orders, oh my god, it’s like someone knows I want to buy before I buy. But he didn’t know why. He didn’t know — he didn’t understand that high-frequency traders were putting machines in exchanges to be closer to the exchange so that they could get price information in two milliseconds before him. And so on and so forth.
Let me — can I finish my analogy?
LEWIS: So of course the tourists get fleeced all the time in the poker games, because they don’t know the deck is rigged. The poker players pay the casino a cut of what they make. The casinos, operators, pay the tour group — the tour group company money to bring in the tourists.
So in this case, casino’s the exchange, the poker players are the high-frequency traders, and the tour group operators are the banks and the brokers that handle the stock market orders. And I think the analogy is pretty close. So is that rigged? Is that a rigged game? I think it is a rigged game.
It’s worth noting that Einhorn is one of the most accomplished poker players Wall Street has ever seen. So he’d probably take issue with anyone who characterises him as a dumb card player or duped fund manager.
Watch the interview at Bloomberg.com.