The reaction of financial market participants to Michael Lewis' new book, Flash Boys, is irritating in the extreme. The typical response is, yawn, nothing new here and I understand the plumbing better and all the outrage is overdone. I'm so sophisticated and blase, tell me something really useful or important... etc., etc.
Is High Frequency Trading (HFT) evil? I don't know. Can I prove that it costs investors $X Billion dollars per year? No.
But it doesn't matter. All that matters is whether it fails the test of whether any particular financial innovation is in the public interest (remember that?). There could be others but here are two simple ones:
Does HFT add complexity to systemically important markets? Yes, obviously
Does HFT decrease public confidence in the fairness of these markets? Yes, obviously
Have we all got attention spans so short we remember nothing about the causes of the financial crisis? IMHO, a major takeaway should have been that the era of "if it isn't illegal, don't worry be happy" laissez-faire approach to financial regulation was a key culprit. Allowing banks, Fan and Fred, and other financial players to "innovate" in the interests of "greater productivity" (after years of cheer leading by the likes of Greenspan and Robert Rubin), or letting them invent whatever new "markets" and sell whatever new "products" - just have well resourced and super competent regulators micro-regulate all these new things. Didn't work out so well, did it? Did we learn nothing!?
Remember that thing called the Great Recession that millions of Americans are still coping with everyday? If you think "financial innovation" didn't directly contribute to the massive levering of America over the decades prior to the crisis, you're staring at trees and oblivious of the forest.
To put it very simply, just because it is legal and we can't prove definitively that elderly widows are losing big chunks of their nest eggs, doesn't mean it should be legal! There are bigger and more important issues here, such as, is this a good thing for our nation or the world? Does it make the system riskier, less predictable, and less trustworthy? If there is an argument in favor of HFT against these criteria, I'm all ears. But getting lost in the weeds as to who loses how many pennies and which exchange is plugged in to which HFT is completely missing the plot. If Michael Lewis can get the attention of our famously shallow and inattentive government officials as well as the general public to have a genuine debate about adding complexity and further reducing Main Street's belief that the Wall Street is completely rigged...GOOD.
WSJ: Book Review: 'Flash Boys' by Michael Lewis
http://on.wsj.com/1fKYmaY