Did you know that the United States stock market is rigged? Well, Michael Lewis, author and financial journalist, thought you should know.
Speaking in an interview with CBS’ “60 Minutes” on Sunday, Lewis presented a case that would really shake your confidence in the stock market and Wall Street to the core: Wall Street firms are using the power of high-frequency trading (HFT) technology and using advanced computer networks and automation to provide them with an advantage over regular investors and traders.
“The United States stock market, the most iconic market in global capitalism, is rigged,” said Lewis. “If it wasn’t complicated, it wouldn’t be allowed to happen. The complexity disguises what is happening. If it’s so complicated you can’t understand it, then you can’t question it.”
The author of “Flash Boys,” a book that is now available to the public, says this practice can assist traders in spotting orders and then take a position on those orders in order to enhance their profit margins within a manner of milliseconds and can process 10,000 orders in that very short period.
“They are able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price,” added Lewis. “The insiders are able to move faster than you and play it against orders in ways you don’t understand.”
Although Wall Street is vehemently criticized on a daily basis, many have countered Lewis’s claims and say he is completely wrong.
Tim Worstall, a contributor at Forbes magazine, wrote in an op-ed piece that both large and small investors actually benefit from HFT technology, even though there are people that are playing around with it from time to time. Here is what he wrote:
“Apologies, but a little bit of the economics of a stock market for a moment. So, it’s a market where people buy and sell things: clearly and obviously. And there’s also always a difference between the price at which the market makers (those who promise to both buy and sell in a particular stock) are willing, at any one moment, to buy or sell the specific stock under discussion. This is called the spread. It’s possible for there to be a wide spread in a particular stock (or bond, currency, whatever). One percent can happen in certain very small markets. The price at which you can sell to the market maker is 1% below the price at which you can buy, at the same time, that same item from that same person. It is, if you like,, a tax upon your activity, 0.5% either side on every buy or sell order. It’s also, from the market maker’s side, his fee for being ready to buy and or sell that item at any time that the market is open.”
In today’s world of highly advanced technology, government largesse and unscrupulous Wall Street insiders, nothing could really surprise the average investor. However, Lewis is actually inadvertently correct when he says the market is rigged, but not because of technology. Instead it’s the disastrous interventionist economic and monetary policies of the Federal Reserve System.
The central bank creates bubbles and business cycles through harmful initiatives of artificially low interest rates, money supply expansion, quantitative easing and allowing the affluent and well-connected to benefit from the freshly created money.
In that sense, yes, the market is rigged.